Lodging taxes when you are self-employed

As summer approaches, one of the biggest concerns for Australians is lodging their taxes. Throughout the country, the usual deadline to lodge your tax returns is the 31st of October. Even if you don't owe anything or can't afford to pay the ATO, it's mandatory to lodge your tax return.

In this post, we're specifically looking at how people who are self-employed—sole traders, consultants, private tutors, and freelancers—can prepare for lodging their returns.

Employed vs. self-employed

When you're an employee in a business, your employer will automatically pay you a super and withhold tax before paying your salary. All you need to do during tax season is log in to your myGov account and lodge your return using the myTax tool.

Working for yourself

Being your own boss is the ultimate dream for so many people. When you're self-employed, though, you register and run an entire business by yourself. You're either paying a salary to yourself or not paying yourself anything. In both cases, you're not earning super or withholding any tax throughout the year. That's why it becomes harder to assess how much tax you need to pay.

Setting aside tax funds

Your tax amount will depend on how much you earn. Since most people who are self-employed don't have a defined income, it's best to make an estimate. Once you know how much you'll earn in a week, multiply that by 52 (weeks) to calculate your annual income.

If that number is smaller than $18,200, then you fall into the low-income tax-free threshold. This means you don't have to pay any taxes on your income, but you still have to lodge your return.

If your annual income exceeds $18,200, then you have to pay tax for every additional dollar you earn (your taxable income - 18,200). The ATO has five tiers of tax rates that determine your exact amount of tax. Look at the ATO's individual tax rates to understand which tier you fall into.

Here's an example:

Annya Alecz is a well-known private website designer and developer based in Perth. She works from her home office and mostly interacts with her national clients over video calls. Let's say she charges $900-$1200 for each client and gets about 2-4 clients a week.

To estimate the maximum amount Annya will owe, we need to assess her approximate annual income.

That's, $1200*4 = $4800/week = $249,600/year

Annya falls into ATO's highest tax tier, which indicates she'll pay, $51,667 plus 45 cents for each dollar over $180,000.

Her excess income is $249,600 - $180,000 = $69,600

The tax on $69,600 at 45c for each dollar is $3,132

So the most Annya's total tax would amount to is $54,799. She has to ensure she has that amount ready to go when it's time to lodge her return. The best and easiest way for Annya to do that is to set up a savings account and deposit $1,054 every week or $4,567 every month. When tax season comes around, she only needs to withdraw from what had already been set aside to pay what she will owe.

So we've talked about Australian residents who live and work here for tax purposes. However, if you're an Australian permanent resident or citizen living abroad, or if you're working in Australia on a working holiday visa, your tax rates are higher than a resident's.

Overseas residents and working holiday visa holders

The major difference for people who fall into these categories is that you don't have a low-income tax-free threshold. This means, regardless of how much you earn, you must pay taxes on your income.

If you're a foreign resident, for up to $90,000 of your income, you'll pay 32.5c for each dollar in taxes. If you exceed that, you fall into the second tier ($90,000 - $180,000), where you have a standard base rate and an additional surcharge. The third and final tier has a much higher base rate. If you're a part-time resident (i.e. you've been in Australia for a specific number of months during the tax year), you may be eligible for a part-time tax-free benefit. Here's the complete tax rate breakdown for foreign residents.

If you're in Australia on a working visa (sub classes 417 and 462), you'll have four tiers of tax rates. For the first $45,000 you earn, you'll pay 15% of your income in taxes. With every incremental tier, your base rate also increases and incurs an extra charge on your additional income. Here's the tax rate breakdown for working holiday earners.

People under 18 who earn an income

Children under 18 years of age can still earn an income through investments and trust funds. However, these incomes accrue special tax rates, usually higher than adults'.

People under 18 who also qualify as an 'excepted person' or earn 'excepted income' will have the same tax rates as an adult.

1. Excepted persons - This includes people who have finished a full-time study and hold a full-time job, people with disabilities, and people who have no financial support.

2. Excepted income - This refers to all incomes received from business activities, full-time employment, Centrelink, and real estate.

The tax season doesn't have to be as complex as mainstream television has made it out to be. However, it's still important to record your income and expenses diligently, and to understand your tax rates. All of this comes with developing a healthy mindset towards income tax and appreciating your contribution towards our society. Keep a close eye on your income every week, and start preparing yourself for the October deadline. If you have a clear assessment of how much you'll owe later in the year, you can put aside the necessary amount without worrying about losing track of your finances.