New year – New business venture..? Then here’s what you need to know about getting started as a sole trader.
Setting yourself up as a sole trader is a great way to get your business started. It’s known for being the most straight forward business structure, but, you still have a few things you need to take care of to make sure you’re on the right business track. Before you switch that sign to ‘open for business’, here are 10 top tips from a bookkeeper on how to start out right as a sole trader.
1. Make sure you have a Tax File Number.
Most Australians of working age already have a TFN, but did you know as a sole trader, you lodge your tax returns under your own TFN? So it’s essential to have this handy and make sure all of your current tax returns are up to date.
2. Next on your hit list, is getting an ABN.
Your ABN is your unique business identifier. You’ll need an Australian Business Number for tax purposes, for claiming all your business expenses, and to quote on your invoices or other sales documents. You can register for one here
https://www.abr.gov.au/business-super-funds-charities/applying-abn
3. Register for GST
This is not an automatic step when you’re setting your sole trader business up though. If you think your earnings will be over $75000, or if you’re starting up a taxi or ride-sharing business, then yes, you need to register for GST. You do not need to register for the GST if your earings are under $75000. Not too sure of your projected income? Not to worry, if your earning hit $75000 during the year, you can register at any time.
4. Make sure you set up a business budget & a personal budget.
It can be hard to predict your income when you’re first starting, but it’s essential to understand how much you need to make each week/month to keep your business, and yourself, afloat. Make sure you adjust your living expenses in accordance with your new earnings. The sole trader life can mean than your cash flow will vary from month to month, so make sure you are prepared for the lean times, as well as the boom times.
5. Super & tax savings setups
As a sole trader, you are responsible for your super and the super of any other workers you employ. You can’t rely on your super being automatically paid into your account like it was when you were an employee, you now need to pay it yourself actively. It’s also your responsibility to meet your tax obligations; tax isn’t automatically deducted from your invoice like it was with your employee salary. So it’s crucial you set up a savings system (be it separate bank accounts or utilising an offset account), so you can save and plan for your tax obligations at the end of the financial year. By keeping your earnings separate from your everyday ‘spending’ accounts, you can save for non-negotiable business expenses, like GST, PAYG, and super contributions.
6. Set yourself up with an Invoicing system
Most people start with just a spreadsheet & an invoice template, but it’s essential to have a trackable invoicing system that is easy to maintain and something you can fill in when you’re busy – you don’t want to lose track of your invoices! Utilising an integrated, cloud-based accounting software is also advantageous here, as it can help you keep on top of overdue invoices and allows you to follow them up efficiently. Having a time tracker is also a great way to understand where you’re spending your time, and how you can improve your productivity or how you might need to change your billing processes.
7. Record & track all of your income AND expenditure
Even though you are a sole trader, you’re still a business, and your accounting process needs to reflect that. Recording & tracking your income and expenses is vital for cash flow, tax time and business planning. This is where the spreadsheet system can often fall down. Keeping track of all of your sales, your invoices and purchase orders, your expenses – including receipts – your inventory (if applicable), business expenses from client entertaining to stationery, all need to be accounted for. Having all your receipts in a shoebox and a copy of your bank statement won’t cut it come tax time. Look around and get on board with cloud-based accounting software, like MYOB, so you can keep your records up to date, and avoid significant headaches & wasted time come June 30.
8. Know your limits (and deductions)
As mentioned before, if you earn under $75,000, you do not need to register for (pay) GST. However, if in the course of the year, you do make over that amount, then you need to register. You will also need to complete a BAS statement. If you earn under $18,200, then you don’t need to pay tax. So it’s imperative to track your income, and know when you are getting close to reaching the threshold. Same with deductions, if you use say your car, or phone for personal and business use, it’s important to know what percentage you use for the business so you can claim that portion correctly. Same applies for a home office. There are deductions for things like depreciation of furniture and super contributions, maintenance costs of machinery, tools, or premises, there are even ways to help you with bad debts or invoices that aren’t going to be paid. In short – there are a lot of deductions available to sole traders, but they have to relate to your business directly. If it all makes your head spin, talk to your accountant about your situation, and they can advise what deductions you can claim.
9. Understand Tax breaks & offsets
There are many incentives for sole traders, and it’s essential to be aware of them, so you don’t end up losing income.
For example, super contributions are classed as a tax deduction for sole traders, so any voluntary contributions you make during the year (up to the legal limit) are deducted from your income at the end of the financial year. Which means you pay less income tax, while still preparing for your future – which is a win in anybody’s book!
You also pay tax at the individual rate, so you may be eligible for the small business tax offset, which can reduce the tax you pay by up to $1,000 each year.
There is a myriad of opportunities open to sole traders, so make sure you speak to your accountant to ensure you’re maximising your chances to save.
10. Don’t be a hero
Which brings us to our final top tip – don’t be a hero and think you need to be on top of absolutely everything. Just because you’re a ‘sole’ trader, it doesn’t mean you have to do it all alone. There are only so many hours in a day, and it’s vital for your business – and your sanity – to get help before you need it. Be it a bookkeeper or accountant, it’s better to consult a professional to ensure you’re compliant, rather than be faced with a huge tax bill at the end of the year. Bookkeepers can also advise on best practice and how to help your business grow. Find someone whom you feel comfortable talking to, who understands sole traders, and can work with you to achieve your business goals.
