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Sole trader invoice example for Construction Industry

I'm an accountant in Australia who is going to explain to you how sole Trader is taxed this is perfect from anyone starting a little side hustle through to those who sole Trader businesses become their full-time gig let's go for those that don't know my name's Ethan rishop and I make videos about tax and growing businesses and all things wealth creation on this YouTube channel if you haven't hit that subscribe button make sure you do that but today's video is all about sole Traders and their taxes and it's really important if you're a sole Trader to understand the basics of how they're taxed so that you can either put money away for taxes or not be so shocked when you get that bill at the end of the year now do stick around for the end because I've got a Bonus tip about how you can make running your side hustle or your sole Trader business much simpler to manage now let's Jump Right In and the basics are a sole Trader will be taxed within their individual tax return there's no separate tax return for a sole Trader it gets put into the business section of your individual tax return and what this means is in general it's going to be income less expenses is going to be your profit and your profit is going to be added to your taxable income and I'm gonna go straight into a couple examples here so let's take the example here as you'll see on the screen that we've earned fifty thousand dollars of profits from our sole Trader business and this is going to result in a tax bill of 7467 now this will either be paid at the end of the year or maybe you're paying installments that's a whole other topic but in general that's how much tax you'll pay on fifty thousand dollars of profits assuming you have no other income sources and this will all go into your individual tax return now what I'm going to do here is look at a bit of a different example let's say this is a side hustle so we're already working existing job and in that existing job we're earning seventy thousand dollars per year and you'll see here on that existing job the tax is going to be approximately fourteen thousand six hundred and Seventeen dollars so this would be the tax that you would likely have withheld from your employment income throughout the year and assuming all things equal you'd pretty much come out square but now we've gone and done this side hustle and we've earned that same fifty thousand dollars from example one this fifty thousand dollars is now going to push our taxable income up to one hundred and twenty thousand dollars so let's see what the tax implications of that is so the tax on our side hustle business when it's been added into our individual tax return is going to be 17 250 now compare this to that fifty thousand dollars we only had no other income which was 7467. so you can see there's a massive difference depending on what else is going into your individual tax return and that's because it's all going to one tax return it's not like a company that has its own tax rate and it's a flat rate with a sole Trader business it's all going to be in your individual return so your other earnings are going to impact how much tax you pay and what rates attacks you're paying and that all depends on what bracket you fall into so here's the tax brackets as you can see and it's going to depend on how much you're earning and which one you're at and what other earnings you got as to what rate of tax you're really paying on your sole Trader business so how do we actually work out this profit that's going to be added to your taxable income well at a basic level like I said earlier it's income less expenses is your profit so let's take a hairdresser for example they're going to charge their clients that's going to be their income so the income should be relatively simple to work out because it's just going to be whatever they've built out to their clients throughout the year expenses where it gets a little bit more challenging because every business is going to be different maybe this hairdresser is renting a salon so they've got rent expenses and maybe they buy some products that they put in people's hair so they've got some cost of goods as well they've got some wages they pay out they've also got utility bills for this premises so maybe they've gone and done some office furniture and suddenly these make up the expenses of the business now there are some more complicated things such as assets maybe they've gone out and bought a new car and you need to understand well how is that going to be taxed so that's a whole other topic but do be aware that it's not just as basic as income less expensive when you're starting to buy and sell assets potentially but at a basic level we're going to go we've got a hundred thousand dollars of income we've got fifty thousand dollars of expenses and therefore we've got that profit of 50 Grand like we talked about in the early examples and that 50 Grand spot gets added to your taxable income now you will need to know how you're going to track this stuff so maybe you're going to use a spreadsheet or maybe you're going to use some kind of accounting software because there's got to be some way that you're going to work out what are my income what are my expenses so I can know my profit to include that in my tax return now I have done some more detailed videos on this so I've talked about spreadsheets versus software such as xero so I'd highly recommend you go and check that one out but make sure you put a system in place from day one it'll make your life a lot easier in the long run especially when it comes to do your tax return because you don't want to be scrambling around looking through 12 months of data you'd much rather go yep I've already got that up to date I can get my tax return done straight away now one of the other key questions people ask about sole Traders well how do I pay myself am I paying myself a wage can can I just access this money whenever I want and the answer is actually yes you can access it whenever you want as a sole Trader you don't actually pay an actual wage like you would to other employees to yourself because you're already being taxed on the profits you can't employ yourself but as a sole Trader because because those profits are going to be allocated to you no matter what you can take whatever you want out of the business account you can spend whatever you want because you're not going to be taxed on what you've taken out you're actually just going to be taxed on the overall profit so for instance if you had a business account and throughout the year you earned that 50 Grand in profit but you left 40 Grand in it doesn't matter from a tax point of view you're still going to be taxed fifty thousand dollars and maybe one year you've you've built up a buffer in the business account and you go and take eighty thousand dollars out when you've only made fifty thousand dollars profit you're still going to only be tacked on the 50 000 because you're not getting taxed on what you're spending or what you're taking out of your business account for instance you're only getting taxed on the profit so you don't have to stress it's very easy you can absolutely spend however you want because it's your money you're going to pay tax on anyway so you don't need to stress about that like you would say in a company structure this leads perfectly into a bit of a bonus tip I've got for you and this is going to make managing your life as a sole Trader much simpler and it's just set up a separate Business Bank count now as a sole Trader you don't have to legally do this but it's going to make your life much easier by setting up a separate business account one it's going to isolate your business expenses and income to this account this is going to make it much easier to track because you already know everything's there if that's the only place you've spent money for the business you know you're not going to miss anything versus if you're using your own bank account then you use a personal credit card then use some cash here it can come really hard to keep track of all those different things this is especially true if you're using accounting software because you have your business bank account linked and you'll likely have a bank feed coming in and therefore you're going to capture all your income and expenses in a one spot it's going to make life much simpler now if you're going to have this business bank account then what I'd recommend is don't use it for personal expenses when you want to buy something personally transfer an amount out of your business account into your personal account normally I recommend setting up a bit like a wage by transferring a regular amount each week at the same time from the business account to your personal account and then use your personal account to pay for your personal expenses this is going to make things simpler from two points of view one you're not going to get confused was that business or was that personal and two it's going to be less transactions to reconciling your accounting software I've seen people that are running their sole Trader business through something like xero and have all their business and personal expenses All in One account and it just is so time consuming for them to reconcile and they're much more likely to make a mistake now if you want more tips on how to make your business more profitable in 2023 of my next video that's coming up is all about profits for small business and how you can improve them I appreciate you watching I'll talk to you again on the next video foreign [Music]