COVID-19 has caused disruption for almost everyone in some way – to put it mildly. For many self-employed people, that disruption will go on for a long time yet. During lockdown, income or contracts may have been lost, you may have applied for the wage subsidy or taken out a government-guaranteed loan, and you may still be struggling to pull yourself back to pre-pandemic levels.
If you’re self-employed, the tax implications of COVID can also cause headaches. Unlike salaried workers, who get to leave most of the tax management to their employers, the self-employed have to apply for subsidies and loans, and file their taxes on their own. With changes to your income and the rules around tax, that might be a bit more complicated this year.
Here’s what you need to know:
The wage subsidy and the tax year
Self-employed people who lost income thanks to COVID-19 were eligible for the wage subsidy, which replaced a percentage of their usual income for 12 weeks. This income is subject to tax, but it’s not exactly the same as other income. You do need to pay income tax on subsidy payments, but not GST or ACC levies. To make sure you’re not charged these taxes, wage subsidy payments need to be listed under ‘Other Income’ when you complete your tax return for the year. The same rules apply to COVID leave payments, which are paid out if you have to take leave to self-isolate.
Another sticky issue is the year the wage subsidy is paid and taxed. Most self-employed people will have received a lump-sum payment for the 12-week subsidy period in the 2020 tax year – that is, before the 31st of March. But if this payment is considered as income for the weeks after the end of the tax year, it can be complicated to work out whether you need to pay tax on the entire sum this year or next. According to the IRD, even if you technically received the subsidy during the 2020 year, it can be spread out over the 12 weeks for tax purposes, which means that it doesn’t need to be included on your return until the following year.
Provisional tax changes for 2020
Provisional tax is a way of spreading tax payments throughout the year, rather than paying in a lump sum at the end. It’s often used by the self-employed as it makes it easier to deal with fluctuating income throughout the year. This year, thanks to COVID-19, the rules around provisional tax have changed. The idea is to lower costs for small businesses and the self-employed, and let them hang onto their cash for longer during this time.
The threshold for provisional tax has been increased from $2500 to $5000. This means that self-employed taxpayers who owe provisional tax of less than $5000 will have until February the year following their tax return to pay their tax bill. If your taxable income for the following year is less than $5000, you won’t have to pay provisional tax at all, as the rules have changed permanently. People who prefer paying in instalments can make voluntary payments or set aside cash in a separate bank account.
Getting a loan to see you through
If you’re self-employed or running a small business, changes to tax rules and the wage subsidy may not have been enough to help you through the COVID crisis. That’s where cash-flow loans come in. The government-guaranteed Small Business Cash-flow Scheme offers loans of $10,000+ for up to five years, to help small businesses and the self-employed stay in business.
Loans are paid and repaid through the IRD, with a set annual interest rate of 3%. However, if you manage to pay back your loan in full within a year of taking it out, you won’t be charged interest at all. If you just need a cash injection to help you through the rough post-COVID period, this could be a good option.
Expert help with your income tax
Although subsidies, loans, and changes to tax rules are designed to help the self-employed stay afloat during a period of downturn, they can also make the administration side of things more difficult. As more loan schemes and changes are introduced, it can be complicated to keep up – particularly if you’re scrambling to retain clients and working as much as you can. If you need help with your tax return or loan applications, talking to a financial expert could be worth your while. You’ll save time filling in complex returns and applications, and make sure you don’t over or underpay your taxes. For peace of mind alone, it’s a smart idea at a complicated time.
Need help sorting out your self-employment income or applying for a loan? Talk to the team at Global Finance now.
**These are general guidelines and are by no means a reflection of bank or lending policies