How to Pay Yourself as a Sole Trader

February 20, 2024
minutes to read
Ben Mensah
Table of Contents

Navigating how to pay yourself as a sole trader can be an intricate task. Striking the delicate balance between personal income, ensuring the sustainability of the business, and adhering to legal and tax obligations requires a measured and strategic approach. In this guide, we'll explore how you can pay yourself as a sole trader and delve into some best practices:

Paying Yourself as a Sole Trader

Sole traders can pay themselves by taking money directly from the business's cash flow. These personal draws are considered part of the profit and are subject to taxation in your personal income tax return at the end of the financial year.

Being a sole trader means that your personal and business income is one and the same in the eyes of the ATO. While this can simplify matters, it can also mean intertwining personal and business finances, potentially creating a headache come tax time without proper financial management.

With Thriday, your small business can easily establish up to 9 business transaction accounts* and manage them in one easy-to-use platform, ensuring that your personal and business finances remain separate and organised. This maintains a clear financial boundary between your personal and business finances - and the power of automated accounting makes sure that you have all your financial records and transactions maintained, automatically categorised and stored in one place to make tax time, relax time!

Paying Yourself as a Company

While sole traders can freely withdraw funds at their discretion, company owners navigate a slightly different path. In Australia, if your business is registered as a company, you have several options when it comes to paying yourself. 

Many business owners opt to draw a minimal weekly or monthly salary, which is accounted for as a business expense, with company owners subsequently paying personal income tax on the salary. Alternative options for sole directors include dividends, loans and bonuses - you can learn more about paying yourself from your company's earnings here.

How Much Should I Pay Myself?

Determining your own pay when running a business, whether it's your main income source or a side hustle, can present a challenge. Finding that delicate balance between your personal living costs and your business's financial stability is crucial.

Importantly, the salary you decide upon now can influence your business's profitability in the long run. Here are a few key aspects to consider:

Crafting a Strategy

Incorporating your own salary or wage into your business financial plan can aid in projecting a feasible amount to pay yourself. Initially, you might opt to draw a minimal salary, redirecting more profits back into your business to fuel growth, potentially enhancing its value over time. Conversely, paying yourself a market-rate salary from the get-go can establish a sustainable business structure and ensure you maintain a comfortable living standard, possibly mitigating initial financial strain.

With Thriday, you can effortlessly manage your financial strategy with the automated generation of key financial reports, such as income and cash flow statements, to have a picture-perfect overview of your business' financials that is continuously updated in real-time. Find out more about Automated Accounting with Thriday here.

Maximising Tax Deductions

As a sole trader, your net profit is treated as an extension of any other income and is taxed at your individual rate. Annually, you'll need to generate a profit and loss statement and file a personal tax return. You may be eligible to claim certain business expenses when filing your tax return. You can refer to the Australian Taxation Office (ATO) website here for more information on claimable items.

Thriday's smart GST recognition and personalised deductions combine to provide real-time tax forecasting, enabling you to stay ahead of your estimated tax obligations throughout the year, ensuring you can strategically plan your deductions and manage your tax liabilities effectively.

Thriday tax estimates
Thriday leverages the power of AI to automatically categorise your income and expenses and generate key financial reports including tax estimates

Preparing for Unforeseen Circumstances

Your business's success may hinge on your personal well-being, making it vital to establish financial safeguards for unexpected events or emergencies. One approach is to explore income protection insurance, which can provide a salary if you're incapacitated or offset the cost of hiring a substitute, among other benefits.

Considering Superannuation

While contributing to your superannuation isn't mandatory, it's a worthy consideration to facilitate your desired future lifestyle. Conventional employers are mandated to contribute 9.5% of eligible employees' earnings into superannuation accounts, given that they earn over $450 per month - if your self-payment exceeds this amount, making a similar contribution could be prudent to help secure your financial future. Ensure you're taking advantage of potential benefits, and explore the ATO website here for details on the possible government contributions available to self-employed individuals.

Balancing your salary, especially in the initial stages of your business, involves careful planning and consideration of both your current financial needs and future business growth. It's about striking a balance that sustains your personal financial health while nurturing the development and stability of your business.

Thriday's next-generation all-in-one financial management platform can be a pivotal ally in navigating the complexities of paying yourself as a business owner.

Automated accounting, real-time financial reporting, and intelligent tax forecasting can streamline your financial management and empower you to make informed decisions regarding your salary, tax obligations, and overall financial strategy.

