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How to Pay Tax as a Sole Trader

9 min read
Starting a new business is exciting but it’s important to make sure you structure it correctly to get the maximum tax benefits. If you’re starting small, you could consider registering as a sole trader, which is essentially an individual running a business.

This means you are the only owner of the business and fully control and manage it yourself. You’re legally responsible for all aspects of the business and any profit or losses sit 100% with you and nobody else. You can hire employees to work in your business but you can’t employ yourself, and you’re fully responsible for paying super for any workers and for yourself.

There are many benefits to this set up if your business is relatively small, as it’s the simplest and cheapest business structure and the process of filing taxes as a sole trader is straightforward. However, if your business is larger to begin with or grows after opening, then you might want to instead register it as a company.

What is the difference between a sole trader and a company?

The main distinctions between running a business as a sole trader or a company are the tax-free threshold and the tax rates. If you choose to work as a sole trader then you benefit from a tax-free threshold of $18,200 – so if you’re running your business as a small side hustle, then this is a smart way to go. Companies do not benefit from a tax-free threshold, so every dollar of profit is taxed.

However if the annual turnover of your business is substantial then a company set up is worth considering, as companies pay a set tax rate of between 27.5% and 30% (depending on the company) whereas sole traders pay an individual tax rate (see below for specific rates).

Sole traders also need to lodge individual tax returns, whilst a company must file a business tax return each year in addition to individual tax returns for company directors and employees.

There are benefits to both set ups and it is worth discussing your situation in detail with your accountant to make sure you choose the best one for your business. When you create a company, you are able to bring on shareholders and investors, which can be beneficial to the growth of the business. You are also able to limit personal liability.

Being a sole trader has many benefits as well, as it’s cheaper and easier to run as a business and you have complete ownership. You’re also eligible for capital gains tax discounts and you can offset any tax losses.

However if your business as a sole trader turns over more than $75,000 in a year or you run a taxi service or want to claim fuel tax credits, then you are required to register for GST and lodge a quarterly Business Activity Statement (BAS). The good news is that your BAS covers both GST and your PAYG instalments so you won’t have to worry about doing both.

What are Sole Trader tax rates?

As noted above, sole traders need to file an individual tax return. So after deducting any business expenses, they apply the same rates as personal taxes to their income. Potential deductions for a sole trader include operating expenses such as rent, accounting fees and travel expenses; vehicle expenses; working from home expenses (if this is relevant) and instant asset write off.

Below is a brief summary of the tax rates for 2021-22. Bear in mind that this does not include the 2% Medicare levy, so this might also need to be factored in.
 
Taxable income Tax payable on this income
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

How do you pay tax as a Sole Trader?

Paying taxes as a sole trader is easy, thanks to the PAYG (Pay-as-you-go) instalments system. This process allows you to pay your taxes quarterly, so you don’t end up with a hefty tax bill at the end of the financial year.

When you’re first starting out, you need to estimate how much income you expect to receive as a sole trader and nominate an instalment amount to pay every three months based on this. Once your business is established, the ATO will simply use your previous year’s income to estimate the amount of tax that needs to be paid in each PAYG instalment.

Your PAYG instalments can be paid directly through the myGov website via your personal account, where you can view all of your current tax information. It’s also possible to pre-pay instalments into a tax bill account and to pay using BPay.

Need help working out how to set up your new business? Our expert tax consultants have extensive experience and can help to make the process smooth and stress-free for you. This means you can have peace of mind knowing your new venture has the best possible set up and focus on what you do best – running your business!

Contact one of our offices to get help with your tax lodge this season.


FAQs (frequently asked questions)
  • How can a sole trader pay no tax?

Sole traders need to lodge individual tax returns and follow the personal tax rates – including the tax-free threshold. So if your turnover is less than $18,200 then you still need to lodge a tax return but you won’t have to pay any tax.
  • Do I need to lodge a tax return as a sole trader?

Yes – a sole trader still needs to lodge an individual tax return each year. Any taxes owing on income is paid using the Pay-as-you-go (PAYG) system of quarterly payments.
  • Do sole traders pay tax in the first year?

Sole traders need to lodge a tax return every year, including the first year of business. If your business profit is more than the tax-free threshold of $18,200 then you need to pay tax on this.
  • How much tax do I pay on $20,000 a year self-employed?

The tax-free threshold for sole traders is $18,200 so you need to pay tax on any amount over this. If you earn $20,000 in a year, then you pay tax on the $800 of profit over the tax-free threshold.
  • Do sole traders only pay tax on profit?

Sole traders pay tax on any business profits over the tax-free threshold of $18,200. Business profit is calculated by deducting any legitimate business expenses from total income

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