How do you pay for super and tax when you’re self-employed?

Australia is one of the best places in the world to start a small business. In fact, in 2020, small businesses accounted for over 97% of all Australian businesses! Owning your own business certainly provides for a greater level of freedom over your day-to-day, but it also comes with a far greater amount of responsibilities.

If you’re self-employed, you’re responsible for paying your own income tax and superannuation, so it’s a good idea to equip yourself with a solid understanding of both of these areas prior to starting your own business. 

In this article, we’ll explore the tax and super obligations for small business owners and sole traders in Australia. 

How do I pay tax when self-employed?

Taxes can be confusing even at the best of times, so if you’ve ever found yourself wondering about your tax obligations as a self-employed individual, know that you’re most certainly not alone! Questions relating to tax are some of the most common questions we receive from our new franchise owners here at Jim’s Group.

If you are self-employed – that is, a sole trader or partner in a partnership – you are responsible for paying your own income tax. As a sole trader or partner, you’ll be taxed at individual income tax rates, which means that you pay the same tax rates as those who have regular jobs in other businesses. It also means that you must report your business income in your individual tax return. In Australia, you have to earn more than $18,200 before you can be taxed on your income. 

In addition to paying income tax, you may also have to register for goods and services tax (GST) as a sole trader or partner. In Australia, businesses that earn over $75,000 must register for GST and lodge regular Business Activity Statements (BAS). These statements report on how much GST the business owner has collected over a certain period of time. 

Preparing for tax time is a little bit more complicated when you’re self-employed. When you’re an employee at another business, paying tax is typically quite easy as your employer helps you meet your tax liabilities by collecting pay as you go (PAYG) withholding. This changes when you become self-employed, because you become solely responsible for meeting your tax obligations. 

A good rule of thumb is to put aside 20% to 35% of your income as you earn it, preferably in a separate bank account that’s reserved for tax purposes only. This will place you in a much better situation at the end of each financial year, as it will mean that you have an adequate pool of money to draw upon. If you fail to set aside money for tax, then you could be hit with a nasty surprise that could break your business come tax time.

How do I pay super when self-employed?

Usually, your employer is responsible for making super contributions on your behalf to your super fund. When you’re self-employed, this responsibility falls upon you since you effectively become your own employer. 

Although there’s no legal obligation for you to pay yourself super, you should still aim to make regular contributions to your fund. It is your future, after all! Saving for retirement might not be a top priority when you’re starting out your own business, but continuing to make contributions to your super fund will help to ensure your long-term financial security and comfort. Plus, you may even be able to claim a tax deduction and save on tax!

In Australia, employers are required to pay super contributions of 10% of an employee’s ordinary time earnings. If you are paying yourself a regular wage as a sole trader or partner, then you can simply deduct 10% of that wage and put that amount into the fund. Super contributions can either be made in instalments or as a lump sum, so you have some control in how you want to make these payments. 

A business’ financial health is key to its success. If you’re in need of high-quality and reliable bookkeeping services, get in touch with the team at Jim’s Bookkeeping today. With trained and certified bookkeepers Australia-wide, Jim’s Bookkeeping has helped Australian businesses obtain excellent results for years. 

If you’d like to sit down with a trained bookkeeper to learn more about your tax and super obligations as a self-employed individual, get in touch today. Call Jim’s Group on 131 546 or contact us online to organise a complimentary, no-obligation phone call with one of trained bookkeepers. 

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