Tax for Self-Employed in Australia
Understanding the concepts of self-employment and taxation principles can be difficult thing to grasp. With all the legal mumbo jumbo, things get confusing real quick. The best way to understand the ins and outs of the tax for self-employed is to break it all down piece by piece. In this article, we will take a look at what self-employment tax regulation is, what it covers, and how it impacts business owners. We’ll also provide some tips on how to stay compliant with the law.
How do I know if I am self-employed?
A “Self employed” person in Australia can be a gig worker, an independent contractor servicing one or more companies/clients, or a business owner-operator (who may or may not employ others). Self-employment is also known as being a sole trader. You can be a self-employed individual while still being employed at another business. It is essentially the state of working for oneself rather than an employer. If a person is self-employed, he or she will generally be considered so by tax authorities if he or she wishes to be recognized as such, or if the individual is producing money that must be reported on a tax return. Self-employed individuals do not receive holidays or sick pay from an employer. and they do not have income tax withheld from payments made to them.
Self-employment and paying taxes
Strategic planning and time management are essential when attempting to ensure that your business activities are organized legally and effectively. Registering a business and setting up a structure to take advantage of tax benefits is one idea to keep in mind. Another one is establishing bookkeeping for tax minimisation through deductions. Creating a tax management plan for income tax and GST while simultaneously developing a strategy to minimize tax and search for tax break benefits is an important step to always remember. Although this information may be useful as a start for the self-employed person to take control of their tax, the specifics might be overwhelming without the assistance of a qualified taxation expert. So, we’ll start simple.
What is income tax?
An income tax is a tax imposed on individuals or entities in respect of the income or profits earned by them. Income tax generally is computed as the product of a tax rate times the taxable income. Taxation rates may vary by the type or characteristics of the taxpayer and the type of income.
Why do we pay income tax?
Taxes are used by the government to run a variety of social programs, including employment initiatives. Income tax also goes towards infrastructure projects, such as building new roads and hospitals. Income tax is also put towards national security measures, such as the military and police forces. Essentially, paying taxes is a requirement to keep our society afloat.
What are some deductions that can be claimed?
There are a variety of expenses that can be claimed as business deductions by self-employed individuals to reduce their taxable income. Some of the most common deductions include:
- Home office expenses
- Vehicle expenses
- Business-related travel expenses
- Professional association fees
- Office Supplies
- Phone and internet bills
It is important to keep in mind that there may be other deductions available that are specific to your line of work. To find out more about the deductions, you can call us and one of our handy accountants can help you out.
Personal services income
You can receive PSI in almost any industry, trade or profession. Some common examples include:
- Financial professionals
- Construction workers
- Medical practitioners
When more than half of your income is a reward for your efforts and abilities rather than being generated by the use of assets, the sale of products, or a company structure, it is classified as PSI. To work out whether your income is PSI or not, you can read the Australian Taxation Offices’ Personal Services Income page. You’ll have a better idea if PSI applies to you or not.
Goods and Services Tax
If your firm reaches $75,000 in sales, you must register for GST. Your taxes will be significantly impacted if you operate within the boundaries of GST. Maintaining invoices of your sales and GST credits will help you with your tax return. This is where bookkeeping comes into play, it can require in-depth dedication when tracking all your invoices. However, it’ll help you in the long run because GST credits can be claimed for the amount of GST while the rest of the purchase can be claimed as tax-deductible.
Business Activity Statements
Business activity statements are a document sent to the Australian Taxation Office by registered business entities to declare their tax obligations, such as GST, pay-as-you-go withholding, pay-as-you-go instalments, fringe benefits tax, wine equalisation tax, and luxury car tax. If your turnover is less than $75,000 as a single trader, you are not required to submit a BAS statement to the ATO. Nonetheless, to report on your earnings and expenditures in your annual tax return, you will need to keep track of all of your paperwork and records.
How to estimate your sole trader income
When you work for someone, you’ll most likely be paid an hourly rate or a yearly salary that makes it simple to calculate how much money you’ll make in a single year. As a self-employed individual, things are not quite as straightforward; your income may be more unpredictable. The difficult part for freelancers is to calculate income when they don’t know exactly what they will be earning. There are a few strategies to work around this issue.
Take a look at your history
You can estimate how much you’ll make if you’ve been self-employed for a while. Using your income from prior years, you may determine how much you anticipate making in the future. This is one of the best ways to guess how much money you’ll earn between two time periods.
If you overstate your tax payments, the government may repay you. If you underestimate, you may be fined; this is the best-case scenario, therefore leave yourself some wiggle room in case things go smoother than expected.
PAYG or pay-as-you-go is a system where tax is deducted from your income as you earn it. This system is in place for people who are self-employed or earning income that is not taxed at the source. The Australian Taxation Office (ATO) allows you to make estimated tax payments throughout the year, which can help to avoid any penalties at tax time. You can use the PAYG instalment calculator on the ATO website to work out how much you need to pay each quarter. So, the good thing about PAYG is that you don’t have to estimate your entire tax year’s income. Many self-employed individuals and sole traders pay their taxes in quarterly instalments.
Hire an accountant
It’s always a good idea to have an accountant on retainer, especially if you’re self-employed. Sometimes dealing with taxes can get overwhelming, considering that there’s so much to think about. Not only will they help you stay compliant with tax law, but they can also offer advice on how to grow your business. Accountants typically charge an hourly rate, so it’s important to get an estimate of how many hours they think it will take to get your books in order. Accountants examine financial records to ensure they are correct and assist clients in fulfilling tax requirements. They compute taxes owed and prepare tax returns, as well as ensure that customers’ tax obligations are met on schedule.
Falcon Advisory can help with all your accountant needs
If you’re self-employed and stressing over taxes, we’re just a call away. Our team of qualified accountants can assist you in all areas, from filing your tax return to organizing your paperwork. We understand that being a sole trader can be difficult, so let us take some of the pressure off. With great service and quick communication, we can solve all your tax issues promptly. Contact us today for more information!
The material in this content is for the benefit and information of clients. The items are in the nature of general comments only and are not to be used, relied or acted upon without seeking further professional advice. Falcon Advisory accepts no liability for any errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. Liability is limited by a scheme approved under Professional Standards Legislation.