Tax tips for freelancers

Written by Accountant Scott Trevethan and Freelancer Clea Sherman. 

How much tax do you have to pay when you’re a freelancer in Australia and how do you figure it out? Have a look at what you need to know. 

They say nothing in life is certain except for death and taxes. In Australia, there’s no two ways about it… if you earn money, you have to pay tax. The end. 

But it’s a weird system. You have to tell the tax department as honestly as you can how much you earned, how much of that money was sucked into the black hole of business expenses and how much of what was left over you owe in tax. 

The whole thing is largely based on honesty, although with electronic banking things are far more trackable these days.

The #winning part of declaring your income and paying tax is that you can then visit the bank, prove you’re legit and ask for a loan. The more you earn, the more you can borrow. Because, you know... you don’t need it as much. Makes total sense.

Anyway, tax. The big secret is that unless it’s your day job, you’ll never 100% feel like you have the hang of all the rules created by the Australian Tax Office (aka the ATO). But you at least need to understand the basics so you don’t get epic bill shock when the Financial New Year bells ring.

Here are the answers to a bunch of the ‘what’s up with that?’ freelancer tax questions:

Ok seriously, how much should I put aside out of every dollar I earn for tax? 🧐

Australia has a marginal tax rate system. This means you get taxed differently depending on how much you earn. It also makes it tricky to do the sums of how much you owe in your brain (or even with a standard calculator). 

In short: 

     💸 Earn less than $18,201 in a year and you get to keep every dollar (woot).

     💸 Earn up to $45,001 and every dollar you earn over $18,201 is taxed at 19 cents. The maximum tax

          you will pay is $5,902.

     💸 Earn up to $120,000 and pay $5,902 plus 32.5 cents for each $1 over $45,000 (max $29,467)

     💸 Earn up to $180,000 and pay $29,467 plus 37 cents for each $1 over $120,000 (max $51,667)

     💸 Earn over $180,000 and pay $51,667 plus 45 cents for each $1 over $180,000

How’s that for a lot of different numbers? And not only are the margins and rates hard to remember and figure out without some serious mental gymnastics, they change reasonably often because of tax cuts and bracket changes. So what is above may have changed since we went to print.

But wait! There is more to pay. 

The above rates don’t factor in the 2% Medicare Levy, which will apply to you if you’re earning a decent amount. Plus there is the potential to have to cough up for the Medicare Levy surcharge, depending on whether you have private health cover or not. 

This is why it’s hard to say exactly how much tax to set aside. But if you aim to siphon 27-32% of the amount you pay yourself into a separate account, and then you don’t touch that money, you’ll never find yourself freaking out at tax time. 

Make it a habit to put this percentage aside as soon as every bill gets paid so you aren’t tempted to splurge on something other than your responsibility to our democratic society. 

One tip is to use a tax calculator. There are plenty of apps and online tools which are specific to Australia. These are great for getting a ballpark idea of how much tax you can expect to owe based on your income.

You pay tax only on the money that doesn’t get spent in order to run your business.   

For example, you earn $8,000 and spend $2,000 on work-related expenses in a month. You allow yourself $6,000 for your personal expenses and savings. Therefore, you are taxed on that amount; the $6,000. 

The amount of tax you will owe is roughly $1,369, plus the Medicare Levy of around $121. You’re left with around $500, which could perhaps go into your superannuation account (a tax-deductible expense… booyah). If you give the $500 to yourself as additional salary, your tax bill will jump up a bit more. 

Putting away too much money for tax can feel like a win. It’s a pleasant surprise that you can put towards growing your business or something personal like a holiday. 

If you put away a bit of money but not enough, at least the bill won’t make you want to throw up. You should be able to pay what money you have and contribute the rest in instalments. 

This article is an extract from the book Finance for Freelancers, by Accountant Scott Trevethan and Freelancer Clea Sherman.