Its a really easy position to find yourself in, especially as a sole trader working for yourself. The bank account looks healthy enough, you think you've got just enough money for your expenses, when out of the blue, you get ANOTHER tax bill! If its not GST, its PAYG, if its not that, then it is Income Tax on what you've earned, and THEN they start charging you in advance! Seriously, this is so confusing!
Here's some of the more common taxes small business come across.:
GST: If you are registered for GST, generally you need to pay the government 10% of your income and they have to pay you for 10% of your business expenses. In an ideal world, 10% of your income is more than 10% of your expenses, and therefore you generally owe them money when the calculation is done. The GST is generally paid quarterly through your BAS (Business Activity Statement).
PAYGW: Pay As You Go Withholding is tax that you need to pay the government on behalf of other people you employ. This may also be tax for yourself if you are running a company rather than a sole trader business. You will pay this via your regular BAS also. It is calculated through running your wages each payment period.
Income Tax: At the end of the financial year (30 June), your Tax Agent will lodge your tax return. This document will take your income and expenses into consideration, along with a number of other factors, and assess the tax that needs to be paid (or refunded) for the year just gone. This is treated as a one-off transaction to be paid or refunded to the Tax Office as per the notification they send you once a year. However, if you are doing your tax return for the first year as a sole trader, the Tax Office will have a look at the amount of tax you had to pay, and may decide that you should pay your tax in instalments in future (see PAYGI).
PAYGI: Pay As You Go Instalments are calculated by the tax office based on last year's tax return. They give you an option of how you wish to calculate them, but essentially they want you to start paying them on a regular basis throughout the year from now on. They ask you to pay them with each of the future BAS you submit.
For the average sole trader with no employees, it can help to set up a separate bank account for your business. Call it something like Tax Management Account. On a regular basis (or even as soon as you get an invoice paid), transfer 30%* of that income straight into the TMA. This means that when your BAS is due, you have the GST there to pay immediately. At the end of the year, you will have either all or most of the tax you will need to pay your income tax. When they impose the PAYGI on you, you will have that as well.
*Please ask your Tax Agent for guidance on a percentage that will work for your business and income specifics. This percentage is based on 10% for GST and 20% for Income Tax, but may not be right for you.
THIS INFORMATION IS NOT FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON WITHOUT DISCUSSING YOUR SPECIFIC SITUATION WITH YOUR TAX AGENT.
Bookkeeper, BAS Agent, Diploma Accounting, I love helping small businesses get their books back in order and create calm out of chaos.