Being self-employed is a tough ask, as one needs to market themselves, entail costs, perform services and then handle tax filings too. Taking on risks and costs that are usually handled by other people when working on a job is tough.
Sometimes they do not get enough customers or fail to generate income and need to prove the value of their offerings. As well as enjoying the benefits of self-employment, you'll need to take care of money matters.
You're guaranteed two things in life – death, and taxes. While taking care of your physical and mental health can lead to a longer, healthier life, financial planning, and strategizing can reduce your tax liabilities. Everyone wants to pay less come tax time. For those who're looking into debt consolidation and credit repair, learning how to reduce your taxable income can keep more money in your pocket and help you pay off your debts faster.
If you're self-employed – that is, a sole trader or a partner in a partnership – you don't have to make super contributions to a super fund for yourself. However, you may want to consider super as a way of saving for your retirement.
If you're a sole trader or in a partnership, you generally don't have to make super guarantee (SG) payments for yourself. But you may want to make personal contributions to super as a way of saving for your retirement.
From July 1 2017, regardless of whether you're self-employed or not, most people will be able to claim a full deduction for contributions they make to their super until they turn 75 years old. Those aged 65 to 74 will still need to meet the work test to be eligible to make a contribution and claim a tax deduction. Keep in mind that contributions you make may attract extra tax if they exceed the contributions limit for that year.
You may also be eligible for the super co-contribution payment. This helps eligible low-to-middle income earners save for their retirement. If you're eligible and you make super personal contributions, the government will match your donation up to certain limits, unless you have claimed your contribution as a tax deduction.
If you haven't spoken to your accountant or bookkeeper on the end of financial year matters yet, you might start to panic right now. After all, you've done the hours and are probably desperate to keep a little more of that hard-earned profit. However, being self-employed, you must first understand the nature of your expenses.
As a self-employed business owner, one of your first decisions is to choose your business structure. Most people choose to become a sole trader or start a company. The business structure you choose will determine the amount of tax you have to pay for your business. This article explains your tax obligations as a self-employed business owner, based on your choice of a sole trader or a company structure.
Business Vs. Personal Expenses
You can claim expenses that are directly related to earning your taxable income. Private and personal expenses, such as after-school care or home loan interest payments, cannot be claimed.
The expenses you can claim — and when you claim them — depends on the type of asset purchased or service engaged. Operating expenses can usually be claimed in the year they occur, while capital expenses must be claimed overtime.
Sole traders and companies have similar tax and reporting obligations, but you should be aware of the critical differences. In the table below, we detail the differences as well as some similarities.
Easy Ways To Save On Taxes For The Self-employed
Set up a Tax Savings Account other than Your Main Account
After being self-employed, one should have separate savings account for tax savings and for business transactions.Having different accounts helps a great deal in handling business and personal stuff. Some self-employed professionals have one account for everything, but it is evident that the tax money, income, and expenses, can get lost in the fray.
Setting up separate accounts will keep it hassle-free in the long run. With every check being deposited, keep 15-20% of income to the separate savings account. Calculate the tax payment at the end of the year and then write a check out of the account.
Prepay Some Expenses This Year To Reduce Taxes
Pay in advance and bring the deduction forward to this year. If you have a healthy cash flow, you can prepay your:
- Business loans (prepay on fixed rates 12 months in advance)
- Office and equipment lease payments
- Business insurance
- Business-related subscriptions
- Business travel, seminars and conference bookings
- Telephone and IT services
Two birds with one stone — See if you can combine the benefit of bringing forward the tax deduction and getting a discount for paying your supplier in advance. For every small business looking for a tax deduction, there will most likely be a service provider or salesperson looking to boost their sales results before June 30.
You can pay part of the taxes in advance, and you will save yourself from the hassle of paying them when you might not do as well.
You can prepay on business loans a year in advance along with office and equipment lease payments. You can prepay subscriptions, seminars, telephone and IT services and the like.
By prepaying, you can even apply for a tax deduction while also getting discounts for paying in advance.
You might find some service provider finding ways to boost sales results before the end of June.
Use Salary Sacrificing
For those trying to learn how to save tax in Australia, salary sacrificing is one way to do it. This is also called "salary packaging," and it works a few different ways. With a salary offer, a taxpayer would put some of their pre-tax income toward a benefit before they are taxed. Some of the most common salary sacrifice benefits are motor vehicles and superannuation.
