Tax benefits up for grabs for locums classed as contractors

Quite often when you work as a locum in a pharmacy you are doing so for a number of pharmacies.  Locums in this situation are generally treated as independent contractors for tax purposes which means that PAYE tax is not deducted from the earnings received like it is for general employees.  The difference between an independent contractor and employee has been a contentious one in the past so to ensure that all parties are clear about the status we recommend that an agreement be entered into between the parties stating that the locum work is being carried out by an independent contractor responsible for their own taxes and costs.  Generally this can be a simple one page document.

Being considered an independent contractor for tax purposes has some real tax advantages compared with working as an employee.  Employees are not able to claim any expenses incurred in relation to their employment other than the costs paid to prepare tax returns – however an independent contractor is able to claim any expenses necessarily incurred to derive taxable income – for example, work related travel and in some circumstances meals.

Work related travel is travel between two places of work (but not from home to work) or incurred while working.  There are three options for calculating the cost of travel – actual expenditure incurred, a log book or a mileage reimbursement rate.  Generally the mileage reimbursement rate is used because of its simplicity and the rate is high enough to cover all expenses for most vehicles.  The current rate is 77 cents per kilometre.

The tax rules around the ability to claim for meals (food and drink) are covered by the entertainment rules.  Generally the cost of meals will be considered private and therefore not able to be claimed for tax purposes.  However it you were entertaining potential customers (pharmacy owners) or other business related people then 50% of the cost can be claimed for both income tax and GST.

If travel is incurred on a one-off or irregular business trip (eg:  Christchurch pharmacist working for a couple of days in a pharmacy in Oamaru) then the cost of meals and accommodation is fully deductible for income tax and GST purposes.  This applies to genuine travel only.

Independent contractors are responsible for paying their own taxes on income earned and ACC levies.  So each year when a tax return is filed, in addition to the tax bill, an invoice for ACC levies will also be issued.  Inland Revenue forward the income details onto the Accident Compensation Corporation to allow them to calculate the necessary levies payable.

If the income earned as a locum is likely to exceed $60,000 then there is also the requirement to register and account for GST.  Whatever the charge to the Pharmacy is for the locum work the total will be plus GST.  When registered for GST, locums are also able to claim the GST content of any work related expenses incurred.

Written by Belinda Canton, director, Moore Stephens Markhams Christchurch

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