4 Tips for Paying Yourself as a Small Business Owner

Compensate Yourself from Profits

Always ensure that your salary comes from your business profits, not the revenue. While revenue might be flowing, it's not a green light to draw all of it for yourself. Assess all costs and then determine a reasonable salary, ensuring the sustainability of your business.

With Thriday's automated bookkeeping and accounting, you can run your business as usual, and the platform will generate all the financial reports you need to have a complete understanding of your business's financial health.

With cash flow statements, income statements, tax obligation forecasting and more automatically generated in the same platform as your banking* and continuously updated in real-time, determining a sensible salary that doesn't jeopardise your business's stability is made easy.

Ensure Consistent Cash Flow Management

Maintaining a steady cash flow is pivotal for ensuring that you can consistently pay yourself, especially during the initial stages of your business. It's essential to keep a close eye on your cash inflows and outflows, ensuring that your business remains financially healthy and that you can sustainably draw a salary without jeopardising operational costs or growth investments.

Thriday works for you to simplify this process by providing an intuitive platform where you can monitor your cash flow in real-time, ensuring that you always have an accurate and up-to-date understanding of your financial position. With Thriday, tracking your expenses, income, and overall cash flow is automated to enable you to make informed decisions about your salary while ensuring that your business maintains a healthy financial status.

Thriday cash flow statement
Enjoy the benefit of a Cash Flow Statement automatically generated from your transactions in Thriday to simplify decision-making

Acknowledge Your Business's Legal Structure

Your capacity to pay yourself, the timing, and any legal constraints should be thoroughly considered, ensuring compliance irrespective of your business's financial performance. For sole traders, while you have the flexibility to determine your salary and payment schedule, tax obligations on all profits remain. Conversely, incorporated businesses typically have the owner on the payroll, receiving a regular wage like any other employee.

Thriday ensures that your transactions, whether salary or otherwise, are automatically recorded, categorised, and securely stored, providing a seamless interface to manage your finances in adherence to legal structures.

Maintain Comprehensive Transaction Records

Documenting all transactions and payments in your accounting software is imperative to maintain a transparent audit trail. Thriday automates this recording process and organises all your financial data in one simple and easy-to-use platform, ensuring that every transaction is accurately logged, categorised and easily retrievable. This ensures you're always audit-ready and can manage your finances with enhanced clarity and confidence.

Incorporating Thriday into your financial management fortifies your financial processes, using automated, intelligent AI-driven solutions to eliminate financial admin. From ensuring you have a clear picture of your business' financials to drawing your salary appropriately from profits to maintaining and categorising meticulous records to make tax time and compliance a breeze, Thriday serves as an automated sidekick in managing your finances as a business owner, ensuring accuracy, compliance, and strategic financial planning.

Learn more about Tireless Transacting with Thriday here.

Navigating Salary Management with Thriday: Empowering Business Owners with Financial Mastery

Determining how to pay yourself as a business owner mixes various facets - from personal financial needs to legal structures, tax obligations and the overall financial health of the business. While seemingly complex, the journey becomes significantly streamlined and transparent with the help of a robust financial management platform like Thriday.

From crafting strategic salary plans, maximising tax deductions, and ensuring preparedness for unforeseen circumstances to considering superannuation - Thriday leverages the power of AI to automate bookkeeping and accounting and simplifies these processes with real-time financial reporting and intelligent tax forecasting.

Thriday all-in-one platform
Use Thriday's powerful all-in-one platform to simplify and upgrade your business' financial management

With instant establishment of up to 9 business transaction accounts*, ensuring clear separation and organised management of personal and business finances. Thriday's smart GST recognition, personalised deductions, and real-time tax forecasting empower business owners to manage tax liabilities effectively throughout the year while ensuring all transactions are automatically recorded, categorised, and securely stored.

Developed with small business owners in mind, Thriday transforms financial management from a complex task into an intuitive, automated process, enabling you to focus on business growth while ensuring financial compliance and strategic planning.

With Thriday, manage and master your finances - turning potential challenges into opportunities for stability and success, and making financial management your strategic advantage!

DISCLAIMER: Team Thrive Pty Ltd ABN 15 637 676 496 (Thriday) is an authorised representative (No.1297601) of Regional Australia Bank ABN 21 087 650 360  AFSL 241167 (Regional Australia Bank).  Regional Australia Bank is the issuer of the transaction account and debit card available through Thriday. Any information provided by Thriday is general in nature and does not take into account your personal situation. You should consider whether Thriday is appropriate for you.

Why waste time on financial admin when Thriday can do it for you?

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