How not to pay tax when self-employed?
Many independent contractors make solid livings. However, even if your annual revenue is high overall, the money doesn't always come in at the same time. The time between paychecks can last for weeks or even months.
Make major purchases only after you've paid yourself and your monthly bills to help with your cash flow. Set aside some cash for unforeseen expenses.
Being self-employed means, you will not be eligible for paid vacation days or sick days. You must set money away on your own. Regularly setting aside a little more money will both help you get by during lean times and provide money for a well-earned vacation.
Ways to save taxes as self-employed in Australia
Set up a Tax Savings Account other than Your Main Account
One should establish separate savings account for business expenses and tax savings after becoming self-employed.
Having separate accounts makes managing your personal and professional life much easier.
Even while some independent contractors use a single account for everything, it is clear that taxes, earnings, and outgoing costs might be misplaced in the chaos.
In the long run, it will be hassle-free if you create different accounts.
Keep between 15 and 20 per cent of your salary in a separate savings account for each check you deposit.
Write a check out of the account after calculating the tax payment for the year.
Claim Operating Expenses
Since they contribute to revenue generation and are deductible each year, operating expenses are considered revenue expenses.
Along with advertising expenditures, electricity, phone, travel expenses, and bonuses, one might include salaries, wages, allowances, and bonuses in the computation.
Prepay Some Expenses This Year to Reduce Taxes
You can pay a portion of your taxes in advance to avoid the bother of having to pay them later if your finances don't go as planned.
Along with office and equipment leasing payments, company loans can be paid off one year in advance.
Subscriptions, seminars, and phone and IT services, among other things, can all be prepaid.
You can even ask for a tax deduction when you prepay in addition to receiving discounts for doing so.
Before the end of June, certain service providers might be looking for strategies to increase revenue.
Consider Asset Purchases
It's crucial to note that a small corporation can still deduct 100% of the cost of an asset it purchases for less than $6500 in the year it actually incurs the charge.
You may still make a claim even if you haven't paid for the item yet as long as you receive an invoice before June 30.
Larger capital purchases with a lifespan of more than a year, like expensive automobiles, expensive plant, and servers for IT, must be claimed over a number of years.
These things are written off using accelerated depreciation of the capital value; 15% is written off in the first year (even if purchased in the year's final month), and 30% in each succeeding year.
Bite the Bullet and Do Away with Bad Debts
A taxable sale that has gone unpaid for more than a year with little possibility of recovery is considered a bad debt.
You must be aware that certain bad loans have been cancelled off.
Discuss the impact of the GST with the accountant as well.
Claim for Entertainment
You can purchase sports team tickets for your favourite team and then claim the cost as a business expense.
However, there are many limitations on how much entertainment can be claimed as business costs.
When doing business with someone while watching a game, either before, during, or after the event.
Even if the costs meet the requirements, they are still 50% deductible.
Use Medical Insurance Deductions
You and your spouse's health insurance premiums, as well as those for long-term health insurance, are both deductible.
The insurance can be in your name alone and is tax-deductible.
Avoid the Hobby Trap
Do not consider your self-employment to be a hobby because you can only deduct expenses up to your income, even though you can provide proof of income.
Even if you make a profit, this is still detrimental.
By maintaining accurate records, you must persuade the tax authorities that your company is a for-profit enterprise.
Since hobbies are exempt from self-employment tax, keep it up if you are making money from dog breeding; otherwise, it will reduce your nett income by 15.3 percent.
Use Superannuation Allowance
Use your approximately $25,000 superannuation allowance if you are 60 years old or older, or your $35,000 allowance.
You can even contribute up to the maximum amount again if your spouse works for the company, but you must also count any additional employer payments you get.
Employee superannuation guarantee payments made before June 25 will be received by the superannuation fund account on time and qualify for this year's tax deduction.
Plan Ahead for Holidays
You can reserve tickets in advance for customer visits or market research, and the money you spent on vacation can be used to support business claims, particularly if you can establish that client visits took place in the meantime.
