Income tax has traditionally been a source of stress and confusion for sole traders. But don't worry we've got you covered. This step-by-step article will take you through what income tax is, how it works and how you can use Solo to simplify and master your tax return.
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Note: This guide is intended for sole traders with self-employed and schedular payment income. It does not cover specific tax return details for rental income or farming.
What is income tax?
Income tax is a tax on the money you earn, including profits from your business as a sole trader. In New Zealand, income tax is applied to individual income, including earnings from self-employment, wages, salaries, benefits, and pensions.
As a sole trader, your business income is considered personal income. After deducting/claiming business expenses, you pay tax on the remaining profit (also known as taxable income).
Do I have to pay income tax?
Yes, if you are earning income as a sole trader (such as self-employed income, schedular payments or rental income), you are required to pay income tax. The amount of tax you pay depends on your profit (your income minus your expenses) for the tax year (1 April - 31 March). If you don’t make any profit, you don’t pay any income tax.
New Zealand has a progressive tax system, this means the amount of tax you pay increases as your profit increases. These increases in the tax rate are know as ‘tax brackets’.
The income tax brackets for New Zealand are:
10.5% for profit up to $14,000
17.5% for profit over $14,000 and up to $48,000
30% for profit over $48,000 and up to $70,000
33% for profit over $70,000
39% for profit over $180,000
Do I need to register for income tax?
You don't need to register for income tax, or even as a sole trader. Simply start earning self-employed income (such as self-employed income, schedular payments or rental income) and, at the end of your first tax year, file an income tax return.
To file an income tax return you will need a personal IRD number, which you will already have if you've ever working in New Zealand, and a myIR account.
If you don't have an IRD number you can apply for one online. You can also register for myIR online.
How do I calculate income tax in Solo?
There are no settings you need to enable for income tax. Solo will automatically calculate income tax on your income and expenses, remind you when your tax return is due and provide you with all the figures you need to simply copy and paste into your online tax return.
By default, Solo will then automatically calculate your income tax and display your income tax period on the Solo Dashboard and on the Taxes page.
When a income tax period becomes due (or overdue), go to the Taxes page to complete/close the period.
Note: When 'Provisional tax' periods are being displayed on the Solo Dashboard, you might not see your 'Income tax' period. This is because your provisional tax is your income tax and displaying both would be a double-up.
On the Taxes page you will see all your tax periods for the current financial year and any periods that will become due within the next 12 months.
Note: To file a tax return for the previous financial year, simply categorise an income transaction for that year and the income tax period will appear.
What is provisional tax?
In your settings you will see an option for provisional tax. Provisional tax is not a seperate tax from income tax. Provisional tax is simply payments of your income tax during the financial year so that you don't have to pay all of your income tax in one big payment at the end of the financial year.
If this is your first year being self-employed you don't need to pay provisional tax and you should leave Provisional tax required set to No.
More info: How Provisional Tax works
How to file and pay an income tax return
When an income tax period becomes due:
Go to the Taxes page in the main menu.
Click on the File & Pay button for the due period.
Note: The 'File & Pay' button will only be displayed once the period is due. If a period is currently active, but not yet due, you will see a 'Preview' button instead.
Next, follow the instructions that are shown when you click the 'File & Pay' button:
1. File your income tax return
When your tax return becomes due you need to login to your myIR account and file your return using the figures that Solo has calculated. This might seem like a lot of steps but really you just need to copy a few figures from Solo. Once you've done it the first time it's really simple.
To file your income tax return:
Log in to myIR.
Click Returns and transactions under 'Income tax' in your summary.
Click File return for the due period.
Build your return: Select the income types that you earned during the year and click Next. If you earned taxed income such as salary and wages or schedular payments, these will likely be preselect for you. If you earned self-employed income you will need to select that income type (zero-rated supplies is included in self-employed income).
BIC code: Your BIC code, which identifies the main type of work you do, will be automatically displayed. If it's not displayed, find your BIC code. Click Next.
