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How to Pay Yourself as a Sole Trader

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedMay 20222 min read

Running your own business offers plentiful benefits, including freedom and flexibility. You’re free to set your own wage or salary – but what does this mean for sole traders? Figuring out how to pay yourself can be tricky, factoring in business expenses along with the cost of living, tax obligations, and superannuation contributions. Here’s how to pay yourself as a sole trader all while keeping your business profitable.

How to pay yourself a wage as a sole trader in Australia

The first step is to look carefully at your latest financial statements and business plan. Your business structure impacts how you’re paid and taxed on earnings. For sole traders, the process is simple - you simply withdraw cash from the business. Personal withdrawals or wages must be tracked accurately and counted as profit so that they can be taxed at the end of each accounting year.

Part of figuring out how to pay yourself as a sole trader is working out the applicable market rate for wages. You should plan to pull money out from your business account and transfer it into your personal bank account as wages on a consistent, regular basis – just as you would with a regular salary or wage. An integrated payment solution can help you keep track of cash inflows and outflows to ensure business growth.

How to pay yourself as a sole trader in Australia vs company owner

While sole traders can withdraw funds when they like, what about company owners? If your business is registered as a company, the process is similar but comes with a few more rules attached. Company owners in Australia must pay themselves a regular salary which is treated as an expense for business accounting purposes. The company owner then pays a personal income tax on this salary.

Most business owners choose to take just enough weekly or monthly pay to get by on a modest budget, leaving enough in accounts to help your business keep growing. Then, if you have a boom in sales, you could always withdraw more funds as a bonus.

How to balance business and personal expenses

One of the biggest challenges in paying yourself is determining just how much to withdraw. You should look not only at your business plan and financial statements, but also your household budget to work out a reasonable amount.

Be sure that there’s enough left in the business accounts to cover operating expenses and current liabilities, as well as all taxes. You should also hold onto some funds for reinvestment, whether it’s new equipment or a product development.

At the same time, you should withdraw enough funds in personal wages to cover your everyday living expenses, debt repayments, insurance, and retirement funds. It’s a balancing act during the early days of a business, requiring strict financial planning.

How to meet ATO tax obligations

Sole traders in Australia must produce both a personal tax return and profit and loss statement. You and your business are viewed as one and the same, with net profit considered a component of existing income. It’s helpful to open a separate bank account to hold monthly tax payments, so that you’re not hit with a large, unexpected bill at the end of the year.

Sole traders can also claim business expenses on their tax returns. Visit theAustralian Taxation Office website for a full list of what’s allowed.

Should you include a super?

A final expense that’s worth considering is superannuation. When you’re just starting out, this added cost might be too much. However, paying yourself a super will help with financial stability in the long run. Consider that regular employers are required to pay eligible workers 9.5% of earnings into super accounts, provided they earn more than $450 per month. If you’re paying yourself more than this, you might want to make this same contribution to safeguard your future.

Technology makes it easier to plan, track, and pay yourself a wage. Online payment systems keep everything in one place, with plenty of options to keep your accounts topped up.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.