Are You Thinking About Your Tax?
Posted on March 15, 2017 by Samantha Gomez
Do you feel like you’re on top of your tax? Do you know how much tax you need to pay? Do you know how to find the right information to work out your tax rate? Have you put money aside during the year for tax?
When you run your own business you don’t have an employer taking out tax from the money you earn but you still need to pay tax and it is your responsibility to take it out of your earnings and put it aside.
It is easy to feel like you are earning a lot when you only look at your before-tax income but the $100 you earn per client could possibly be as little as $69 after tax.
If you don’t worry about your tax all financial year, when it comes time to lodge your tax return you will receive a large bill from the tax department. For a small business this can really be a really big problem if you haven’t allowed for it and don’t have the cash flow to pay the bill.
So, what can you do to avoid an unexpected tax bill?
Know how much tax you need to pay
How much tax you pay is dependent on how much money you earn each year. The Australian Tax Office (ATO) has an online calculator which will help you determine how much tax you will need to pay.
Alternatively if you prefer to look at tax on your monthly income (rather than annual) you can use this table to calculate how much you would need to pay per month.
Put the money aside
Once you know how much tax you SHOULD be paying, the best thing you can do is move that amount of money into a separate account each month. That way when you get your tax bill at the end of the financial year, you have the money sitting there ready to pay the bill.
If you are hesitant to be responsible for working out and setting aside your own tax money the ATO offers a system called PAYG (Pay As You Go tax). To use PAYG you just register with the ATO and they will send you a quarterly tax bill based on your previous financial year’s report. The benefit of PAYG is you don’t get a big bill at the end of the financial year because you have been paying in installments throughout the year, plus someone else takes the responsibility for prompting you to organize and pay your tax.
If your income varies from year to year the ATO make an adjustment when you submit your tax return.
Even if you register for PAYG it is a good idea to put aside the tax portion of each client payment so that you don’t get cut short at the end of each quarter. You should also be conscious that you may have a small bill at tax time (or a small credit), depending how your year compared to the previous one.
Being aware of your tax implications is vital to the success of a small business.
If you need more information the Australian Tax Office has a good easy to read website which has a section catering to small business.
Do you keep your tax aside or ignore it and hope for the best at tax time?