Independent Contractor: What It Means and How to Get Started

Published Friday 30 January 2026

Table of contents

• What is an independent contractor?
• Employee vs contractor differences
• The benefits of becoming a contractor
• Balance the benefits with the downsides
• Choose your business structure
• Plan what you will earn
• Common myths about contracting
• How you get started
• Five ways to find contract work
• Taking control of your financial future
• FAQs on independent contracting

Key takeaways

• Choose the right business structure by consulting with an accountant to determine whether operating as a sole trader or limited liability company best suits your liability needs and tax situation.
• Calculate your true earning potential by factoring in all business expenses, taxes, insurance costs, and the value of employee benefits you'll need to cover yourself, not just comparing hourly rates.
• Build financial security by saving 3-6 months of expenses for income gaps between projects and using accounting software to automatically track earnings and set aside tax obligations.
• Find contract work through multiple channels including online platforms like Upwork, your professional network of former colleagues, and direct outreach to businesses that need your specific expertise.

What is an independent contractor?

An independent contractor is a self-employed person who provides services to businesses under a contract for services, not as an employee. Often, this income is considered Personal Services Income (PSI), defined as when more than half of an individual’s income is gained from their personal efforts or skills. You typically work on specific projects or timeframes, often for multiple clients.

Key characteristics of contractors:

• Project-based work: Complete specific assignments rather than ongoing employment
• Multiple clients: Work with several businesses simultaneously or consecutively
• Business ownership: You own and operate your contracting business

This working style offers significant advantages for skilled professionals seeking more control over their careers.

You're classified as an independent contractor rather than an employee when you:

• Own your business: Operate as a sole trader or company
• Work for multiple clients: Serve several businesses each tax year
• Provide specialised expertise: Offer specific skills or knowledge
• Complete project-based work: Take on temporary assignments with defined end dates
• Supply your own resources: Provide most tools, equipment, and materials
• Control work methods: Decide how to complete projects within client requirements

Check local rules for a clearer picture, as the guidelines vary from one country to another.

Employee vs contractor differences

Understanding the difference between an employee and a contractor is important for your rights and tax obligations. The main distinction comes down to who controls the work.

An employee works in a business for wages or a salary. The employer controls how, where, and when the work is done. They also typically provide the tools and equipment, and handle tax deductions through PAYE (Pay As You Earn).

A contractor, on the other hand, is self-employed and provides services to a client. You have more control over your work, use your own tools, and are responsible for managing your own taxes and Accident Compensation Corporation (ACC) levies. You operate under a contract for services, not a contract of service.

The benefits of becoming a contractor

Independent contracting delivers several key advantages over traditional employment:

Financial benefits:

• Higher earning potential: Charge market rates for your expertise, often 25-50% more than salary equivalents
• Direct payment: Get paid for every hour worked without salary caps

Lifestyle advantages:

• Flexible schedule: Choose your working hours and location
• Reduced commuting: Work remotely or choose local clients
• Less office politics: Focus on project delivery rather than workplace dynamics

Career development:

• Skill diversification: Test new industries without long-term commitments
• Business ownership: Build your own client base and reputation
• Company evaluation: Try potential employers before considering permanent roles

Balance the benefits with the downsides

Independent contracting challenges require careful planning and management:

Financial considerations:

• Irregular income: No pay during gaps between projects or sick leave
• Tax responsibility: You must calculate, save for, and pay your own taxes
• No employee benefits: Health insurance, retirement plans, and paid leave are your responsibility

Legal and workplace factors:

• Limited employment rights: Fewer legal protections than permanent employees
• Excluded from company culture: No inclusion in meetings, strategy sessions, or team events
• Potential workplace tension: Some employees may resent contractor rates or status

Risk management strategies:

• Build emergency funds: Save 3-6 months of expenses for income gaps
• Use accounting software: Track earnings and set aside tax obligations automatically
• Secure appropriate insurance: Professional indemnity and public liability coverage

Make sure each client classifies you correctly. Getting your status right from the start helps you and your client avoid tax or benefit issues later.

Choose your business structure

When you start contracting, you need to decide on a business structure. This affects your tax, liability, and the admin you need to do. The two most common options for contractors in New Zealand are sole trader and limited liability company.

