Tax tips, tax, business, bookkeeper, ato, startups, small business,

So you have a steady flow of income but you’re stuck on how to pay yourself? First it’s important to understand what structure your business is operating under, and this will impact how you can pay yourself.

In this tax tip, we will look at three of the common business structures, being; sole trader, partnership and company, and how you can pay yourself under each of these.

Sole Trader

As a sole trader you are the individual operator and from the tax office’s viewpoint, there is no distinction between you and the sole trader – your sole trader is attached to your own personal tax file number. All the money that you make from your business (less tax) is yours.

Sole trader’s generally pay themselves by making drawings from their business bank account. It is important to note that the money you make as a sole trader is taxed in your personal tax return. This means you need to make sure you have cash set aside that can be used to pay the required tax when it is due. There is also a medicare levy of 1.5%. Always make sure that you put money aside to pay your tax bill. This a common trap sole traders fall into.

The personal tax rates for the current financial year (FY15) are:

Taxable income Tax on this income
0 – $18,200 Nil
$18,201 – $37, 000 19c for each $1 over $18,200
$37,001 – $80,000 $3,572 plus 32.5c for each $1 over $37,000
$80,001 – $180,000 $17,547 plus 37c for each $1 over $80,000
$180,001 and over $54,547 plus 45c for each $1 over $180,000

Partnership

A partnership works in a similar way to a sole trader. The difference being that you are working with others, who are your business partners. It is important that when you are paying yourself and your partners, you are doing so in line with rights specified in your partnership agreement.

Whilst the partnership itself does not pay tax (even though it has a separate tax file number to the individual business partners), the individuals within it who receive a share of the profits, pay tax through their personal tax return. The same tax rates, as seen in the table above, apply.

Company

Paying yourself when you have a company structure is a bit more tricky. You and your company are a separate entity (with a separate tax file number). Unlike a sole trader, you can not simply draw money from the company. This applies even if you are a sole director and sole shareholder of the company.

There are a few different ways you can pay your company as an employee and as a shareholder. In summary they are detailed below, however there are many other issues which need to be considered.

  • As an employee – this is where you receive a wage. When paying yourself it is essential that you ensure the relevant tax is withheld from your wage and you pay the required superannuation contributions.
  • As a shareholder – this is where you pay yourself a dividend. This means that you are effectively paying out the profits of the company to the shareholders.

It is essential to understand the effects of the different ways of paying yourself and the legal and tax requirements around the different structure of your business. Always ensure that you seek advice from your accountant to determine what is best for you and your situation, and the different implications.

This tax tip is brought to you with love by Nudge Accounting. You can read other Tax Tips here.