I got a question! If you have any questions you’d like me to write about, just comment here or ask through FormSpring.
Can you go into more detail about paying taxes as a freelancer? That’s always confused me. Like at what pint do you start paying taxes, and what type of records should you keep to show to an accountant. Thanks.
First up: I find this sort of stuff pretty confusing too, so I can’t promise that I’m the most reliable source of information. I’d definitely recommend speaking to a tax accountant or small business advisor, even if you plan on doing your own tax eventually, just to make sure you have everything set up correctly to begin with. You really don’t want to be in the position of having to pay back a ton of tax that you didn’t realise you owed in the first place. When I started out, the accountant that I spoke to didn’t even charge me for that first appointment (although he turned out to be very unreliable and I didn’t end up using him at tax time, but that’s another story). Even if they do charge a fee for the advice, it’s worth it to get things right from the beginning.
All this information will be as it relates to Australian freelancers. Here’s a really long and rather boring document from the ATO that you should really read, as it’s more comprehensive and reliable than my information here. But here’s a summary.
Business or Hobby?
The first thing to work out is if you have a business or a hobby. The ATO has a rather vague article that’s supposed to help you figure this out. The main jist is this: if you’re doing work with the intention of making a profit, it’s a business. It doesn’t matter if it’s just something you do on weekends whilst carrying on with your full time work, or doing part time – it’s still a business. If you’re not really making a profit and aren’t really doing it as a source of income, then it’s a hobby.
For example: I’ve had a craft stall at a handmade market and a few anime conventions. The amount that I made from these things was just about enough to cover my materials, a bus fare to Sydney from Canberra and (barely) a hotel room for the night. It just barely covered my expenses (or not even, in some cases), so I made negligible profit and don’t consider it at all a source of income. It is definitely a hobby. Therefore I didn’t put the money I received or my expenses on that year’s tax.
On the other hand, if you’re calling yourself a freelancer that implies to me that you’re doing it as a business. Even if you’re just doing it on top of a full time job and are just charging peanuts (which is what I was doing when I started), it’s an income and it’s taxable.
ABN: If you’re running a business you can and should register for an Australian Business Number (ABN). The form is a bit of a pain to fill out, but it’s free and makes doing your tax etc. much easier. You can just use your personal Tax File Number (TFN) if you’re operating as a freelancer/sole trader.
Business Name: a freelancer/sole trader can operate under their own name, so don’t need to register a business name. Some banks require you to have a registered business name in order to open a business account though (which I recommend doing), so you might find yourself having to get one anyway. The process for doing this depends on what state you’re in, and there is a yearly fee (which can be claimed as a business expense, of course). Mine costed $90.
PAYG: You will be told if you need to Pay As You Go for your tax, after your first tax return as a freelancer. For me, this is calculated based on my previous year’s tax and paid in quarterly installments. They do charge you extra fees if you don’t pay them or pay them late, although if you don’t leave it ridiculously long they usually waive them. At the end of the year when you do your tax return, if your yearly earnings differ to the previous year’s you might end up getting some back or having to pay a bit more.
GST: If you earn over $75,000 per year as a freelancer, then you have to register to claim Goods and Services Tax (GST). If you earn less than that amount, you can still choose to claim GST – I’ve been told that it can work out better for you tax wise. I don’t earn quite that much and don’t want the extra work of figuring out GST at this point, so unfortunately it isn’t something I’m familiar with yet. If you’re not charging GST, make sure to make a note of it on your invoices so it’s clear to clients.
ATO has a lengthy guide for this as well. The basic things that you really must keep track of are:
- record of invoices and payments made to you
- receipts, with the business’s ABN on them, for any expenses
- bank statements for your business account
- your previous tax records
- justification for any partial expenses*
These need to be kept for at least 5 years. They can be electronic (my software receipts and business statements all go to my email), as long as you can print them out easily if needed.
How fancy your record keeping needs to be is up to you. I have probably the most basic ‘system’:
- spreadsheet of payments made to me, with the client’s name, project, date paid and amount
- spreadsheet of expenses, with the type of expense, date and amount
- file of printed receipts
- folder on my computer for electronic receipts
- folder in my email client for email receipts I haven’t saved to my computer yet
There’s lots of other ways of keeping records, and if your expenses etc are more complicated then you might want to look into purchasing some software for it. I haven’t really dabbled with any so can’t offer any recommendations – if you’ve tried something you can recommend please let me know!
* Some things will be part business, part personal – for example, my mobile phone or petrol for my car. I only claim part of these things as business expenses. To justify the percentage used for business, keep a logbook of usage for a week or so.
Hopefully this has given you a general idea of what you need to do based on my personal experiences, but I really recommend speaking to someone more knowledgeable about these things. I don’t claim that any part of this is 100% correct, legal advice and am admittedly terrible at all things tax, so take all of this with a grain of salt and read through the tax office’s information thoroughly yourself as well.
I’m going to try and write a weekly post each Friday about what it’s like to be a freelancer! This is something that I find a lot of people are curious about, and there’s a lot of incorrect assumptions out there. If you have any questions for me on freelancing, leave a comment here or on Formspring.