Being your own boss comes with freedoms – and responsibilities. Find out how to make the right start.
Manage your cash flow
If you’re self-employed you’re in good company. More than 62% of businesses in Australia are sole traders, with no employees. However, sole traders also have lower survival rates than larger businesses. Since 2019/20, more than half of new sole traders did not survive beyond three years. So planning for longevity means planning your money stuff.
Cash flow means the money coming in and going out of your business. Many self-employed people earn a good living but the flow of money is not always regular. Sometimes you’ll have more going out than coming in, and invoices might not get paid on time.
To help with your cash flow, have a business plan and a budget to help you look ahead and prepare for the unexpected. Keep a close eye on your income and expenses, and make tweaks along the way. For example, consider only making larger purchases once you’ve paid yourself and covered regular bills.
Keep some money aside for the unexpected, as being self-employed means you won’t have the benefit of paid holidays or sick leave. Regularly saving a little extra will help you manage during quiet periods, as well as funding a well-deserved break.
Separate your wages and business money
Make a clear division between ‘your money’ and what belongs to the business. Pay yourself a wage, and keep separate bank accounts so that business spending doesn’t get mixed up with your own.
This makes it clear what the business has earned and paid out. It’s also easier to see the financial state (the ‘profit and loss’) of the business at any time.
Nathan stays on top of a variable income
Nathan runs his own business as a landscaper.
Nathan’s income and expenses go up and down through the year. At first, he found this hard to manage. So he added up his monthly expenses to work out an amount to pay himself each month.
Next, he worked out his monthly cash flow by looking at what he earned across the whole year, then dividing it by 12 to get a monthly average. This tells him whether he’s earned extra or not.
When Nathan earns more than usual, he now puts the extra into savings to get him through the leaner months. This means he has funds to cover unexpected business costs, such as an urgent repair.
Think about tax early
It’s important to think about tax throughout the year, not only at tax time. Get advice from an accountant and plan for what’s coming.
Income tax
If you’re self-employed, you need to pay your own income tax.
Put money aside as you earn it, rather than waiting to receive a big tax bill. Open a savings account and transfer a percentage each time you get paid. Make this account for tax payments only, and off limits for other spending.
If your business grows, the Australian Taxation Office may require you to pay income tax in quarterly instalments. This is known as pay as you go (PAYG). Get an idea of how much you might have to pay with their PAYG instalment calculator.
Goods and services tax (GST)
Businesses that earn over $75,000 per year must register for GST. Once you’ve registered, you must lodge a regular Business Activity Statement (BAS) to report how much GST your business has collected and is claiming. This may be quarterly or annually.
You can use our GST calculator to calculate the amount of GST you have to charge your customers or pay your suppliers.
Tax deductions
You may be able to claim some of your business costs against your income, meaning you pay less tax. Speak to your accountant and keep all your receipts in case you need them.
Make your super count
Superannuation may not be at the top of your list when you’re starting out by yourself. But getting on top of it early can help you save for the future. Super is a tax-efficient way of saving money to live on when you stop working.
Since you won’t get regular super contributions from an employer, it’s up to you to make them yourself. As well as investing for your future, you can generally claim your super contributions as a tax deduction.
Protect your income — and your business
Without sick leave, getting sick or injured can mean financial difficulties. Income protection insurance can help you pay your bills if you can’t work.
If you have a super fund, find out whether they offer income protection insurance as part of the package.
If you’re moving from employee to self-employed, check if this affects the insurance cover through your super. Insurance terms and conditions vary from fund to fund.
Consider other types of insurance that can protect you and your business. Like public liability insurance and workers compensation insurance.
Know the legal stuff
Setting yourself up properly – legally and financially – is key when you start a small business.
If you own and run your business as a director under a company structure, you will need to apply for a director ID.
Many small businesses form part of the value chain of larger businesses, who have reporting obligations to the Australian government related to climate change. If you deal with larger businesses, keep in mind that at times you may be asked for information about your business to help them fulfil their obligations.
Get help if you need it
Help from a financial professional
If you need help with your business finances, consider seeking out a licensed financial professional.
- We can help with your BAS (business activity statement) and PAYG (Pay as you go) instalments.
- A bookkeeper can help keep track of day-to-day financial transactions.
- We can help you with tax and preparing your BAS.
Source:
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://moneysmart.gov.au/work-and-tax/self-employment
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