- Tax responsibilities for different business structures
Each year your taxable income is worked out by deducting expenses (and any available losses) from your gross income. The result will be a net profit or loss.
There are four common business structures:
As a sole trader you work out your tax on your net profit (gross income less expenses), complete an Individual income return (IR3) and pay income tax on the individual tax rates. You can't pay yourself a wage, instead you take money from the business for personal use (drawings).
Sole traders can trade under a trade name, register for GST and employ staff. If they do register for GST or register as an employer, they must also be aware of the responsibilities associated with those. They will be covered more fully under the "GST and Employer" sections of this tool.
A partnership doesn't pay income tax. It completes a Partnership income tax return (IR7) allocating the net profit/loss to its partners.
Partners then complete an Individual income return (IR3), declaring their allocated profit/loss from the partnership and any additional income they have (rent, interest, salary/wage income, etc) and pay their tax using the individual tax rates. Partners can be paid a wage with PAYE deducted - in this case, the partnership needs to be registered as an employer and send us employer monthly schedules.
Partners are personally liable for any debts of the partnership, including PAYE and GST, and any personal income tax liability arising out of income received from the partnership.
A company completes a Companies income tax return (IR4) and will be taxed on the net profit at the company tax rate. It can also distribute money through drawings, dividend, and salaries to shareholders.
A look-through company (LTC) completes a Partnerships and look-through companies income tax return (IR7) and has a similar tax treatment to a partnership. Owners must elect for the company to become an LTC.
Each owner completes their own income tax return to account for their share of the LTC's profit/loss.
We also have a video on business structures which will provide you more information on the options.
Business.govt.nz also has some useful information on different business structures.
- Income tax in your first year in business
A common misconception is that your first year in business is tax-free.
Usually you aren't required to make any income tax payments to us during your first tax year in business. However, during your second year of business you:
- must pay tax on the profit you made in the first year, and
- may also need to pay provisional tax for your second year (depending on the amount of profit you made in the first year).
You can choose to make voluntary tax payments during your first year of business which helps to spread the cost over a longer period of time.
If you are in business as a sole trader, or a partner in a partnership, you'll file an Individual income return (IR3) at the end of the tax year. If you have made voluntary income tax payments during your first year of business you may be entitled to claim an early payment discount.
To help you with budgeting for your tax and other compliance commitments (such as ACC levies), it is recommended that you put 25% of your business income into a separate bank account.
- Provisional tax and how to pay it
Provisional tax is a way of paying your income tax 'as you go' during the income year and is offset against your end of year tax bill.
Watch our "Introduction to business" video for more information.
When do you become a provisional taxpayer?
If your residual income tax for the previous income year is more than $2,500, you'll need to pay provisional tax in the following income year. You may also be required to make provisional tax payments in your first year in some circumstances.
Find out more about provisional tax in your first year:
Residual income tax
Residual income tax is the amount of tax you have to pay less any:
- tax credits you may be entitled to (excluding Working for Families Tax Credits or other tax payments made during the year), and
- PAYE deducted.
Provisional tax due dates
Provisional tax payment due dates will depend on:
- the provisional tax option you choose for your business, and
- your GST filing frequency (if you are registered for GST).
There are four options for paying provisional tax:
Your provisional tax payments using the standard option are based on the previous year's income tax.
The standard option is usually based on your residual income tax for the previous year plus 5%.
However, the calculation may differ depending on:
- any changes to the tax rates
- when you filed your previous tax return, or
- whether you're a company or an individual.
Accounting income method (AIM)
AIM uses accounting software to work out your provisional tax instalments on your profit during the year.
Your accounting software will work out if you have a profit by deducting any allowable expenses and adjustments for your income for the period. If you have a profit your provisional tax payment will be based on your:
- company tax rate, or
- individual tax rate.
If you don't have a profit you won't need to make a provisional tax payment.
You can generally use AIM if your annual turnover is less than $5 million.
If you want to use the estimation option, you'll need to work out how much you think your income will be for the income year and then calculate the tax on it. This option could be right for you if your income is dropping.
Once you use the estimation option, you can't change back to the standard option in that tax year.
You need to:
- take care when estimating your income and the amount of tax payable
- change your estimate if you have fluctuations in your business income and you think your current estimate is no longer relevant.
You can change your estimate any number of times during the year, up to your last instalment date. At this date your latest estimate becomes final. If your estimation is lower than your actual residual income tax for that year you'll be liable for interest on the underpaid amount, as well as a penalty.
To estimate, choose the estimate option ('E') in your tax return. If you need to change the estimate for your provisional tax you need to let us know by:
If you choose the ratio option, provisional tax payments will be based on a percentage of your GST turnover. This option may benefit your business if you have fluctuating income and turnover by allowing you to pay tax as you earn your income.
You can only use this option if you meet the following conditions:
- You've been in business and were registered for GST for all of the previous tax year, and that tax year was not your first year in business
- Your residual income tax for each of the two preceding years is more than $2,500 but not more than $150,000.
- You file your GST returns monthly or every two months.
- The business you're operating isn't a partnership or a look-through company.
- The ratio percentage we calculate for you is between 0% and 100%.
We calculate and print your percentage on your GST return. The percentage can change during the tax year due to:
- a new income tax assessment, or
- a reassessment of your GST, or
- income tax figures for the previous tax year.
We'll write to you with your new percentage if it changes.
You can only change to using the ratio option at the beginning of an income year, not during an income year.
In some circumstances, you can stop using the ratio option and choose a different option.
- When you can pay your student loan
In the first year that you're self-employed you can make your repayments:
- directly to us at the end of the tax year (31 March), or
- throughout the year so you don't have as much to pay at the end of the tax year.
For the following years you'll most likely need to make repayments 3 times a year if you:
- earn over the repayment threshold, and
- have a student loan bill of over $1,000 at the end of the year.
- How to join KiwiSaver
Joining KiwiSaver is a big financial decision.
If you choose to join KiwiSaver:
- you can't opt out
- you can only withdraw your savings in certain circumstances, and
- in most cases, your savings will be locked in until you become eligible for NZ Super
- if you join KiwiSaver after the age of 60, your savings will not be available for withdrawal until 5 years after your joining date.
As a self-employed person you need to choose a scheme provider and apply directly to them. You make your payments directly to your scheme provider.
For more information read our guide Self-employed - your guide to KiwiSaver (KS12).
Business.govt.nz also has some useful information for business owners on KiwiSaver.