• Sole trader: This is the simplest structure. You are the business and are personally responsible for its debts. Your business income is your personal income for tax purposes, and according to Inland Revenue, you must register for goods and services tax (GST) if your turnover was over $60,000 in a 12-month period.
• Limited liability company: A company is a separate legal entity, meaning your personal assets are protected from business debts. It has more compliance requirements (for example, specific rules apply for a company to carry forward losses) but can be a good option as your business grows.

Talk with an accountant or business adviser to figure out which structure is right for you.

Plan what you will earn

Calculate your contractor earnings potential by comparing total compensation, not just hourly rates.

Research market rates:

• Check freelance platforms: Sites like Upwork show current market rates for your skills
• Survey former colleagues: Ask about contractor rates in your industry
• Factor in value delivery: High-expertise work commands premium pricing

Calculate true costs:

1. Estimate annual revenue: Multiply your hourly rate by realistic billable hours
2. Subtract business expenses: Insurance, equipment, software, and tax obligations
3. Add benefit costs: Health insurance, retirement savings, and emergency funds
4. Compare to employee salary: Include the value of benefits, paid leave, and job security

Make the decision:

Use accounting software to model different scenarios and consult a financial adviser to validate your calculations before making the transition.

Common myths about contracting

There are a few common misunderstandings about life as a contractor. Let's clear some of them up so you can make a confident decision.

• Myth: You'll always earn more money. While contractor rates are often higher, you have to cover your own sick leave, holidays, taxes, and expenses. Plan your budget carefully to see if you'll be better off financially.
• Myth: It's an insecure way to work. Working for one employer can also be insecure. As a contractor, you build relationships with multiple clients, which can create a more diverse and resilient income stream.
• Myth: You're completely on your own. You might work alone, but you're not without support. You'll build a network of clients, other contractors, and advisors like accountants who can help you succeed.

How you get started

Set up your independent contracting business with these essential steps:

1. Register your business structure: Choose between sole trader, partnership, or company based on your liability and tax needs
2. Create a business plan: Define your services, target market, pricing strategy, and financial projections
3. Separate your finances: Open dedicated business bank accounts to simplify tax reporting and cash flow tracking
4. Secure insurance coverage: Get professional indemnity and public liability insurance appropriate for your industry
5. Implement accounting systems: Choose software that handles invoicing, expense tracking, and tax calculations automatically

Professional support:Consider hiring an accountant during setup to ensure compliance and optimal tax structure for your situation.

Have your own standard contract, non-disclosure agreement (NDA) and services agreement for your clients to sign. Be aware that some clients may prefer to use their own documentation.

Five ways to find contract work

Find contract work through these proven channels:

Online platforms:

• Freelance marketplaces: Bid on projects through Upwork, Freelancer, or industry-specific sites
• Government contracts: Register as a supplier on official procurement portals for public sector opportunities
• Professional networks: Use LinkedIn to showcase expertise and connect with potential clients

Personal networks:

• Industry contacts: Leverage former colleagues, clients, and professional associations
• Contractor partnerships: Collaborate with complementary contractors for referrals and joint projects
• Direct outreach: Contact businesses that could benefit from your specific expertise

Success factors: Maintain an updated portfolio, gather client testimonials, and consistently deliver quality work to build long-term relationships.

If what you make or do can be delivered online or by mail, you can broaden your search to other countries. Good accounting software will make it easy to invoice in different currencies.

Taking control of your financial future

Contract work involves responsibility, drive, the ability to act on your own, commitment and initiative. You may also have to cope with a solitary working environment at times, or insecurity about where the next job is going to come from.

But with the right skills and attitude, being a self-employed contractor can be liberating and empowering. It's likely you'll have more freedom than you ever had in your previous working life. And with the cloud-based software applications available today, becoming a contractor is easier now than ever.

Ready to take the next step? Try Xero for free and see how Xero accounting software can help you manage your contractor business with confidence.

FAQs on independent contracting

Here are some answers to other common questions about being an independent contractor.

What's the difference between a freelancer and an independent contractor?

The terms are often used interchangeably, but there can be a slight difference. Freelancers typically work on shorter-term projects for multiple clients at once. Independent contractors might take on longer, more involved projects for one client at a time. In New Zealand, both are generally considered self-employed.

What is another name for an independent contractor?

You might hear independent contractors called freelancers, consultants, or sole traders. Legally, they are all forms of self-employment, where you are engaged under a contract for services.

Do independent contractors pay their own tax?

Yes. As a contractor, you are responsible for managing and paying your own income tax and ACC levies. Your clients don't deduct these from your pay. It's important to set money aside for your tax obligations throughout the year.