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A step-by-step tax guide for the self-employed

by Samuel Williamson

3 min read

Self employment tax guide

Starting a business is one of the most exciting decisions you can make, but it’s critical you understand which self employment taxes apply when venturing out on your own.

If you don’t get your self employment tax obligations in order, the financial consequences could be disastrous. Put the time and effort into understanding your obligations now to avoid bigger problems down the line.

Sole trader responsibilities

The first thing to understand about taxes for the self-employed is that the amount you pay depends on how your business is structured.

When you operate as a sole trader or partnership, you are personally liable for your tax debts, and there isn’t any division between your personal or business assets. This means any income is regarded as the individual’s income, and is subject to the same personal income tax brackets as salaried employees. You’ll need to put some money aside in a separate bank account for your tax payments.

As a sole trader, you can reduce the tax you pay by claiming a range of deductions or expenses related to running your business.

When you have a company structure

The other business structure recognised by the Australian Tax Office (ATO) is a company, which is taxed separately from individuals and at a flat rate.

There is no tax-free threshold for companies, but they can claim deductions. Generally, company tax is complex and many businesses rely on tools like online accounting software to make sure they meet their obligations.

Plan for the goods and services tax

You should also keep in mind the goods and services tax (GST). Both sole traders and companies must pay GST once earnings are more than $75,000 a year. It’s a good idea to plan for your regular GST payments and ensure you have the money in hand – or in your bank account – to meet your obligations. Typically, businesses will pay GST on a quarterly basis. (Please refer to our EOFY Checklist).

Optimise your tax deductions

There are multiple ways to reduce tax payments. For most businesses – either structured as a sole trader or company – these are in the form of deductions. They are expenses incurred in running the business that can be offset against income.

The ATO states: “You can claim a deduction for most expenses you incur in running your business as long as they are directly related to earning your assessable income.”

Deductions can differ based on your structure. For instance, the ATO allows you to claim a tax loss in a previous year against the current year’s income. If you are a sole trader, you can offset business losses carried forward against other income as well. However, you aren’t allowed to choose the year, or years, when you claim a deduction for tax losses in previous years.

It’s crucial for business owners to keep on top of rulings like these and always calculate their profit and loss carefully.

What reporting do you need to do?

When you’re self-employed, you must also understand your self employment tax reporting requirements. The most common is the business activity statement (BAS), which all businesses registered for GST must complete.

The quarterly BAS reports how much money you’ve made, how much GST you owe (or the ATO owes you), any pay-as-you-go (PAYG) instalments and other tax obligations you might have. If you’re operating as a company, you can also submit a return for fringe benefits tax.

Tap into tools to keep on top of your tax

Starting your own business is an exciting time. While coming to terms with your tax obligations might sound overwhelming, there are useful tools to help you achieve your dream. Online accounting software such as QuickBooks Self Employed can take much of the worry out of tax time, allowing you to focus on building your business.

To read more articles on Self Employed Tax, visit here.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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