Taxes just the word is enough to make many of us shudder. But what if I told you that understanding Australia’s Self-Employed Vs Freelance tax could be the key to putting more money back in your pocket?
Whether you’re a seasoned local or a newcomer to the Land Down Under, this blog is your guide to understanding your tax responsibilities. In the next few minutes, we’ll break down the self-employed vs freelance tax similarities and differences.
Self Employed and Freelance Key Tax Deductions
First, let’s see the key deductions for self employed and freelancers in Australia.
You can reduce your taxable income by claiming expenses related to your work.
Example: If you’re a self-employed photographer, you can deduct the cost of your camera, lenses, and photography props from your income, lowering the amount you’re taxed on.
- Home Office and Workspace Expenses
- Business-Related Supplies Expenses
- Business-Related Vehicle Use Expenses
- Business Travel Costs
- Professional Membership and License Fees
- Marketing and Advertising Expenses
- Home Internet and Phone Costs
- Professional Development and Training Expenses
- Bank Fees for Business Accounts
- Business Insurance Premiums
- Depreciation of Business Assets
- Rent or Lease Payments
- Superannuation Contributions
- Interest on Business Loans
- Meals and Entertainment Expenses
- Employee Wages and Super Contributions
- Taxation and Accounting Fees
- Payments to Subcontractors
Recommended Read: All You Need to Know About Tax Deductions in Australia
Self Employed Vs Freelance Tax Implications Australia
In Australia, self-employed and freelancers work for themselves independatnlt. But each of these individuals have distinct tax implications according to the guidelines set by the Australian Taxation Office (ATO). Let’s explore the key features and differences between the two:
What it means: You have to pay tax on the money you earn.
Example: If you’re a freelance graphic designer earning $50,000 a year, you’ll pay income tax on that $50,000.
What it means: You need to keep accurate records of your income and expenses.
Self-Employed: Required to keep records of financial transactions and business activities for a specific period (usually five years).
Freelancers: Also need to maintain financial records for the same period as self-employed individuals.
Example: As a freelancer, save all your invoices and receipts, so you can prove your income and the expenses you’ve claimed when tax time rolls around.
What it means: If you expect to owe a substantial amount in taxes, you might need to pay in smaller amounts throughout the year instead of in one lump sum.
Example: If you’re self-employed as a consultant and you estimate you’ll owe $20,000 in taxes for the year, you might make quarterly payments of $5,000 each to spread the burden.
What it means: A portion of your income goes toward funding Australia’s healthcare system.
Example: If your taxable income is $60,000, you’ll pay a Medicare Levy on that income to support public healthcare services.
What it means: You’re responsible for saving for your retirement because you don’t have an employer to contribute to your superannuation fund.
Example: As a self-employed landscaper, you need to make your own contributions to your superannuation fund to ensure financial security in retirement.
What it means: The way you legally set up your business affects your taxes and liability.
Example: If you’re a freelancer working as a sole trader, your business income is treated as your personal income. If you’re a self-employed builder with a company, your business income and personal income are separate for tax purposes.
What it means: You must accurately report your income and expenses on your annual tax return.
Example: Whether you’re self-employed as a web developer or a freelance writer, ensure you honestly report your earnings and deductions to avoid penalties.
Capital Gains Tax (CGT)
What it means: If you sell assets related to your business, you may be taxed on the profit.
Example: If you’re self-employed and sell a commercial property that was part of your business, you might need to pay CGT on the profit from the sale.
What it means: Keep financial records for a specific period as required by the ATO.
Example: Whether you’re a freelancer or self-employed artist, hold onto your financial records for at least five years in case the tax office needs to review your finances.
Marginal Tax Rate for Self Employed and Freelancers
|Up to $18,200
|0% (Tax-free threshold)
|$18,201 – $45,000
|$45,001 – $120,000
|$120,001 – $180,000
Self-Employed Vs Freelance Tax Australia – Key Differences
Self-Employed: Often operate as sole traders, companies, or partnerships, with distinct legal entities.
Freelancers: Typically work as individuals without a formal business structure.
GST (Goods and Services Tax)
Self-Employed: Must register for and charge GST on taxable sales if their annual business income exceeds the GST threshold (currently $75,000). They need to submit regular Business Activity Statements (BAS) to the ATO.
Freelancers: May or may not need to register for GST, depending on their earnings and the nature of their services. Some freelancers may choose to voluntarily register for an ABN (Australian Business Number) instead.
Self-Employed: Often involves a long-term commitment to running a business, managing employees, and business operations.
Freelancers: Typically work on a project-by-project basis or short-term contracts, offering more flexibility in work arrangements.
Self-Employed: Can claim deductions for a wide range of business-related expenses, including rent, utilities, and employee wages.
Freelancers: Can also claim deductions for work-related expenses but may have a narrower scope of deductible items depending on their specific freelance work.
ABN (Australian Business Number)
Self-Employed: May or may not have an ABN, as it depends on their business structure and whether they require one for their operations.
Freelancers: Can choose to register for an ABN, which simplifies business transactions, but it doesn’t automatically classify them as self-employed.
Tax Reporting Section
Self-Employed: Report business income and expenses on their individual tax return using a Business and Professional Items Schedule (Form T2125).
Freelancers: Also report income and expenses on their individual tax return but may use the income section of the return.
Capital Gains Tax (CGT)
Self-Employed: May face CGT implications when selling business-related assets, with potential concessions for small business owners.
Freelancers: Subject to CGT rules when selling assets but typically have fewer assets tied directly to their freelance work.
You Qualify as a Freelancer if You
Offer Specialized Services
Freelancers offer specialized skills or services, often in creative, technical, or professional fields like writing, design, IT, or consulting.
Freelancers work independently without long-term employment contracts, often juggling multiple clients or projects.
Make Contractual Agreements
Freelancers use contracts or project agreements that outline work details, payment terms, and deadlines.
Set Prices By Yourself
Freelancers set their own rates and negotiate directly with clients for project fees.
Work On Your Schedule
They have flexible work arrangements, choosing when and where they work as long as they meet project deadlines.
Key Traits of Qualifying as Self-Employed Individual:
Independant Business Operations
Self-employed individuals run their own businesses, which can take various forms, like sole traders, companies, partnerships, or trusts.
Own and Control Business
They have full control over business operations, including decision-making, finances, and hiring.
Legal Business Structure
They choose a legal structure for their business, such as registering as a sole trader, setting up a company, or forming a partnership.
Self-employed individuals are personally liable for their business’s debts and obligations, except in the case of limited liability companies.
Profit and Loss
They bear the financial risks and rewards of their business, potentially earning profits or incurring losses.
Self-employed individuals can deduct legitimate business expenses, like rent, equipment, marketing, and wages, to reduce their taxable income.
They must meet legal requirements, such as obtaining an Australian Business Number (ABN), managing GST obligations if applicable, and maintaining accurate business records.
Expand Your Understanding: 10 Self-Employment Tax Deductions and Benefits for Australians
In a Nutshell
Knowing self employed vs freelance deductions can put more money in your pocket. You must adhere to your freelancer or self-employed tax responsibilities in Australia according to ATO Guidelines. Keep expense records, seek professional advice, and make the most of these deductions to lower your taxes.