Keep track of your car's mileage, destination, and reason for each journey, excluding personal excursions.
Use the usual mileage rate, or stick to actual costs to determine tax deductions.
Add your costs, and deduct them
If you're a self-employed professional, you can reduce your tax liability by writing off the expenses you incur for your firm. These expenses include what you spend on tools, using your car for business purposes, going to conferences and networking gatherings, joining trade associations, and paying for advertising and marketing.
Tax obligations as a self-employed business owner
It depends depend on whether you choose a solo proprietorship or a corporate form.
Taxation as a Sole Trader
As a sole owner, you are subject to the rates that apply to individuals' incomes. On your individual tax return is where you will report any income from your business. Your tax liability will be based on the following factors:
You may be responsible for paying taxes at a rate of up to 45 percent if you run your business as a sole proprietor and it is profitable (excluding levies). On the other hand, you may be eligible to profit from the tax-free threshold of $18,200, which is applicable to sole owners as well as individuals.
Taxes for Companies
A separate legal entity from its owners and operators is a business. A corporate tax return, not an individual tax return, is the one that needs to be filed in order to declare any revenue from a firm.
There is no tax-free threshold and no graduated tax rate applicable to enterprises. Both of these provisions are eliminated. Instead, the company is required to pay the same amount of tax on each and every dollar of income it generates.
There are two different tax rates that apply to the income of businesses:
- the 27.5 percent "base rate" that is applicable to businesses with combined annual revenues under $50 million; and
- for businesses with an overall turnover of more than $50 million, a 30% tax is applicable.
In contrast to someone who operates their business as a sole proprietor, you will not be able to deduct any tax losses from your personal income. The corporation itself is the entity that is responsible for the company's tax losses. Businesses that experience rapid expansion tend to favour flat tax rates since these types of rates keep the overall tax burden the same regardless of the level of revenue.
Tax Responsibilities of Shareholders
As a shareholder in your firm, if it is a business, you have the opportunity to receive a portion of the company's profits in the form of dividend payments. These dividends will have an effect on your annual tax liability because they will be a part of your personal income and therefore subject to taxation. Imputation is the method used in Australia to compute tax obligations; this is done to avoid double taxation on the part of the government at both the corporate and shareholder levels.
The first scenario is one in which your company hands over to you, in the form of dividends or other payments, gains that have already been subject to taxation. After that, the company has the option of "imputing" (which literally means "passing along") tax credits. During the entirety of this process, the distribution is regarded as "franked."
If a company sends you fully franked dividends as a shareholder, you will be eligible to obtain franking credits for the tax that the company has already paid on your behalf. As a direct consequence of this, you will not be required to make any tax payments on any portion of the dividend. You will be required to pay taxes only if the rate at which you are personally taxed is higher than the rate at which the business is taxed. If the tax rate that applies to you as an individual is lower than the tax rate that applies to the business, you will be eligible for a tax refund.
Goods and Services Tax (GST)
Both corporations and sole proprietors must register for the Goods and Services Tax (GST) if their business:
- has a turnover of at least $75,000.
- providing ridesharing services for a fee, such as driving for Uber, for example;
- or desire to apply for gasoline tax credits for your company.
If none of the aforementioned circumstances are true of your business, then registering for GST is completely voluntary on your part.
If you decide not to register for GST, you need to keep a close eye on how much money you make. If you fail to register with the ATO and your annual revenue is more than $75,000, you may be subject to fines and penalties.
'Small Business' Tax Concessions
If you started out as a self-employed business owner, you may qualify for certain tax incentives that are given to small businesses.
If you make less than the following amounts throughout the income year and your business is operational for all or part of that year:
- $10 million in combined revenue (for all exemptions excluding the capital gains tax exemption); or
- $2 million in total revenue (for capital gains tax concessions only).
For the purposes of tax incentives applicable to small businesses, the primary distinction between operating as a sole proprietor and operating as a corporation is how the tax on capital gains is applied (CGT).
