Sole Trader Tax Rates Australia 2026: How Much Tax Will You Pay?
Sole traders pay the same individual tax rates as employees — but also owe Medicare levy, GST (if turnover exceeds $75K), and get no employer super. Here's what you'll actually pay on $120K with $30K in deductions.
Sole traders pay the same individual tax rates as employees
There is no special "business tax rate" for sole traders in Australia. Unlike companies that pay a flat 25% or 30% corporate tax rate, sole traders are taxed as individuals. Your business income flows directly into your personal tax return, and you pay tax at the standard individual marginal rates. For 2025-26, these are: 0% on the first $18,200 (the tax-free threshold), 16% on $18,201 to $45,000, 30% on $45,001 to $135,000, 37% on $135,001 to $190,000, and 45% on income above $190,000. On top of these rates, you pay the 2% Medicare levy on your entire taxable income. The key difference from employees is that no one is withholding tax from your pay throughout the year — you are responsible for setting aside money for tax and potentially paying it in quarterly instalments. This catches many new sole traders off guard, leading to a nasty tax bill in their first year of business.
GST: you must register once turnover exceeds $75,000
If your annual business turnover (gross income, not profit) reaches or is expected to reach $75,000, you must register for GST. Once registered, you charge an additional 10% GST on your goods or services, collect it from customers, and remit it to the ATO via your Business Activity Statement. You can also claim GST credits on your business purchases. If your turnover is below $75,000, GST registration is voluntary — but some sole traders choose to register anyway because it allows them to claim GST credits on expenses and can make their business appear more established. Note that certain industries have different rules: ride-sourcing drivers and taxi operators must register for GST regardless of turnover. BAS is lodged quarterly for most sole traders (monthly if turnover exceeds $20 million). The BAS reports your GST collected, GST credits claimed, and your PAYG instalment amount. Late lodgement attracts penalties starting at $313 per 28-day period for small businesses.
No employer paying your super — you must do it yourself
As a sole trader, no one is contributing the 12% Superannuation Guarantee on your behalf. This is one of the most significant financial differences between being self-employed and being an employee. On an $80,000 salary, an employee receives $9,600 in employer super contributions per year — free money that a sole trader earning the same amount simply misses out on. You can make voluntary personal contributions to your super fund and claim them as a tax deduction, up to the $30,000 annual concessional contributions cap. Since you have no employer contributions, the full cap is available. The tax benefit is substantial: contributions are taxed at just 15% inside super, compared to your marginal rate outside. For a sole trader with $90,000 taxable income (30% marginal rate), contributing $10,000 to super saves $1,500 in tax. To claim the deduction, you must submit a Section 290-170 Notice of Intent form to your super fund and receive an acknowledgement before lodging your tax return. Make super contributions a non-negotiable part of your business expenses.
Key deductions for sole traders
Sole traders can claim deductions for any expense incurred in earning their business income. The most common deductions include: home office expenses (either 67 cents per hour fixed rate, or actual costs calculated on floor-area percentage), vehicle expenses (logbook method or 85 cents per km up to 5,000 km), equipment and tools (items under $1,000 can be instantly written off; items over $1,000 are depreciated), phone and internet (business-use percentage), professional development and training, accounting and tax agent fees, insurance (professional indemnity, public liability, income protection), advertising and marketing, subscriptions and software, and bank fees on business accounts. You cannot claim private expenses, fines, entertainment (unless provided to clients in limited circumstances), or the cost of initial professional qualifications. Keep meticulous records — the ATO requires you to retain receipts and documentation for five years. Using separate bank accounts and accounting software like Xero or QuickBooks makes tracking deductions dramatically easier and more accurate come tax time.
Worked example: $120,000 turnover with $30,000 in deductions
Let's calculate the tax for a sole trader with $120,000 gross business income and $30,000 in legitimate deductions. Taxable income: $120,000 minus $30,000 = $90,000. Income tax (2025-26 rates): $0 on first $18,200, $4,288 on $18,201-$45,000 (16%), $13,500 on $45,001-$90,000 (30%) = $17,788 total. Medicare levy: 2% of $90,000 = $1,800. Total tax payable: $19,588. Effective tax rate: 21.8% of taxable income, or 16.3% of gross income. If this sole trader also contributes $15,000 to super (claiming the deduction), taxable income drops to $75,000. Tax becomes $13,288 plus $1,500 Medicare = $14,788 — saving $4,800 in tax (though $15,000 is now locked in super). By comparison, an employee earning $90,000 would pay the same $19,588 in tax, but also receives $10,800 in employer super contributions on top. That $10,800 difference is the real hidden cost of being a sole trader versus an employee at equivalent income levels.
PAYG instalments: paying tax throughout the year
Once the ATO determines that you will likely owe more than $1,000 in tax for the year, they will enter you into the PAYG instalment system. This means you pay estimated tax in four quarterly instalments rather than one lump sum at year end. The ATO calculates your instalment amount based on your most recent tax return and notifies you via your BAS. You can choose to pay the amount the ATO calculates, or calculate your own instalment based on current-year income if your circumstances have changed. PAYG instalments are due on the same dates as your BAS: 28 October, 28 February, 28 April, and 28 July. If you are a new sole trader in your first year, you will not receive PAYG instalment notices — but you should still set aside 25-30% of your profit each quarter to avoid a shock at tax time. Many accountants recommend opening a separate high-interest savings account specifically for tax money. The interest earned helps offset the opportunity cost of holding that cash aside throughout the year.
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General information and estimates only — not legal, financial, or tax advice. Always verify with the Fair Work Ombudsman (13 13 94) or a qualified professional.
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