The price to pay once you start working for yourself are the manageable tasks of mastering sole trader tax rates and compliance.
If you’ve left the employee life and created your own business as a sole trader, you’ve embraced a host of freedoms.
Working for yourself is a source of incredible self-satisfaction, but it also comes with more responsibilities – Thankfully, with sole trader accounting software you can easily manage your own tax compliance.
Administering your sole trader tax obligations to the Australian Tax Office (ATO) is an important undertaking for a sole trader, as your tax isn’t automatically withheld from your income anymore.
To help you stay compliant, let’s investigate sole trader tax rates, how to calculate tax, when to submit tax returns and the role of advisors can have on your business.
Sole trader tax rate
The sole trader tax rate is calculated in the same way as an individual would be, as opposed to a company.
- The sole trader tax rate in Australia is based on the individual tax rate and will depend on your earnings.
- The tax-free threshold for a sole trader is $18,200 in the 2020–21 financial year.
- A sole trader business structure is taxed as part of your own personal income.
The following tax rates and brackets apply to sole traders:
| Taxable income | Tax 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 to calculate tax for sole trader
If you need to calculate tax for a sole trader, you can use the table above as a guide, or the ATO has an income tax calculator for accuracy and peace of mind.
The income tax calculator can also take into account important tax considerations such as:
- Medicare levy
- HELP debt
- Tax offsets
- Tax credits
Find the ATO’s income tax estimator calculator here.
How to pay tax as a sole trader
So, how do you pay tax as a sole trader? The best way to go about managing your tax responsibilities is to get ahead of it.
You can prepare for your sole trader tax return in a number of ways:
- You can make pre-payments into your tax bill account.
- You can be responsible for putting funds aside throughout the year in anticipation of your expected tax bill.
- You can voluntarily pay tax in instalments.
PAYG
After the first tax return that shows you operate above the tax-free threshold, you’ll automatically be entered into the PAYG (pay as you go) scheme. However, you can enter into PAYG voluntarily to anticipate your tax liability and get ahead of a tax bill.
Reporting
You’ll have to report earnings, tax and business activity to the ATO through both a BAS (business activity statement) and a tax return. Your BAS will include GST payments as well as your PAYG instalments.
Sole trader tax return
Submitting a sole trader tax return is a requirement from the ATO and is an integral part of trading as a small business and individual in Australia.
You have a few options for lodging a tax return as a sole trader:
- You can manage your own tax return by using myTax, which is linked to your myGov account.
- You can fill out a paper tax return.
- You can engage the services of an accountant, bookkeeper or advisor.
Using an advisor to lodge a tax return
Many sole traders and small businesses use the option of a registered tax agent as they’re adept at picking up on missed tax reduction strategies and will ensure compliance. There are many easy-to-miss tax deductions that you’ll incur as a sole trader, highlighting the importance of professional tax advice.
If you need help finding an accountant or bookkeeper near you, feel free to use our advisor search tool.
If you need further advice on sole trader tax, please visit the ATO website.