The tax that must be paid on profits and losses incurred by capital assets is referred to as CGT. Real estate and corporate shares both qualify as examples of assets with a long-term time horizon. For example, if you sell company shares, the difference between the amount you paid to purchase the asset and the amount you made from selling it is used to calculate the gain or loss from the transaction.
Discount on Capital Gains Tax for Sole Proprietors
If you are a sole proprietor and meet certain requirements, you may be qualified to get a CGT deduction equal to fifty percent of your capital gain before having to include that gain in your taxable income. At a minimum, a year must have passed since you acquired the asset. It is possible for the capital gain to be decreased following the application of all of the capital losses for the income year as well as any additional unapplied nett capital losses from earlier years.
Discount on Capital Gains Tax for Businesses
In contrast to individual proprietors, corporations are not eligible for the CGT deduction worth 50% of their profits. On the other hand, if your company is considered to be a small business, you can be eligible for certain CGT savings, including the following:
whether or not your organisation is qualified for the CGT savings offered to small businesses.
The annual revenue of the company is less than two million dollars; or
The total nett worth of the Company's assets, as well as the total nett worth of any linked organisations or subsidiaries, does not exceed $6,000,000 at any point in time.
Because of the small business capital gains tax allowances, you have the opportunity to ignore some or all of the capital gains that were produced by an active asset.
An asset is considered to be active if it is either being used in a business or is closely related to the operation of that business. An "active asset" could be, for example, the corner store that you recently purchased in order to better advertise the candies and confections that you produce.
If you are 55 years old or older when you retire and sell an active asset that you have owned for at least 15 years, you are eligible to fully disregard the capital gain.
In the absence of this 15-year exemption, you are free to do any of the following:
- 50 percent off the capital gain;
- If your capital gain is up to $500,000, you can minimise it by using the small business retirement exemption; or
- If you spend money on making improvements to an active asset or if you buy an active replacement asset, you can defer all or some of the capital gain for two years or longer.
These concessions are intended to increase your cash flow and possibly reduce or even completely eliminate tax owed upon a business departure.
Income from Personal Services
If you run a one-person operation, you need to be aware with the rules that regulate income from personal services (PSI). This refers to the money that you have earned mostly as a result of your own work or ability.
Your income is subject to PSI regardless of the sector in which you work or the profession you hold. A few instances of this are people who work in the medical field, the building industry, the engineering field, the financial sector, and the information technology consulting field. If the ATO determines that you are receiving PSI, then the entire amount of profit you make from your business will be subject to wage taxation. Despite the fact that you are producing money through a business structure, the end outcome is the same as it would be if you were operating as a sole proprietor.
Despite this, it is highly unlikely that the PSI requirements will apply to your company if you are in the business of employing people or selling products. Any profits that are earned over and beyond the needs of the company can be retained there and taxed at the corporate rate.
You should make tax management your top priority rather than considering activities that could put a strain on the cash flow of your firm in the future in order to achieve a short-term benefit on your taxes.
It is a waste of money for your company to make investments in idle assets, upgrade vehicles, or boost superannuation contributions if doing so would lead the company to have problems with cash flow.
Although following these tips will help you pay less in taxes, the most important aspects of tax preparation are having the appropriate processes in place and filing your taxes on time. These are the things that will help you pay the least amount of tax possible.
As you prepare to start a new fiscal year, you may want to discuss the possibility of incorporating your business with your accountant to see whether or not this is something you should do in the long run.
Consult a tax expert to ensure that your books are in order for the filing of your taxes and to ensure that you are making the most of all of the deductions that are available to you. In addition, make use of accounting and tax software to keep track of your expenditures during the entire year, as well as to accelerate and simplify the process of completing your returns.
Even though you are unable to completely eliminate the amount of taxes that you owe, it is possible for you, as a professional who is self-employed, to decrease the financial strain that is caused by paying taxes.
Frequently Asked Questions
"Goods" has been defined as every kind of movable property other than mon- ey and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.