How to pay yourself as a sole trader

As a sole trader and business owner, it’s important to pay yourself a regular wage. Sole traders pay themselves by withdrawing money from their business. Those withdrawals are considered to be profit, which is taxed at the end of the financial year. It’s important to set aside a percentage of your earnings in a separate business bank account throughout the year so you have money to pay any bills or tax obligations at tax time.

Separate your personal and business finances

As a sole trader, it’s important to separate your personal and business finances. It's a good idea to open a separate a business bank account, even if you run your business part time. This makes it easier to manage your business income, expenses and profits. It also lets you track your business expenses, which can save you time and money on admin.

Why you should open a separate business bank account

Pay yourself a regular wage

When writing your business plan, it’s important to forecast how much and how often you’ll be able to pay yourself. Complete a cashflow forecast to help you understand the business expense, and decide on an appropriate wage that balances your household and business needs. See our business plan template and our template for effective cash flow management.

 Some sole traders only pay themselves enough for essentials and to manage their personal expenses, preferring instead to invest their revenue into the business.

Tax considerations for sole traders

There’s no legal separation between sole traders and their business, which means they’re liable if something goes wrong.

At tax time, you’ll need to provide a personal tax return and a business profit and loss statement considering both you and your business are viewed as the same legal entity. Your net profit is considered an extension of any existing income and gets taxed accordingly (at your individual tax rate).

Because of this, it might be worth using a separate business bank account, such as a business savings and deposits account, to ensure it is easier to claim expenses on your tax return.

How to pay tax as a sole trader

Review the business profit and loss statements

Your business plan should contain forecasts which show your salary. However it’s important to regularly review your profit and loss statements in case your circumstances change. When you monitor your business’s financial situation you can make better decisions about your salary and change it if needed.

Build up your savings

As a sole trader, you’re responsible for all aspects of the business so it’s important to have money in reserve for unexpected expenses. Some sole traders keep two to three months’ worth of expenses available to cover personal health issues, unplanned costs or holidays.

Why you need an emergency fund

Consider superannuation

Sole traders are not legally required to pay into a superannuation fund for themselves, but it might be a good idea to set one up for your retirement. However all employers regardless of size are required to pay at least 9.5% of all eligible workers’ ordinary time earnings to their super accounts if they earn more than $450 a month (before tax). You may want to make similar contributions to your own superannuation.

For more information visit the Australians Taxation Office’s page for super for sole traders and partnerships, opens in new window.