27 September 2023

Calling all side hustlers: How to conquer tax and financial admin

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Spaceship* says all of Australia’s 1.5 million sole traders have got a whole extra layer of finance to deal with.

There are currently about 1.5 million sole traders working in Australia, comprising roughly 12 per cent of the Australian workforce.

Further to that, a recent Upwork report (now a few years old) estimated the number of permanent employees who have a side hustle may be in excess of four million people.

Either way, these huge (and rapidly growing) numbers can be credited to the many benefits of self-employment, which include:

  • Ease of access.

Side hustles have become a lot more accessible with the advent of platforms such as Airtasker, Freelancer, Upwork, and Expert360, which have made access to paid work a lot easier.

  • More flexibility.

The flexibility of running your own business can be really beneficial to an individual’s lifestyle, providing opportunities to save earlier, choose your hours, indulge more, or have more disposable income to spend on day-to-day needs.

  • Be your own boss.

More than just choosing when you work, there’s a huge amount of liberty that can come from having your own business. Everything is on your terms: you decide how you work, who you work for, and ultimately what type of work you do.

But then… there’s the financial admin

But there are drawbacks to being a sole trader.

One of the most challenging parts of being a sole trader – and the focus of this article – is dealing with all the financial admin before and after getting paid.

There are three stages of getting paid and each can have its own pain point.

Before getting paid: How do you invoice effectively?
When you get paid: How should you manage your taxes?
After getting paid: How can you make efficient super contributions?

Below we talk in more detail about each of these challenges.

Before getting paid: How to invoice effectively

Of the thousands of freelancers who use Hnry for their invoicing needs, a staggering 81 per cent of them have had an overdue invoice in the last 12 months.

Further to that, 38 per cent of all invoices get paid past their due date.

So what does this mean?

It means your invoicing process is important. Here are three tips to help you get paid more reliably:

  1. Send your invoices the moment the job is done.

Don’t wait days or weeks to send an invoice. The sooner you send it, the sooner you’ll get paid.

Some businesses only pay their invoices on the 20th day of the following month, so if you forget to send an invoice before the end of June, then you might not get paid for that invoice until the 20th of August!

  1. Keep your invoices simple and professional.

They can’t stress this enough – Tim from Accounts Payable does not care about how sleek your invoices look.

All he’s doing is checking that it’s factually correct and it has all the information he needs to pay your invoice.

There is a lot of information that needs to be included on all invoices, such as:

  • Your name and contact information
  • Your company details (such as an Australian Business Number)
  • Your client’s name and contact information
  • Your GST number (if you’re GST registered)
  • A description of the services you provided
  • Payment methods and information (such as due date)
  • And any additional comments that may be relevant.

This is also an opportunity to add your own personal touch with your logo and emphasise your brand while maintaining that air of professionalism.

  1. Follow up on your unpaid invoices.

If your client is late with payment, it’s perfectly okay to send a polite reminder.

As long as you keep it short and professional, it won’t do any damage to your relationship.

And here’s the thing: it works.

When getting paid: How to manage your taxes

Without a doubt, managing your tax obligations is one of the most challenging parts of having a side hustle.

Most people have a side hustle because they’re passionate about their craft – writing, graphic design, carpentry – NOT because they’re passionate about accounting.

At Hnry, they see self-employed people make a lot of common mistakes when it comes to managing tax administration. Here are our top three recommendations to sole traders when it comes to tax.

  1. Know your tax rate.

You should always have an understanding of how much you expect to make in a year; you can use a tax calculator to know your tax rate.

For many freelancers, income uncertainty can make this a real challenge, but even if you can only estimate to the nearest $10,000, that still gives you an approximate tax rate that you can work towards throughout the year as you set aside money.

  1. Set aside money as you go.

Provided you know your tax rate, the most important part of managing tax is setting aside money.

Habit is crucial here; whenever you get paid, you need to put the right amount of money into a separate tax account.

This will prevent you from getting confused over what money is yours and what is the ATO’s.

The money you need to set aside from every bit of income includes:

  • Income tax (provided you know your tax rate!)
  • Medicare
  • GST (provided you’re above the GST threshold)
  • Any HECS/HELP or other education repayments

If you fail to set aside the money and fall behind, it becomes oppressively hard to claw back the difference – and for the rest of the tax year you’ll be stressed out knowing you won’t have the cash you need for the tax you’ll owe.

  1. Don’t touch your tax money.

This one is obvious, but still needs to be mentioned.

For some people it can be really tempting to dip into their tax money throughout the year for, well, anything.

They tell themselves that they’ll just make up the difference later, but in practice making up that difference is super challenging.

To use your tax money for personal expenses is to put yourself in debt; remember, even though your tax money is in one of your accounts, it’s not yours.

It’s the ATO’s.

So you should only touch your tax money in emergencies.

And if you’ve used your tax money for an emergency, then you need to quickly put together a plan to pay it back, because soon enough your taxes will come due.

As you probably already know, managing taxes is one of the most stressful parts of being a sole trader.

After getting paid: Making efficient superannuation contributions

Unlike salaried/PAYG employees, who get a 10 per cent superannuation contribution from their employer, sole traders are (usually) on their own when it comes to saving for retirement.

This is another big pain point of being a sole trader, and it leads many self-employed contractors and freelancers to neglect their retirement planning.

Fortunately, the ATO has a few structures in place to help sole traders make effective superannuation contributions.

Let’s talk about them.

Superannuation concessional contributions

The first tax benefit you can get from contributing to super comes under the concessional contribution.

Basically your super contributions come out of your income before tax, and are then taxed at a lower rate than your other income, assuming you earn more than $18,200 per year.

For example, if you earn $70,000 per year, your top rate of tax is 32.5 per cent.

If you make a concessional contribution of $6,000 to your superannuation fund, then that $6,000 gets deducted from your income before tax.

The $6,000 super contribution would then get taxed in your super fund at just 15 per cent rather than 32.5 per cent, thus reducing your total annual tax bill by $1,050!

Contributing to your super is an important way of saving for your long term future and the concessional contribution is a nice sweetener to incentivise good behaviours.

Super co-contribution

Another benefit sole traders can extract from the Australian government is called the super co-contribution, which was designed to help low to middle income earners increase their superannuation contributions.

You can qualify for the super co-contribution if you:

  • Earn less than $54,837 per year, and
  • Contribute at least $200 to a Superannuation fund in that year

The government will match up to 50 per cent of your superannuation contributions up to a limit (the limit is set by your income).

The chart below shows the government contribution thresholds at certain income and personal contribution levels.

This government contribution gets paid directly into your super scheme after you have lodged your tax return.

You should note that if you make personal contributions as an income tax deduction, then you won’t be eligible for the co-contribution scheme.

All of this information may feel overwhelming, but there are plenty of resources online to help you figure out your best course of action.

Tax calculators and how-to guides are just the tip of the iceberg.

And if you do start to feel overwhelmed by tax or superannuation, then using a service like Hnry may be the right step for you.

This blog post has been prepared by Hnry and is general information, you should seek your own professional taxation advice before making any decisions.

*Spaceship is a financial institution and superannuation fund.

This article first appeared at spaceship.com.au.

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