So, an employee would forgo part of their pre-tax paycheck before they get it. For example, they could use salary sacrificing to pay for a new car, computer, insurance, rent payments, mortgage payments, and other benefits. These benefits are also referred to as "fringe benefits," and they can save Australians thousands of dollars in taxes every year, with a few exceptions.
For one thing, there is a limit on what can be salary sacrificed, also called salary packaged. Also, Fringe Benefits Tax, or FBT, can impact the types of benefits your employer offers. For example, employers will offer to salary package a car as a novated lease. This is an agreement between your employer, you, and a financer, and is one way to get access to a new car while reducing your taxable income. If you want to increase your refund this year, you could also consider salary packaging your superannuation too.
Claim ALL Deductions
If you spend any money on anything related to earning income, you'll want to claim it. Be sure you declare all deductions possible to pay less tax in Australia. Even things that may seem small and insignificant can add up to huge savings at the end of the financial year. For example, if you purchased something that is used for work, but you also sometimes use it during your time off the clock, you can still claim the money you spent on it as a work-related tax deduction.
If you're unsure whether or not you can claim a specific item as a work-related tax deduction, keep the receipt of purchase and ask your tax agent when you file. It's always better to hang on to receipts and not be able to claim the item than to toss the pass and miss out on tax savings.
Consider Asset Purchases
A small business that purchases any asset priced at less than $6500 can claim costs in the actual year itself. This is applicable even if you haven't paid but have been invoiced before June 30.
Larger capital acquisitions can be claimed for more than one year, including IT servers, cars and expensive equipment via accelerated depreciation of capital value. One can claim 15 percent in the first year and 30 percent each year after the first year.
Make Your Super Count
Superannuation may not be at the top of your list when you're starting out by yourself. But it's essential to think about it early. Super is a tax-efficient way of saving money to live on when you stop working.
Since you won't get regular super contributions from an employer, it's up to you to make them yourself. As well as investing for your future, adding to your super can reduce the tax on your current income. You may also be eligible for the government super co-contribution.
See super for self-employed people for more information.
Feeling Charitable? How to Pay Less Tax with Donations
Every donation you make to a registered charity greater than two dollars is considered tax-deductible. After donating, the organisation should send you a receipt. Make sure to file that away for tax season. Once tax time rolls around, add up your charitable receipts and enter that into the "charity donations" section in your tax return. But remember that donations do not come back via a tax refund. Instead, the amount of the monetary gift is reduced from your total taxable income, meaning you'll get back a percentage of the donation.
As per rules, one cannot deduct charitable contributions on Schedule C.
But if you give money to NGOs for advertising, it can be listed as a business expense.
Minimise your Taxes with a Mortgage Offset Account
If you have a home loan, a mortgage offset account lets you offset your non-deductible interest on the home loan with interest on the standard, taxable earnings of money in a deposit. With this arrangement, taxpayers can create a savings account with their lender. But instead of paying interest on the entire amount of the home loan, taxpayers are charged interest on the loan, minus the money in the savings account.
Use Medical Insurance Deductions
One can deduct premiums for health insurance for you and your spouse, along with bonuses for long-term insurance for health care.
The policy can be in your personal name and deductible for taxes.
You should only do this if it makes sense. If you don't carry private hospital insurance, but you're single and make more than 90,000 dollars a year, or you're a family and make more than 180,000 dollars per year, you will pay a minimum one percent Medicare Levy Surcharge. The Medicare Levy Surcharge is also collected on top of a mandatory two percent Medicare Levy that most taxpayers have to pay anyway.
Basic, private healthcare plans can cost less than the one percent of Levy Surcharge on your gross income, which would be less than the Medicare Levy you'd pay without insurance. For some people, private healthcare might be worth it to lower your taxes. Depending on your needs and medical history, it might also be worth it for the often shorter wait times you'll get with private healthcare.
Avoid the Hobby Trap
Do not deem your self-employment as a hobby, since although you can furnish your income, you can deduct expenses only for your income amount.
Even if you earn a profit, it is a detriment in this regard.
You have to convince the tax guys that yours is a for-profit business by keeping good records.
If you are earning from your hobby of breeding dogs, then keep it that way since hobbies are not liable to self-employment tax, else it would eat into 15.3% of net income from the same.
