As Biggie Smalls once rapped, 'I've been in this game for years'. I'm currently entering my fifth year as a freelance/sole trader. I make money as a copywriter, journalist and guest blogger for other websites. A freelancer or start-up business creator needs to do their own research when it comes to taxes, because let's face it: During the first few years we're the CEO, accountant and creative team all wrapped into a one-woman band. I've taken the liberty of listing the things I've learned about taxes as a sole trader (applicable to Australia only) below to help you out.
What You Need to Know About Taxes as a Sole Trader/Freelancer
If you have been operating as a freelance writer, graphic designer or web developer for the last year or two, you may be due to lodge your first tax return as a sole trader. Lucky you! I hope you’ve kept all your business-related receipts and created a savings account for the taxes you are due to pay.
Uh, what? Pay? I hear you ask. I have to put aside the cash I earned to give to the ATO?
Don’t fret. You’re not the first person to go through this. While lodging my first tax return as a freelance writer I was suddenly hit with the understanding that yes, I was in fact NOT supposed to spend all my money on shoes, but to create a separate savings account specifically for my tax bill when it rolled around. There are some prerequisites you will need to educate yourself on in order to understand whether or not you're due to pay a tax bill. This includes the amount of money your business makes and what your business is defined as. First things first:
Are you a sole trader?
A sole trader is, according to the ATO website, a person who trades, controls and manages a business on their own. Their business is not owned and operated by another company and typically many of these businesses are paid via a PSI - Personal Services Income. This means the sole trader (you, you lucky thing!) creates and is paid for work produced from their own efforts as an individual - freelance journalists and graphic designers are a perfect example. As a sole trader you should also have an ABN.
Why do you need an ABN?
An Australian Business Number means you get to make your money and actually keep it. Operating as a sole trader or any kind of business requires an ABN. Without one you would have to pay over 48% of your earning to the ATO.
How do you know if you are above the earnings threshold to pay tax?
If you have earned over $400 in the last financial year through your business operations you need to fill out the questionnaire on the ATO website to find out if you need to lodge a tax return because, well, you probably do. However, according to the eTax accountants the tax-free threshold for small businesses is $18,200. If your total income is less than that amount, you won’t need to pay tax on that income. Phew!
How do you save to pay your quarterly tax bill?
Set up a separate saving account within your operating bank account titled something like, ‘QUARTERLY TAX BILL SAVINGS’ so that come tax time, you don’t get charged a bundle you can’t pay for your hanging cacti and candle ball business.
What can you claim back?
Typically any business-related expense over $100.00 - such as a laptop, art supplies, graphics pad, etc - is worth claiming, so save and file your receipts using a Profit and Loss form (you can draw one up using Microsoft word tables if you can’t afford virtual accounting software). You can also claim 15% of your rent and internet bills if you operate out of your home.
What is a PSI?
The ATO website will tell you that income is classified as PSI when more than 50% of the amount you received per job was for your own skills, labor or expertise. A PSI can be claimed whether or not you do operate as a sole trader and a PSI is worked out per job. Meaning: The income you received for job you commissioned through your business must be assessed according to the PSI rules. The PSI rules can be found through the ATO website. It’s a wonderfully informative place!
To do all the research you need to do come tax time check out the ATO website here and assess your personal situation in reference to their information.