When it comes to paying taxes as a sole trader, it’s likely you’ll be asking yourself:
In this article, we cover these questions and a lot more:
Note: looking for a tool that’ll help you optimise your taxes and pay on time? Parpera is a money management tool specifically designed for sole traders. You’ll be able to send and receive payments, create and send invoices and set aside money for taxes. Sign up to your 30 day free trial now!
Please note that this is not tax advice and all information is from the ATO website. For personalised tax advice speak to an accountant.
Here are the Australian Taxation Office’s (ATO) individuals and sole trader tax rates you need to calculate your tax for 2021-2022:
The good news is you may have a tax-free threshold of up to $18,200.
Now let’s look at the essential details you’ll need to figure out your business revenue, so you can calculate how much you’ll owe in taxes more precisely.
Australian sole trader taxable income is the total amount of all your client income minus your tax-deductible business expenses.
Total revenue - tax deductible business expenses = Taxable income
Here’s a sole trader tax calculation example:
You add up your revenue for a total of $73,000 at the end of the financial year. Your tax-deductible business expenses are $8,300, which puts your sole trader taxable income at $64,700. On the first $18,200, you’ll pay no tax, then on your revenue from $18,200 to $45,000, you’ll pay 19% or $5,092 in tax. The remaining $19,700 in taxable sole trader income will be taxed at 32.5% or $6,403.
That brings your total tax payment to $11,494, not including any additional taxes or offsets.
The ATO’s Income Tax Estimator will make sure you include any of these additional taxes, offsets, or deductions available to you. When you’re ready to complete your tax return at the end of the financial year, use our step-by-step tax return for sole trader guide.
On your first year of trading, you’ll pay your tax at the end of the financial year in July.
Once you’ve lodged your first tax return, you’ll then be required to submit your tax via PAYG every quarter.
Here are the essentials to remember if you’re a sole trader business owner:
Once you submit your first tax return, you’ll be entered in the ATO’s system and be required to submit and pay for PAYG every quarter. These are tax estimates based on the last three months of your work.
Keep these must-know PAYG details in mind to avoid fines while managing your cash flow:
If you’ve been in business a while, use last year’s tax revenue to estimate this year’s payable instalments. New sole traders can use this year’s revenue minus business expenses to make a best guess for pay-as-you-go tax estimates.
Here are three ways you can figure out your PAYG estimates for the financial year:
When calculating your PAYG estimate, remember you can adjust it each quarter if it’s off.
Even if your payments are higher than your actual earnings, you’ll get reimbursed once you lodge your tax return. You could get hit with penalties if you underpay your tax payments, so it’s better to estimate higher than lower.
Here’s a PAYG tax estimate calculation example:
Let’s say you’re six months into your second year as a sole trader. You have an average of $3,700 in client payments each month, so you estimate your yearly business income at $44,400. Since you’re not 100% sure of all your deductible expenses and don’t want to underestimate your PAYG instalments, you deduct $200 per month as expenses for a total of $2,400 of annual deductions.
Your taxable sole trader income estimate is $42,000, giving you a total tax payment of $4522. You can set aside $1,131 per quarter or $95 each week in a savings account to ensure you’ve got enough for your estimated tax payments.
If you pay electronically, you’ll receive email notices about your payment due dates. As a rule, each instalment is due 28 days after the quarter ends.
Make sure to set money aside each month, so you’re ready when it’s time to pay. Here are a few ways to do it:
According to the ATO, if your sole trader business revenue is less than $75,000 per year, you won’t receive a BAS unless you’ve registered for the Goods and Services Tax (GST). In this case, you’ll receive instalment notices for your PAYG payments each quarter. In essence, you only need to worry about a BAS statement if you’re registered for GST.
To make a PAYG payment, log into your MYGOV account and send in your payment electronically using BPAY®, debit card, or credit card. To change your PAYG estimate, you need to lodge your instalment notice.
As a sole trader, you can register for GST at any time, but it’s not required for most businesses until you earn more than $75,000 per year. You must keep check of your revenue, and register 21 days before you pass the $75,000 threshold.
Immediately add the 10% GST to your client invoices because you’ll be required to pay it, whether it comes from your own pocket or your clients. Once you’re registered for GST, you’ll receive a BAS when it’s time to lodge your PAYG and GST.
Find out how you can automatically add GST to your invoices with our complete guide on how to invoice as a sole trader.
Take full advantage of every legal sole trader tax deduction you can to lower your final tax bill. You’ll need to follow a few crucial rules to qualify for these deductions.
Here are the key tax obligations:
Types of deductions you may claim as a sole trader:
Read our guide on the different sole trader tax deductions and how to claim them.
Parpera is an all-in-one financial tool, including a Volt business bank account to help sole traders make and receive payments, invoicing software, and much more so you can manage and grow your freelance business easily.
Designed for the self-employed, the Parpera App also makes estimating and setting aside your tax instalments easier. Here’s how:
Avoid scrambling to pay a big tax bill by estimating your taxes early. Input last year’s figures or your current business revenue into the Parpera App and you’ll get an estimate of how much tax is due.
As your income fluctuates, Parpera will adjust the tax estimation accordingly.
When your tax payments are due, make sure you’ve got the right amount saved up in advance to prevent falling short.
You can transfer the right amount to your Tax Saver wallet or sub-account in just a few seconds. Coming soon: you’ll be able to configure your account to automatically set it aside.
Both your overall balance and your Tax Saver sub-account total are easy to spot in your dashboard whenever you need to check them.
As you make business purchases, you can quickly flag them as tax-deductible before you forget and lose out on substantial tax reductions.
Your estimated tax payment will also self-adjust each time you categorise an expense as a deduction in the app.
Be even more prepared at tax time by snapping a photo of your receipts or adding an electronic invoice to business expenses for your tax records in a few seconds.
We hope these sole trader tax essentials help you avoid unnecessary mistakes and unexpected large tax payment notices. Knowing how to use your sole trader tax rate to calculate and estimate your sole trader tax will help put you at ease and help you focus on what you really want to do: your freelancing work.
Download Parpera to make keeping track of your tax prep and payments even more effortless.
Please note the information contained in this article is general information only and does not take into account your personal circumstances. Before you open any account please ensure that you obtain and read the account terms and conditions and Target Market Determination to see if the account is suitable for you.
Parpera Australia Pty Ltd (Parpera) ABN 47 641 580 743 is an Authorised Representative (No. 1292372) of Railspay Pty Ltd (Railspay) ABN 17 646 031 558, which holds an Australian Financial Services Licence (AFSL) (No. 530983).
Volt Bank Limited (Volt) ABN 67 622 375 722, which holds an AFSL (No. 504782) is the issuer of the bank accounts in Parpera's App and deposits of up to $250,000 per account holder are protected by the Financial Claims Scheme.
RailsPay Pty Limited (RailsPay), which holds an Australian Financial Services Licence (AFSL) 530983 is the Product issuer of the Mastercard debit card (Card) which can be used in conjunction with the Volt accounts. Please read the PDS and FSG before deciding if you want the Card. Parpera Australia Pty Ltd (Parpera) ABN 47 641 580 743 is an Authorised Representative (1292372) of RailsPay under its AFSL and arranges for the issuance of the Volt business bank accounts and the Card available through Parpera's app.