A sole trader is a self-employed individual who runs their own business. Unlike employees who receive a regular salary, sole traders are responsible for generating their own income. Paying yourself as a sole trader is crucial for ensuring financial stability and covering personal expenses.
This article will provide you with comprehensive information on the various methods available, including drawings, dividends, and superannuation contributions.
How do you pay yourself a wage as a sole trader?
Sole traders cannot pay themselves a salary or wage in the traditional sense. The ATO clarifies that since you’re the business owner, you’re not considered an employee. Sole trader income can only be accessed through drawings from your business bank account.
Paying yourself with drawings
Sole traders can take money out of their business for personal use through drawings from a business bank account.
Drawings are simply withdrawals from your business bank account for personal use. They are not subject to the same tax treatment as wages or salaries. This means they are taxed at your individual tax rate, and they aren’t tax deductible for the business.
Paying yourself with dividends
Dividends are payments made to shareholders from a company’s profits. They are taxed differently than wages or salaries, and the tax rate depends on your income level and the type of dividend.
While you can’t pay yourself a wage as a sole trader, you can set up your business as a company to receive dividends. If you do this, you can then pay yourself a salary, which is subject to the usual income tax rates for employees. However, this involves additional administrative and financial obligations.
What is the minimum wage for sole traders?
Self-employed individuals are business owners, so sole traders in Australia do not have a minimum wage. As the boss, you set your rates and income.
To figure out the appropriate amount of drawings, consider factors related to your business needs, emergency funds, and future investments. It’s important to strike a balance between your business and personal expenses.
A common approach is to:
- Set a budget: Create a personal budget for your monthly living expenses.
- Estimate your profit: Estimate your business’s expected profit for the year.
- Allocate drawings: Allocate part of your estimated profit for drawings, keeping enough for reinvestment and emergencies.
How do sole traders make super contributions?
As a sole trader, you are responsible for your own superannuation. You can make voluntary contributions to your superannuation fund or set up a self-managed super fund (SMSF) to manage your retirement savings. It’s easy to automate super calculations as a sole trader and make super contributions using Payroller’s integration with BEAM super clearing house.
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Tax considerations for paying yourself as a sole trader
For sole traders, the tax on owner drawings is considered personal income and is taxed at your individual tax rate. This rate varies depending on your total income for the year.
It’s important to keep accurate records of all payments made to yourself, including amounts paid and payment methods. This makes it easier to complete your personal tax return and ensure that you are meeting your tax obligations. It’s also a good idea to speak with a qualified accountant for advice on tax effectiveness.
Calculate PAYG, taxes, and superannuation automatically by setting up your details as an employee in Payroller, the easiest payroll provider for sole traders.
Frequently asked questions about getting paid as a sole trader
How much can I earn as a sole trader without paying tax?
The current tax-free threshold for sole traders in Australia is $18,200. You have the option to claim or not claim the tax-free threshold on your income. If you claim the threshold and your income is under $18,200, you won’t pay income tax.
Even if your income is below the tax-free threshold, you might still need to register for Goods and Services Tax (GST) if your annual turnover exceeds the GST threshold.
How much does a sole trader have to earn before paying GST?
The GST turnover threshold in Australia for sole traders is currently $75,000. This means that if your annual turnover as a sole trader exceeds this amount, you must register for GST. Once registered, you’ll need to collect GST from your customers and remit it to the ATO.
Can I pay employees as a sole trader?
Yes, a sole trader can absolutely have and pay employees. Sole traders can hire multiple employees without incorporating a company. However, it’s essential to understand the following:
- Types of employees: You can hire employees as full-time, part-time, or casual workers.
- Your rights and responsibilities: As an employer, you have specific rights and responsibilities, including paying minimum wages, providing leave entitlements, and complying with workplace health and safety regulations.
- Tax obligations: Your tax obligations will change as you start paying wages. You’ll need to register for an Australian Business Number (ABN) and Goods and Services Tax (GST) if applicable, and you’ll be responsible for withholding taxes from your employees’ earnings.
Do sole traders pay more tax than employees?
Yes, sole traders generally pay more in taxes than regular employees. Sole traders pay income tax on their net profit, which is the total income minus expenses. Employees, on the other hand, typically have income tax withheld from their wages by their employer. Sole traders who exceed the GST turnover threshold are required to register for GST and collect it from their customers. This can increase their overall tax burden.
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