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Is there any real difference between sole traders and self-employed professionals?

Posted on 02 September 2019

There’s a bit of confusion between the name “sole trader” and “self-employed”. Some use them interchangeably; others say they should be used exclusively. And still others would say that “sole traders” are really “self-employed” professionals with proper business cards—but “self-employed” professionals don’t have to be “sole traders”.

So which is which? Let’s begin by defining what a sole trader is.

A sole trader is, essentially, a person who runs his or her own business. As a sole trader, you can run your business as a self-employed person and are solely responsible for its financial success. Or, you can employ a team to help you with your work and projects.

Doing Business as a Sole Trader

A sole trader is a simple business structure that generally requires less paperwork, footwork, and has lower costs. You can operate your business alone, taking on work or projects full time or part-time. You may also employing a team to work under your management and supervision.

As a sole trader you may need to:

  • Register for your:
    • Tax File Number
    • Australian Business Number (ABN), if it’s required by your clients or contractors (it’s free). Wondering if an ABN is required? Click this link.
    • Goods and Services Tax
    • Pay-As-You-Go Withholding
  • Register your business name and open separate bank accounts (one for your business; a second for your personal savings)
  • Optionally, if you employ people to work for you, you’ll be responsible for:
    • Your workers' compensation insurance
    • Your employees’ tax and super obligations, and entitlements
    • Registering for Single Touch Payroll (with a provider of your choice)

Sole Trader Tax Responsibilities

If you’re a sole trader, you will be taxed as an individual and report your business income in your individual tax return. Your tax responsibilities may include, but not be limited to:

  • using your Tax File Number (TFN) when lodging your income tax return
  • paying the same income tax rates as individual payers
  • reporting all income in your tax return, using the section for business items to show income and expenses
  • keeping tax records for at least five years
  • claiming deductions for operation costs and for personal superannuation contributions
    Also, if you’re working alone and paid mostly for your efforts and expertise, look into how you can claim deductions based on receiving Personal Services Income (PSI).

So—is it Sole Trader or Self-Employed?

Key difference between being a sole trader and being self-employed is this: being a sole trader refers to the structure of your business; being self-employed refers to how you pay your taxes. In this context, if you’re self-employed then you’re basically running a business as a sole trader, whether you consider yourself a business owner or not.

Would you like to know more about how to register yourself as a sole trader? Or are you a backpacker and are wondering if you should identify as a sole trader (or as a self-employed professional)? Click this link and we’ll help you figure that out.

Claim Your Tax Back Now!

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