How to Pay Tax as a Sole Trader
Your job as a sole trader is challenging, and you must oversee every detail of your business to make sure everything is done correctly. Why add stressing about how to pay tax as a sole trader to the list?
While we always recommend recruiting the services of a business accountant, preparing taxes as a sole trader does not need to be frustrating. With some time and pre-planning, you can complete your taxes without difficulty.
How to Pay Tax as a Sole Trader
The first thing you must do is ensure your records are complete and easy for you to find. This may mean scanning everything into your computer files or gathering the necessary paperwork. The more thorough your records are, the easier the overall process of lodging your tax will be, and you will not need to spend a great deal of time searching for the information you need for the return.
Once you are organised, you can start the filing process. As a sole trader, you are the business. As such, you will file your individual tax return. This is because the money you earn as a sole trader is your income, no matter how many other sources of income.
In your tax return, you should report:
- Your business income minus the business deductions you can claim
- Any other income, such as wages from another job, rental income, or dividends minus the applicable deductions
If your income is below $18,200, you can take advantage of the tax-free threshold. This is an excellent way to keep what you earn, especially if you work as a sole trader as a side hustle or supplementary income. This system makes filing as a sole trader straightforward.
What Can I Deduct?
There are a number of deductions you can claim as a sole trader, including:
- Business expenses: Such as supplies, accounting, advertising, relevant trade subscriptions, or applicable continuing education courses
- Maintenance costs: For your workplace, machinery, tools, or equipment
- Super contributions
- Operating expenses: Phones, electricity, cleaning and other office expenses
- Vehicle expenses: This includes fuel, maintenance, registration, insurance, loan interest, or lease payments
There are more potential deductions that you may be able to claim. These often require specific circumstances, and consulting with an accountant would ensure you did not miss any possible deductions. You should note that if you use something, such as your car, for personal and business purposes, you can only deduct a portion of its costs.
How Much Will I Pay?
Many people ask, “how much tax do I pay as a sole trader?”, thinking they might get taxed similarly to a larger company. However, that is not the reality. The answer is that you will be taxed at the same level you would as your individual tax rate. See the below chart for a rough idea of how much tax is due based on income earned.
Sole Trader Tax Rate 2022-2023
| Taxable income | Tax payable |
|---|---|
| 0-$18,200 | Nil |
| $18,201 – $45,000 | 19 cents for each $1 over $18,200 |
| $45,001 – $120,000 | $5,092 plus 32.5 cents for each $1 over $45,000 |
| $120,001 – $180,000 | $29,467 plus 37 cents for each $1 over $120,000 |
| $180,001 and over | $51,667 plus 45 cents for each $1 over $180,000 |
While sole trader filing is not tricky initially, greater profits lead to a more complex tax bill. It is important to note that once you earn $75,000 as a sole trader, you will need to register for goods and services taxes, also called GST. At the same rate, you will need to file a Business Activity Statement or BAS.
If you have a profit equaling or greater than $75,000, you must keep tax invoices for your sales. This can help your tax return because of GST credits. You can claim the credits for the amount of the sole trader GST. If the rest is for work, it can be a tax-deductible expense. When maintaining your records this way, you have a greater chance of a good tax return. However, the bookkeeping often is over the average person’s depth.
You should also remember to keep up with your Business Activity Statement. Carefully review all of your business activities during the period of time you are filing. Be sure to write down every business sale and every business purchase.
While your business-related purchases need to be reported for GST and BAS, there are a significant number of items that you do not need to record for these purposes.
The list of items that you do not need to record includes:
- Bank fees and charges
- Depreciation
- Dividend you received
- Donations
- Fines
- Interest paid
- Most Australian government taxes
- Non-deductible entertainment expenses
- Private expenses that are unrelated to your business
- Salary
- Sale of your home if it is your primary residence
- Stamp Duty
- Superannuation
- Wages
While the GST and BAS may seem like a lot, it is essential to remember that your business is becoming more profitable, which is a good sign for you.
Once you have the figures necessary to determine if you need to report GST and BAS, you can make your payment, if required, using the Pay as You Go (PAYG) instalment system. Paying this way helps you portion your payments into manageable pieces, and you can avoid a large tax bill at the end of the year.
Frequently, sole traders will put money away to pay their taxes. The simplest way to pre-plan for the tax is by setting aside 20 per cent of every $100 you earn. Be sure to put this money into a separate account so you cannot access it for expenses that are not related to your tax bill.
Your payments can go through your personal account on the myGov website. You can also access all of your information at the site. Some sole traders prefer to make payments in advance by placing them in a tax bill account using BPay.
Maximise Your Deductions With a Professional
Staying on top of your business is your primary focus and should not be jeopardised by maintaining your business taxes. Save time, money and effort by working with a business accountant. At M2 Corporate, we are a boutique accounting practice dedicated to offering our clients expert personalised services. You do not need to struggle with sole trader taxes on your own. Get in touch today to learn more about how we can help.
FAQs
What is a sole trader?
A sole trader is an individual running a business who operates under their own Australian Business Number (ABN) and invoices clients for the work they complete.
How is a sole trader taxed?
Sole traders pay tax at the individual income rate on their taxable income, not the total amount they invoice for their services. Operational expenses and superannuation contributions reduce their taxable income and tax bill.
How much income tax do sole traders pay?
Sole traders pay the same tax rates as those who have a regular job. The current tax table provided by the Australian Tax Office (ATO) can be used to determine the tax rate.
What are some tips for maximising a sole trader’s tax return?
Assessing for Personal Services Income (PSI), claiming deductions for personal super contributions and health insurance premiums, and keeping accurate records of all expenses are some tips for maximising a sole trader’s tax return.
What taxes and superannuation do sole traders need to pay and report?
Sole traders need to register for goods and services tax (GST) if they sell most goods and services in Australia to Australian companies or individuals. They also need to collect PAYG withholding, lodge an individual tax return each year, and report their business activities to the ATO.
