Sole trader tax: What you need to know

Introduction

If you’re a sole trader and need to get your taxes organised, start by reading these tips for maximising your return and get a jump start on next financial year.

End of the financial year can be stressful for any business owner, especially when it comes to completing your tax return. But rest assured, with a little pre-planning and help, you can easily reduce your tax-time stress while maximising your deductions.

To help make tax time less stressful, here are our top tax time tips for sole traders – and some common mistakes to avoid.

Sole trader tax rate

Sole traders are taxed as part of their own personal income, so the personal income tax rate applies.

How much can I earn as a sole trader without paying tax?

The tax-free threshold for sole traders is $18,200 in the 2021–2022 financial year.

Do sole traders get a tax return?

Sole traders are obliged to lodge a tax return, even if their income is below the tax-free threshold. Whether or not a sole trader gets a tax return depends on what their income and costs were during the financial year. An income tax estimator can be used to get an idea of whether a return will be earned. Alternatively, your accountant will be able to help you work this out.

How is taxable income calculated as a sole trader?

For a sole trader, taxable income is calculated at the same rate as personal income. The ATO calculates the sole trader’s income tax by deducting allowable deductions from taxable income. The result of this equation is the amount that the sole trader is liable to pay tax on.

How to pay tax as a sole trader

In a sole trader’s first year of business, they can make tax pre-payments into their tax bill account, put money aside for the tax they expect to pay or voluntarily enter into installments.

Once a sole trader has lodged their first income tax return and reported a tax-payable amount above a certain threshold, they will automatically enter the pay-as-you-go (PAYG) instalment system.

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