Secondary forms: Select This return will include IR 10 Financial Statement and click Next.
Specific situation: Select No specific situations apply (unless you're filing a part year return) and click Next. You don't need to include attachments.
Disclosures: Select You have no disclosure to make and click Next.
Income: If you have income with tax deducted, such as salary, wages or schedular payments these should be automatically be displayed in your return (if they are different to the figures displayed in Solo this might be due to an income type that Solo doesn't support, or Solo might not have updated with the latest income figures). Depending on your situation, copy the following figures from Solo:
If you have self-employed income - Copy the Self-employed net income figure from Solo into your return and click Next.
If you have schedular payment income - Copy the Expenses figure from Solo into your return and click Next.
If you have both self-employed and schedular payment income - Follow the same instructions from option a. (your expenses have already been subtracted from the Self-employed net income figure and don't need to be also included for schedular payments).
Tax calculation: You will now see a summary of your total taxable income, any tax that has already been paid (Total tax credits) and how much tax you have left to pay (Residual income tax). If you've paid provisional tax during the year, it will be included in the next step. Click Next.
Review: Lastly you will see any provisional tax that's been paid and your estimated total of remaining tax to pay. Click Next.
That's the important part done. Next you need to copy some figures from Solo into your Financial statements (IR10).
2. Filing your financial statements (IR10)
The IR10 is part of your tax return and used by the IRD to collect statistics. It might seem a little overwhelming, but that because it's focused at companies rather than sole traders. The figures you enter in the IR10 will not affect how much tax you pay.
Financial statement: Copy the figures from Solo info the relevant box in the online return. Click Next.
Balance sheet: If you have depreciated assets in Solo you will have figures to copy into the fixed asset fields. Otherwise leave all the fields empty as these are not required for sole traders. Click Next.
Other information: It is unlikely that any of these fields will relate to you. Click Next.
That's it, you should now be able to review and submit your return. Once you have submitted a return it can be changed later in your myIR.
3. Pay the amount due to the IRD
Use the payment options provided when completing your return to pay the due amount to the IRD. Or visit your online banking and use the 'pay tax' function to make payment.
Note: Solo doesn't handle any tax payments to the IRD. Tax payments need to be made outside of Solo directly from your bank to the IRD.
How Solo calculates income tax
The amount of tax you pay depends on your profit (your income minus your expenses) for the tax year (1 April - 31 March).
In order to calculate your profit and the resulting income tax, Solo first needs to know your total income and expense for the year so far.
To work out your total income, Solo combines any income transactions that have been categorised, with any taxed income from your IRD feed. Solo then minuses any expenses that have been categorised and any depreciation from your assets. The basic equation looks like this:
+ Categorised income transactions
+ Income from the IRD feed
- Categorised expense transactions
- Asset depreciation
= Profit (taxable income)
Your income tax is then calculated based on your profit, in relation to the income tax brackets mentioned earlier.
If you have both self-employed income and taxed income, such as salary or wages, your self-employed income is added on top of your taxed income.
For example, if you've earned $10k in self-employed income and $50 from a salary, the $10k is not taxed at the lowest tax bracket of 10.5%. It is considered income between $48,000 to $70,000 and therefore taxed at 30%.
Note: If you have your IRD feed connected Solo will automatically take into consideration any tax that has already been paid.
More info: How the IRD Feed works
What if I start using Solo part-way through the year?
You can start using Solo at any time during the year. For Solo to accurately calculate your income tax and tax return you just need to categorise all your income and expense transactions since the beginning of the financial year (1 April).
If you have a lot of transactions to process, there are features available to help you batch categorise transactions.
When you connect your IRD feed Solo will automatically retrieve all your taxed income (and the amount of tax you've paid) from the IRD and include it in Solo's calculations. You don't need to categorise any income transactions for income you see in the IRD feed.
I hope this article has answered all your income tax questions and given you a better understanding of how income tax works. As always, if you have any further questions please send a message though the in-app chat and we will be happy to help.