Our guide to transitioning from employee to contractor

contractor with options

You’ve accepted your first contracting opportunity, what’s next?

Transitioning from being an employee to a contractor for the first time is very exciting. There are a whole host of benefits such as attractive hourly rates, independence, and the opportunity to work on a variety of exciting projects.

There is a small amount of admin that is associated with being a first-time contractor, luckily, contracting through a recruitment agency makes it easy.

The tax requirement to transition from employee to contractor

First, you need to decide if you will operate as a sole trader or a limited liability company.

Many sole-trader contractors work under their own name and IRD number but you can also set up a limited liability company for your contracting work.

Goods and Services Tax

As a contractor, you must be GST registered if sales from your taxable activity are at least $60,000 per year.

You will be paid GST of 15% on top of your hourly or daily rate and you’ll need to file GST returns. You can do this via your MyIR login or your Accountant.

Income Tax

Like any employee, you will still need to pay income tax.

If you operate as a self-employed contractor and work for yourself, you will need to complete an IR3 return at the end of each financial year and pay provisional tax.  We recommend discussing this with an accountant to ensure you understand all your tax requirements.

If you operate as a self-employed contractor and contract through a recruitment company then tax is taken care of. All payments from the recruitment company are considered Schedular Payments and Withholding Tax will be taken out from each payment unless you have an exemption from the Inland Revenue Department. You will still need to do a tax return at the end of the financial year, which we also recommend discussing with an accountant.

More information about tax requirements for self-employed people can be found here.

If you operate as a limited liability company, you will need to take care of your taxes and file an income tax return each year.

More details about income tax for companies can be found here.

The above tasks don’t take long to set up. Once you are set up, you will have the flexibility to start your contracting journey by working with a range of different companies and industries.

If you need help to get started, you can talk with our Finance Manager, Debbie Beatson, who can assist and answer any questions you may have.

Other things that may change

Recording Hours

The main difference in transitioning from employee to contractor is how you get paid. How you record the hours that you work and what you do in that time will also change.

If you contract for yourself you will need to record the hours you work and what you are working on. You will then invoice your time on an agreed-upon basis, usually monthly.

Working for a recruitment company like 40 Foot makes life easy.  Most recruitment agencies have an easy online time-sheeting system where you can enter your hours of work each week. 40 Foot uses Invoxy software.


Most tech contracts require you to have professional indemnity insurance to protect both yourself and the employer. 40 Foot recommend Bizcover, where you can purchase a simple, professional indemnity insurance policy for approximately $20 per week.

happy contractor

Why would I choose to be a Contractor?

There are several benefits to transitioning from employee to contractor, including:

  • Contracting can offer greater flexibility and more opportunity for development
  • You can make great business connections as well as long-lasting professional relationships
  • You will gain exposure to a variety of projects and technologies
  • Contracting can be a great way to get in the door with a variety of different companies and industries
  • You will have the opportunity to build your brand and reputation and after time, the majority of your contracts will come from referrals
  • Contracting can move much more quickly than applying for a permanent position. Don’t be surprised if you are offered a contracting role after just one interview!

Keep in mind, that you may have downtime between contracts which can also be a real benefit to your work-life balance.

As you complete contracts, you may find you are offered an extension. It is then up to you if you would like to continue working on that project.

If you contract via a recruitment agency, you will always have their ongoing support. Your agency will be there to answer any questions you may have. You’ll establish a long-lasting relationship with them, which will be able to provide you with many contracting opportunities.

If you’d like to find out more about contracting and to keep up to date with any roles that 40 Foot have available, register with us here.

Happy contracting!

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