So you love to get your hands dirty, but don’t love the tedious amount of time and effort it takes to get all your tax obligations sorted? You’re not alone.
For many self-employed tradies, the stress, time and expense of doing your tax can be overwhelming (the cost of your tax accountant included). But there are ways to do it simpler and smarter.
We asked the team at Hnry, Australia’s fastest-growing automated accountancy service for tradies, to share what they’ve found to be the most common tax mistakes self-employed tradies and builders make – and how to fix them.
Mistake #1: Why be a company when you can be a sole trader?
Why bother with a company structure if you don’t need it? Unless you’re looking to raise capital for your business or take on a business partner, staying as a sole trader will save you a tonne of paperwork, time and money.
For starters, the setup is cheaper. Setting up as a sole trader can be done for under $40 (start with a free ABN, register your business name for $37 for one year or $88 for three, set up separate business accounts, and away you go). By contrast, setting up as a company can be $512 for a Pty Ltd, reserving your business name ($52) and registering it ($37 for one year, $88 for three).
A company structure requires more financial admin to meet the rigorous reporting requirements – find out more on the ATO’s website. On the other hand, as a sole trader you can put all income and expenses on a personal tax return.
But surely being a company would protect you from bad debt liability? Not so, because creditors and the ATO can still pursue directors personally for company debt and PAYG and superannuation debts.
Finally, as a sole trader, you can draw money directly from your business account as the ATO doesn’t distinguish between personal and business assets. Company directors, however, cannot make personal drawings from the company account but may receive money via shares, dividends or loans.
And as you can see in the below Hnry Sole Trader Pulse survey, 1.5 million Australians choose to be sole traders too.
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Mistake #2 – Not claiming every deduction you’re actually entitled to
Cobbling together a zillion receipts at tax time? It’s a very common mistake that makes it easy to miss obvious expenses to claim.
Instead, try to think ahead about what you’ll claim as a tax deduction. Self-employed tradies can claim a lot of different work expenses, including clothing, admin, materials, equipment bought or hired for work, as well as work vehicles (if it’s used for both private and business purposes, then calculating your vehicle expenses can get a bit more complicated – see mistake #3!).
You can also claim the cost of subcontractors you bring onto your jobs. They can be claimed as a non-taxable amount, where you added them to an invoice, or as a client chargeable expense, where your client directly pays the subcontractor.
Mistake #3 – Getting your vehicle expenses wrong
When your vehicle is used for both private and business purposes, it gets confusing. But, assuming your vehicle is classified as a car (carrying less than one tonne and fewer than nine passengers), there are two standard methods to calculate your vehicle expenses:
Cents per kilometre method – If you travelled less than 5000km for business purposes, you can use the cents per kilometre method to claim a fixed amount per kilometre travelled. This involves claiming a flat expense per kilometre travelled by car, rather than using receipts to calculate the actual costs and fees incurred. More on that here.
Logbook method – For any claim exceeding 5000km in a tax year, a logbook is required. You’ll need to keep a detailed logbook of every business and personal journey, along with receipts for all car expenses. You can then claim back a percentage of the total car costs based on the work usage calculated in the logbook. For each logbook trip, you’ll need to include the time period, the car’s odometer reading at the start and end, total kilometres of each journey and reasons for those trips. More here.
Mistake #4 – Not setting enough aside for taxes
Got an unexpected tax bill or shortfall to cover? Make sure you set the right amount of money aside from every payment you receive.
To do this correctly, you need to have a reasonable estimate of how much income you will earn in the tax year. Then, use a tax calculator like Hnry’s Australian Self-Employed Tax Calculator to see what percentage to set aside from every payment for income tax.
You’ll also need to set aside amounts for your Medicare levy (2 per cent of your income), GST (10 per cent, applicable if you’re above the $75,000 income threshold), any study or training loans you need to repay, and work out if you need to pay the Medicare Levy Surcharge if you’re not covered by private health insurance.
To avoid any bill shock later, get on top of it throughout the year. Hnry’s automated payments system covers income tax, GST, Medicare and student loans – so you don’t even have to think about it once it’s been set up.
Mistake #5 – Trusting the wrong accountant
Oh, you heard about a friend’s accountant who can get you “extra” deductions? Well, not all of those are legit. You want to make sure your tax return is 100 per cent by the book – after all, you’re the one liable for any incorrect information contained in it.
If the ATO audits you and finds questionable claims, the final liability and any penalties will be in your name. So, keep it above board, for your own sake.
What Hnry does differently
To make sure you’re never missing a potential deduction or other tax payments, it helps to streamline your expenses and taxes in one place. For thousands of tradies around Australia, that place is Hnry.
As an all-in-one tax service, Hnry pays and lodges your tax as you earn. All you need to do is join Hnry and have all your self-employed income paid into your Hnry Bank Account. Then when a client pays to that account, Hnry’s accountants calculate, deduct and pay all your taxes straight away.
When you upload your expenses, Hnry reviews your invoices and lodges all of your returns, no fuss. Plus, you’re never paying more tax than you need to – it’s the only real way to ‘pay less tax’.
It sure beats holding onto scraps of receipts and all that admin it takes to categorise and claim all of those receipts at the end of tax year.
Want your taxes calculated and paid automatically and your returns lodged by expert accountants? Join Hnry now.
This article is brought to you by Flying Solo in partnership with Hnry.
Feature image: AdobeStock