(tax filing- 5 minute read)
Happy new year everyone!
Ngā mihi o te tau hou!
If you’re based here in (currently) sunny Aotearoa, then you’ll know that the financial year end is just a couple of months away (31 March 2023 to be exact). If you are self employed or own a business you have until July 2023 (31 March 2024 if you have a tax agent) to file your taxes.
Naturally, many of us kiwi small businesses are anxious when it comes to taxes. So we’ve put together this article on how you can tackle those tax anxieties in three simple steps:
Keep a separate tax filing account for your business
Never mix your personal and business funds together. When setting up a business, ensure that you have different business bank accounts set up. One of those bank accounts should be an account specifically set up for taxes!
We’ve talked about how you can best estimate tax filings in this article here. However, a simple rule of thumb is to put aside about 25% of your sales income into the tax account. This means you always have funds set aside to pay your tax bills.
If you are on provisional tax, you still want a separate tax account. This ensures that you have enough money put aside to pay the provisional instalments as they come.
Calculate your income and expenses for tax filing
You should always be keeping a record of any sales that you make. This is just standard business practice. These records can be in the form of receipts, invoices or entries made onto your sales system. At the end of the tax filing year, you can add up all these records to determine how much income you made for the year.
On the other side of the equation, you need to keep record of any expenses you have made for the business. Common expenses include things like:
- Wages paid to staff (or contractors)
Be sure to check out this article on claiming expenses to figure out what you can and can’t claim as a business expense. Keeping track of expenses is A LOT easier if you have a separate bank account for your business. You can review the bank transactions for the financial year to identify business expenditures.
Once you have your income and expense, you can work out your taxable income (which is income minus expenses). If you have more expense than income, then you have a loss which you can carry forward to the next period.
Please note that if you are GST registered, you need to use the GST EXCLUSIVE (no GST) amount in calculating your income and expenses. DO NOT include GST when calculating your income and expenses.
Use software! It will make your life easier!
Accounting software will greatly simplify the calculation of your income and expenses. Its worth checking out software like Xero and MYOB for this reason. If you really want to cheap it out, Google Sheets has some expense templates that you can use for free.
Ditch the calculator and shoeboxes full of receipts! Live in the future!
Have a basic understanding of how tax is calculated
Here in NZ, we operate using a progressive tax filing system. You can read more about how it works here. The idea is, you pay less taxes on the first $14,000 that you earn and this percentage then goes up for every bracket your income goes up. Note that as a self employed individual, the income that you declare is your taxable income (sales income minus expenses).
Currently the highest tax bracket in Aotearoa NZ is 39% for any income over $180,000. This doesn’t mean that a person earning $200,000 pays 39% in taxes. In actual fact, a person earning $200,000 will be paying an average tax rate of 29%. This is because amounts below $180,000 are taxed at a lower rate.
So don’t worry about putting away 33% of your taxable income away for taxes if you have an income of $70,000. You should only have to put away 20% of your taxable income because that is what your average tax rate will be.
Still having trouble? Talk to an accountant
Taxes shouldn’t be hard, but they can be anxiety inducing. This is why so many small business owners have tax agents and accountants that help manage their taxes for them.
An accountant can help you set up the right bank accounts and financial software to ensure that your finances are tidy and your taxes are paid on time. However if you find your average accountant to be outside of your price range, check out our other articles on www.thecomicaccountant.com for more finance and accounting tips for small businesses!