How to calculate your tax rate
When you run a small business you can potentially be subject to countless state and federal taxes. The most common is income tax and, if your business turns over more than $75,000 a year, you will become a tax collector under the GST system. Where a person is employed and runs a business they can also be caught up in the Pay As You Go withholding tax and PAYG instalment tax systems.
Q. I ran a small business as a sole trader for 17 years, but due to a gradual decline in income I was recently forced back as a full-time PAYG employee. I still have the small business that should generate a net income after expenses of about $300 a week. Will I need to add the net business income and my $50,000 before-tax PAYG income, then calculate the tax on that total and pay the difference between what my employer at the tax rate that would apply?
A. There is nothing you need to be doing between now and the end of the 2013 financial year if you don't want to. When you lodge your tax return it will include your employment income, with the amount of PAYG withholding tax deducted by your employer shown. In addition you will need to complete the section of the return that details your business activities.
Depending on your employment you may have expenses that can be used as tax deductions to decrease the assessable amount of employment income received. In addition your employer may deduct slightly more PAYG withholding tax than the amount that will be payable. When all of these factors are taken into account the actual tax payable may be less than 34 per cent of the $15,600 of net business income.
When an individual earns more than $2000 a year in business or investment income, and they have a tax payable amount of more than $500 on a tax assessment, they become liable for PAYG instalments tax. You do not need to register for this tax as the ATO will send a letter if you become liable for it.
When you receive the PAYG instalment letter it will advise you what your instalment rate or amount will be and how often it must be paid. This could be to pay an annual instalment amount or quarterly instalments. The amounts of PAYG instalments tax paid during a financial year are deducted from your final tax payable amount, just as the amounts of PAYG withholding deducted by your employer are also deducted, to arrive at a net amount payable for that tax return.
You could ask your employer to increase the amount of PAYG withholding tax to cover the tax on your business income. It makes more sense to put aside one third of the net business income you receive, possibly in a mortgage offset account, so that you will have the funds to pay the tax after lodging you tax return.
Questions on business tax and other matters can be emailed to firstname.lastname@example.org.