If you work for someone, but you’re not an employee, you’re considered an independent contractor. According to the Australian Taxation Office (ATO), you’re a sole trader – meaning you’re essentially running your own business. This distinction can make understanding your tax obligations tough. To help you out, we’ve answered some of your most pressing questions.
Do you need an ABN?
Yes, to work as a contractor within Australia, you’ll need an Australian Business Number (ABN). You’ll need it to invoice your clients, otherwise they’re obligated to withhold 47% of your total payment for tax. Your ABN also makes it easy for you to communicate with the government and comply with your tax obligations in your end of year return.
Do you need to pay income tax?
If you earn more than the tax-free threshold – that is, $18,200 – in the financial year, you’re required to pay income tax. Australia’s tax system is progressive, so the amount of tax you pay will depend on how much you earn. The more you earn, the higher the rate of tax, so it’s important to know the tax rate that applies to you.
Because you’re not considered an employee, income tax isn’t automatically deducted from your pay. Rather, as a business owner, you’re obligated to keep aside the amount of tax you expect you’ll have to pay the ATO at the end of the financial year. To keep things in order, you might consider opening a separate bank account, where you can transfer the correct proportion of tax owed from each invoice you receive.
If you’re working a lot, keeping track or your invoices and tax payable manually throughout the year can be time-consuming. Fortunately, you can simplify the process by investing in accounting software that does the calculations for you. For example, QuickBooks Self-Employed connects straight to your bank account to easily track and categorise business income.
Do you need to pay your own superannuation?
While making superannuation contributions isn’t a legal requirement when you’re self-employed, it is wise to put money aside for your retirement regardless. This will ensure that you will have enough money to live comfortably on when you reach retirement age.
To incentivise low- or middle-income contractors to make personal super contributions, the Australian government offers a co-contribution scheme. If you meet certain requirements and make a personal, after-tax contribution, the government will make a co-contribution of up to $500 at the end of each financial year. You don’t need to apply for this scheme as it will be automatically processed when you lodge your tax return.
To learn more about your tax obligations as a sole trader, check out these resources.