The power of being your own boss!
Freelancing: an easy way to make good money when particularly skilled in a specific field or industry. It is also a great way to be your own boss and balance a work lifestyle you desire. With continuing advancements in technology and younger generations craving autonomy, freelancing ticks all the boxes! So, let’s look at common questions asked by Freelancers!
“Do I have to pay income tax? If so, how much?”
Freelancing is the contracting of an individual to a business engaged to perform a project for an agreed upon fee. In layman’s terms; you have an ABN and people pay you for jobs they need done. Because the individual is not an employee of the contracted organisation, there can be tax implications.
Firstly, income tax is not withheld from payments to most contractors such as in the case of an employee. As a result, if a freelancer earns over the tax free threshold ($18,200) they will be liable to pay tax. The amount of income tax a freelancer is liable for depends on how much money made in the financial year. This is not only in their freelancing business but from all their individual income sources. If you are unsure of your taxable position consult a tax agent to help assess your situation. Furthermore, it is highly recommended that any freelancer earning more than $18,200 save a portion of their income to meet their tax liability.
Note: if you are a freelancer and you do not earn over the tax free threshold ($18,200) in a financial year, you are not liable to pay income tax. The exception to this rule however is if you are liable to pay the private health insurance rebate surcharge. However, this is only in cases where an individual’s spouse earns more than the joint spousal income tax tier for private health insurance rebate claimed. For more information on this exception click here.
“Do I have to register for GST?”
For freelancers you are obligated to register for GST if you are running a business earning over $75,000 in a financial year. Note: this is $75,000 in gross revenue, not the money in your pocket after expenses. An individual can also voluntarily elect to register for GST. If anyone is registered for GST all invoices issued through a freelancing business must include GST. It also means that an individual can claim the GST paid on work related expenses incurred. For example, if the freelancer is working as an artist, what can they claim? They can claim the GST paid on paint, pencils, canvas’, or any other materials used to create the art for sale. Speak to a tax agent to ensure you are up to date with all relevant GST lodgements required.
“What deductions do I get as a freelancer?”
The deductions claimable depends on what work you perform and what is considered realistic for your chosen industry. Remember, the ATO now uses benchmarking. Therefore, any deductions considered to be outside the industry standard will be flagged by the ATO. Here is a list of common freelancing deductions:
- Motor Vehicle expenses – fuel, registration, insurance, repairs, servicing, etc. (Note: it is important to keep a log book to substantiate your deduction claims).
- Mobile phone and internet usage.
- Superannuation contributions.
- Income protection insurance premiums.
- Home office expenses – including running costs such as electricity and water apportioned to the home office space. There are specific circumstances in which you can claim occupancy expenses such as rent expenses, strata levies or interest. However, there are different implications if you are the home owner. You need to consider the capital gains tax (CGT) implications when planning to claim home office expenses.
- Depreciation of work related assets – including computers, desks, chairs, mobile phones, etc.
- Subscriptions to accounting software for organising business finances.
Is more than 50% of your income the direct result of your personal skills or expertise? If so, then the ATO will determine your income to be personal services income (PSI). If this is the case, there are additional expenses a freelancer can claim:
- Public liability/professional indemnity insurance.
- Subscription/membership fees.
- Accounting fees.
- Advertising/marketing fees.
For more information contact us here at Northern Beaches Accounts Consultancy.