Sole trader: Set up an automatic regular payment from your business bank account to your personal spending account (this is called drawings). Preferably, you’d keep this limited to the amount you’ll need to get by, but if you need a little extra from time to time, that’s OK (as long as your creditors are still getting paid). These are drawings as well.
Company: Set up regular payments to yourself as salary and wages.
How not to pay yourself
It’s not a good idea to pay your personal expenses with business bank accounts. Not only does it make lodging your tax returns harder, it blurs the reality of how much cash your business has available.
Do you pay tax on drawings?
Drawings is the term we give to money taken out of the business by owners.
As a sole trader you don’t pay tax on drawings (these are not claimable expenses), but you do pay tax on the overall profit your business makes.
As a company, the salary you pay yourself is a deductible expense for the business. Here’s how we approach it:
Tax on profit
Sole trader: Beany will look at your end of year profits (all the income less all the claimable expenses). Then, you’ll pay tax on the profit the business has made.
Company: The company will be taxed on the company profit (which includes a deduction for your salary). You will then be taxed in your personal name for the salary that was paid to you. We usually determine the salary amount by comparing the tax rate of the company and the tax rate of you as an individual. Additionally, we consider how much you require for living expenses.
As a sole trader, the ATO will require you to begin making quarterly Pay As You Go Instalments (PAYGI) once your tax payable from the business exceeds $499.00. These PAYGI payments will be credited to your next tax return.
If you’ve opted to run as a company, you are required to withhold tax from employee payments and make either monthly or quarterly Pay As You Go Withholding (PAYGW) payments to the ATO.
We recommend one move to everyone: make sure you’re always able to pay tax as it falls due. Set aside 25% of your sales in a separate bank account as soon as you receive the money. If you keep it reserved for future tax bills, you won’t ever find yourself panicking when tax time rolls around.
You can chat with our support team and see what’s best for you. [email protected] or 1800 955 089.