Plan Ahead for Holidays
You can book tickets for your future client visits or for surveying the market in advance, and the amount spent in holidays can be shown as business cases especially if you can prove that client visits happened during the interim.
Add to Your Super (or Your Spouse's) to Save Tax in Australia
Concessional super contributions are taxed at a rate of 15 percent once they enter a super fund. This is different than if they were taxed at a marginal rate, which is sometimes as high as 49 percent. What are the different types of concessional contributions you can make? You can make the following concessional contributions to lower your taxes:
- Salary sacrificing
- Personal deductible contributions
There is no income tax limit on salary sacrifices. Self-employed taxpayers or unsupported taxpayers can make contributions to their supers and also claim a full tax deduction.
Minimise Capital Gains and Minimise Taxes
Any significant assets sold in a given financial year, such as shares, or property, are subject to a capital gains tax. If the investment has been held for at least one year, you'll be charged a 50 percent capital gains tax on top of your marginal tax rate. Capital gains taxes have to be paid in the year they are realised. However, losses can be carried forward, but not back. Taxes payable within the financial year can also be decreased if you prepay deductible interest.
On investments, you can prepay expenses up to twelve months in advance. So, interest on investment loans and management fees can be claimed this financial year. If you have a substantial tax liability this fiscal year from the sale of an asset, prepaying can help you save money on taxes.
When it comes to taxes and property, another tax exemption from Capital Gains Tax is if your property is your principal place of residence or PPOR. You can claim the principal residence exemption from Capital Gains Tax for your house. To get it, you'll need to have lived in the house, or the property must have a dwelling on it that you live in. Learn more about how to reduce Capital Gains Tax for property used for business and investment purposes.
Don't Include Non-Taxable Income.
The ATO considers some income that is exempt or non-taxable, and you don't want to include it on your tax return. But, certain exempt income could be taken into account when tax losses of earlier income years are calculated. You can deduct some income and the adjusted taxable income of any dependents you have. Exempt or non-taxable income includes the following:
- Some Australian Government pensions, including disability support pensions from Centrelink to those who are younger than pension age
- Some Australian Government payments and allowances, e.g., the childcare subsidy and carer allowance
- Overseas pay and allowances for Federal Police personnel and Australian Defence Force
- Australian Government education payments, including allowances for students younger than sixteen
- Specific scholarships, awards, and grants
- Lump-sum payments from the surrender of an insurance policy, mortgage protection, or as payment for a terminal illness or work-related injury
Meet ATO Deadlines
If you register with a tax agent, tax returns can be lodged as late as May of the next financial year as long as you aren't in dispute with the Tax Office. But for everyone else, all returns must be lodged by October 31. Meeting all ATO deadlines can help you avoid conflicts and penalties. Self-lodgers with simple finances and circumstances typically submit their taxes online with the Tax Office. The account will be populated with your previous year's return and any information provided from your bank, workplace, government agencies, etc. The Tax Office collects this information until the beginning of August, so you'll want to wait until after that to lodge online.
Use a Tax Agent
A professional tax agent can save you a lot of time when it comes to lodging your taxes. They also have inside knowledge and industry expertise on taxes and refunds. By hiring a tax agent to help you with your taxes, you'll get the largest tax refund possible without running afoul of the ATO.
If you're learning more about credit repair and trying to reduce debt, lowering your taxable income and getting a refund come tax time can keep more money in your account. Instead of giving that money to the taxman because you didn't know what deductions you could take, you can use that refund to pay off debts and rebuild your credit faster.
You're guaranteed two things in life – death, and taxes. While taking care of your physical and mental health can lead to a longer, healthier life, financial planning, and strategizing can reduce your tax liabilities. Everyone wants to pay less come tax time. For those who're looking into debt consolidation and credit repair, learning how to reduce your taxable income can keep more money in your pocket and help you pay off your debts faster. Our list of 15 easy ways to reduce your taxable income in Australia can help.
Protect your income — and your business
Without sick leave, getting sick or injured can mean financial difficulties. Income protection insurance can help you pay your bills if you can't work.
If you have a super fund, find out whether they offer income protection insurance as part of the package.
Consider other types of insurance that can protect you and your business, such as public liability insurance and workers compensation insurance. See business.gov.au for information about insurance for business.