Being self-employed can be both financially and emotionally rewarding, but when it comes to tax time or retirement, the picture is sometimes not as rosy. As entrepreneurial types know, when you work for yourself a little financial preparation can go a long way to benefit you as an individual.
There are many regulations around the withholding of tax from the pay packets of staff within a company structure, and the amount of super they must be paid by their employers. Many of these rules are not in place for the self-employed,1 working as sole traders or as partners in a partnership.
That absence of regulation and the resulting lack of financial discipline can cause problems when essential bills, such as the quarterly Business Activity Statement (BAS) and annual tax, fall due. It can also damage retirement wealth. But those that manage the process well can discover new benefits.
How do entrepreneurial types best manage their finances? The best start, experts say, is to act as if you are a company and begin following company rules in order to develop financial discipline.
Organise your accounts
It all begins with a decision around salary. By way of example, if the business brings in $100,000 annually before tax and after expenses, you might decide to pay yourself an annual salary of $85,000, which is a monthly, pre-tax income of $7,083.33.
Then remove the tax equivalent from this amount – simply use tax tables provided on the Australian Taxation Office (ATO)’s website. In this case, those within the tax-free threshold should withhold $1,759 monthly. So after-tax income will be $5,324.33.
Then organise your bank accounts. Once again this should be a simple process. In fact, the accounts you need are probably ones you already have.
As money comes in when invoices are paid, move the entirety of every payment to a specific account. A mortgage account with a free redraw facility is an excellent choice, as the extra funds in the account can reduce interest payments.
On a specific date each month pay your monthly, after-tax salary into your savings account. Everything else stays in the mortgage account, meaning your BAS and annual tax payments will always be available in this account, when required.
Sort your super
The self-employed are under no legal obligation to pay themselves superannuation. While their full-time equivalents are seeing a compulsory amount equal to 9.5% of their regular income paid into their super funds by their employers, the self‑employed must organise their own contributions.
The good news is that as well as helping to secure their retirement wealth, paying money into superannuation may offer a self-employed person several benefits.
Many substantially self-employed2 people will be able to claim superannuation payments as a tax deduction. Of course, such payments must not exceed annual concessional (pre-tax) caps of $30,000 for those under 50 in 2015–16, and $35,000 for those turning 50 or older in 2015–16. The contributions will be taxed, but at the concessional rate of 15% within the super fund.
A co-contribution from the Government might also be available to certain self-employed people, at a rate of 50c paid by the Government (up to a maximum of $500) for every $1 you contribute. This scheme depends generally on assessable income.
There are many benefits of setting up a salary plan to take away the possibility of bill shock when BAS and tax are due, and in making regular and automatic superannuation contributions that may be tax effective. Mix these simple financial strategies with a personal insurance plan and you’ll be able to take control and budget confidently for the future, rather than spend time worrying about it.
Information in this web page is based on regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document.
This web page may contain general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.