Throughout its history, Australia has been a hub of self-made businessmen. Besides entrepreneurship, in recent years, there has been an incredible surge in students choosing the path of self-employment. Well, it's better than taking a job as there are many associated benefits, such as the freedom to set your own working hours and maintain a perfect work-life balance. And, the best thing is that there are good chances of increasing the income with time. But at the end of a financial year, your tax obligations are similar to those of employees. Besides this, you'll need to pay self-employment taxes, including Medicare and Social Security programs. These tax obligations are mandatory, but there are some ways the self-employed can reduce this amount.
The best thing about being self-employed is that you are paid the full amount you earn as nothing is deducted from your paycheck. So, you must make estimated tax payments during the year to pay your self-employment and income tax. The Australian Taxation Office(ATO) makes it mandatory for a self-employed person to submit estimated quarterly taxes every year. It might be daunting to calculate the exact amount each time when your income is fluctuating. But if you project these quarterly payments correctly, it can ease your tax burden. Here our taxation assignment help experts have discussed the ways to avoid them:
1. Set up a separate tax savings account
Taxation experts say that most people fail to keep the actual records of their income, and thus end up paying more than the estimated amount. Therefore, we suggest having a separate saving account to receive the payments from clients, and get another one for saving the taxable amount. In this way, you can transfer the taxable money when required, and thus, you need not make all these calculations at the end of the quarter.
2. Automate saving for taxes with an app
A simple idea to set aside sufficient money for taxes is by using an app like Digit. By connecting it to your bank account, you can withdraw very small amounts of taxable money a few times every week. And, it also helps in making manual transfers via text message. All you need to do is simply ask it to transact this amount of money from your checking account to your savings one.
3. Don’t skip quarterly tax payments
Besides setting aside taxable funds in a separate savings account, it is extremely important that you pay it quarterly. The Australian Tax Office does not want you to pay your taxes once a year. Rather, they want you to transfer them four times a year. Moreover, if you are earning a good income, by avoiding quarterly payment, you will not only get stuck with a large tax bill but could face additional penalties for not paying the taxes.
4. Keep business expenses organized
The taxation laws of Australia make it mandatory for everyone earning above a certain amount of income to pay their taxes annually. But as a self-employed person, your income may not be equivalent to the payments made by clients as there might be some business expenses too. To derive the exact income, you can either do the calculation manually or use an app like FreshBooks to capture and categorize each receipt. Moreover, you may also hire a bookkeeper to manage your business income and expenses.
5. Double check your tax documents
Although many people think that a tax document, such as 1099-MISC or W-2 is accurate, you need not rely on them completely. We recommend you to cross-examine the tax statements of your clients as they may not show the exact amount of income you earned. And, overlooking slight variations in your exact earnings may lead you to pay more taxes than required.
6. Don’t forget your tax deductions
As a self-employed, you’re entitled to a lot of deductions, viz. business travel expenses, leases, rents, training events, internet, phone, insurance, cost involved in book-keeping or business activity statement (BAS) preparation, and business asset repairs. And, the more deductions you qualify for, the less tax you’ll have to pay.
These were some smart strategies that you can apply to avoid a large tax bill. If you don’t meet self-employment tax obligations, then the financial consequences could be disastrous. So, put some time and effort into understanding them to avoid bigger problems down the line.