Ok, you’ve set up a side business and you’re making some money – yay! But how do you pay tax on that income when you’re also working as an employee? Don’t worry, your side business taxes don’t need to be scary. In this guide, we’re breaking down exactly what you need to know about paying tax on your side gig.
How is your side business income taxed?
Assuming you’re a sole trader – which many first-time side business owners are – your side income is taxed at your marginal tax rate. What that means is, it’s taxed at the same rate as if you’d earned it in your day job. The only difference is that your employer isn’t withholding the tax for you. You need to do that bit yourself.
When you’re a sole trader, you and your business are essentially one entity, so all profits that the business makes are a tax liability for you as the individual.
Let’s look at an example. Lucy works as a nurse and earns $65,000 per year. She also runs a cookie business on the side, which has a net profti of $20,000 per year. Lucy pays tax on $85,000 as a total income, but must pay the tax on the $20,000 of side business income herself. Because Lucy’s employer will average out the tax liability on her salary as an equal amount from each pay, the $20,000 that Lucy’s cookie business makes is taxed at the top end of the $85,000 total. That means Lucy will pay 32.5% tax on her $20,000 profit, because her total earnings of $85,000 places her in the 32.5% bracket.
The current tax brackets are as follows:
|0 – $18,200||Nil|
|$18,201 – $45,000||19 cents for each $1 over $18,200|
|$45,001 – $120,000||$5,092 plus 32.5 cents for each $1 over $45,000|
|$120,001 – $180,000||$29,467 plus 37 cents for each $1 over $120,000|
|$180,001 and over||$51,667 plus 45 cents for each $1 over $180,000|
How do you put aside tax for your side business?
One of the major pitfalls of running a side business is not putting aside enough tax, and ending up with a huge tax bill at the end of the year – nobody wants that! Opening a separate savings account for your taxes is a really helpful way to make sure you’re setting aside your tax from every invoice or sale. Every time your business makes income, send 30-40% over to your tax savings. That way, you’ll have plenty at tax time.
You’ll also need to pay the Medicare Levy, which is 2% of your total income, and possibly the Medicare Levy Surcharge (MLS), depending on how much you earn, your age, and whether you have a sufficient private health insurance policy.
How do you pay your side business taxes?
When you lodge your tax return online or through an accountant, you’ll declare your total taxable income from your employee position, as well as the revenue you make from your side business. Then, you’ll be asked to input any tax deductions, which are costs incurred with running your side business. Making tax deductions on your small business income reduces the amount of tax you pay, by first reducing your taxable income.
Let’s look at another example. Lucy’s $65,000 job as a nurse and $20,000 income from her cookie business would mean her total taxable income is $85,000. But it costs Lucy $5,000 to run her cookie business, so she deducts $5,000 worth of expenses from her total taxable income. She now only owes tax on $80,000, which reduces her tax bill.
What tax deductions can you make with a side business?
Good question – we love tax deductions! Tax deductions are essentially costs that you incur in running your business. For Lucy’s cookie business, that could include cookie cutters, ingredients, a commercial kitchen lease or a home license (including running costs at home such as light and power), and costs associated with marketing and packaging her cookies. These link to direct operations. Additional expenses may be administrative i.e. a new laptop, subscriptions, mobile phone, internet, travel, postage.
What about Goods and Services Tax (GST)?
GST is an additional 10% tax you’ll pay if your business’ turnover is more than $75,000 in a 12 month period. If you earn over $75,000 per year in total but some of that is from your day job, you’re not required to register for GST unless the business portion is over $75,000 in its own right – it’s only your business revenue that counts towards the threshold. We’ve got a simplified guide on all things GST for you here.
If you’re looking for tax advice on your side business, reach out to us. We can help you with lodging your tax returns, registering for GST, and even incorporating a company when the time is right. Whether you need us at tax time, or throughout the year, we’re here for you and your hustle – large or small. For more tax tips, head to our blog.