Updated June 2025

When you run a business as a sole trader, you’re responsible for managing your tax, as your tax isn’t automatically withheld from your salary like an employee’s would be. Under a sole trader structure, your business earnings are added to any other personal income you receive, and you pay tax on the total amount.

In this guide, we’ll cover everything you need to know about sole trader tax: the current tax rates, how to work out what you owe, which business expenses you can claim, and practical ways to manage your tax throughout the year.

Understanding sole trader tax

As a sole trader, you’re running your business as an individual and are personally responsible for its operations. A sole-trader business structure means:

You and your business are the same legal entity for tax purposes
Your business profits are taxed at your personal marginal tax rates
Your taxable income includes both business profits and any other personal income, such as investment income, employment income or capital gains from selling assets
You can claim deductions for legitimate business expenses
You may be eligible for small business tax concessions.

The sole trader tax-free threshold 2024-25

As an Australian taxpayer, you benefit from the tax-free threshold, which means you don’t pay tax on the first portion of your income. The tax-free threshold for the 2024-25 financial year is $18,200.

This threshold applies to your total taxable income, which includes:

Your business profits
Any employment income
Investment income (interest, dividends, rent)
Capital gains
Other assessable income.

Once your total taxable income exceeds $18,200, you’ll pay tax on the amount over this threshold at progressively higher rates.

It’s important to know that if you operate your business as a sole trader, you must lodge a tax return, even if your income is below the tax-free threshold.

Tax rates for sole traders 2024-25

Sole traders pay tax at the standard individual income tax rates. The amount of tax a sole trader pays depends on their total taxable income. For the 2024-25 financial year, the resident tax rates are:

Note that the above rates don’t include the 2% Medicare levy.

Taxable income	Tax paid on this income	Effective tax percentage
0 – $18,200	Nil	0%
$18,201 – $45,000	16 cents for each $1 over $18,200	16%
$45,001 – $135,000	$4,288 plus 30c for each $1 over $45,000	30%
$135,001 – $190,000	$31,288 plus 37c for each $1 over $135,000	37%
$190,001 and over	$51,638 plus 45c for each $1 over $190,000	45%

Note that the above rates don’t include the 2% Medicare levy, which most Australian taxpayers must pay in addition to income tax.

What income do sole traders pay tax on?

As a sole trader, you pay tax on your business profit, not your gross income. Your taxable business profit is calculated as follows:

Business profit = Total business income – Allowable business deductions

If you run multiple sole trader businesses, you’ll combine the income and expenses from all these activities to calculate your total business profit or loss.

Your business profit is added to your other income to determine your total taxable income. This is what your tax liability is based on.

Common allowable business tax deductions for sole traders include:

Business vehicle expenses
Home office expenses
Tools and equipment
Professional services (accounting, legal)
Business travel
Marketing and advertising
Training and professional development
Business insurance
Phone and internet costs (business portion)
Uniforms and protective clothing.

For more detail on allowable business deductions, see our article, ‘What can I claim in my 2024-25 tax return?’.

What happens if a sole trader makes a loss?

If your business expenses exceed your business income, you’ve made a loss. This loss can either be:

Carried forward to offset future business profits, or
In some cases, offset against other income you’ve earned (subject to certain rules).

How to calculate sole trader tax: Joe the plumber example, part 1

Let’s look at a practical example to understand how to calculate tax for a sole trader.

Meet Joe, a sole trader plumber. Here is Joe’s income for the 2024-25 financial year:

Business income:

Total sales: $140,000
Business expenses: $84,000
Business profit: $56,000

Other income:

Bank interest: $5,000
Capital gain from cryptocurrency: $3,000

Joe’s total taxable income: $64,000 ($56,000 business profit + $5,000 bank interest + $3,000 capital gains).

Joe’s taxable income puts him in the $45,001 – $135,000 tax bracket. Here’s how his tax is calculated:

The first $18,200 is tax-free.
The next $26,800 (from $18,201 to $45,000) is taxed at 16% = $4,288
The remaining $19,000 (from $45,001 to $64,500) is taxed at 30% = $5,700.

Joe’s total tax (excluding the Medicare levy) is $9,988. That’s an average tax rate of 15.6%.

Small business income tax offset for sole traders 2025

If you’re a sole trader with an aggregated turnover of $5 million or less, you might be eligible for the small business income tax offset. This offset can reduce the tax on your business income by up to $1,000.

The offset is calculated as a percentage of the tax payable on your business income, with a maximum offset of $1,000:

It’s important to note that:

The offset is not refundable
If your business makes a loss, you won’t receive an offset
You don’t need to calculate this yourself. The ATO will calculate it based on information in your tax return.

You can use the ATO small business income tax offset calculator for a quick estimate.

How to calculate the small business income tax offset for sole traders: Joe the plumber example, part 2

Let’s continue with Joe’s example.

Joe is eligible for the small business income tax offset because his business has a turnover of under $5 million.

First, we calculate the percentage of Joe’s income that comes from his business:

$56,000 (business profit) ÷ $64,000 (total taxable income) = 87.5%

87.5% of Joe’s income is from his small business activities.

Next, we work out how much of Joe’s tax liability comes from his business income:

$9,988 (total tax) × 87.5% = $8,739.50

Finally, we multiply this by the small business income tax offset rate (16% for 2024-25):

$8,739.50 × 16% = $1,398

The offset is capped at $1,000, so Joe can apply the full $1,000 to reduce his tax liability to $8,988.

How to pay tax as a sole trader

Your annual tax liability is determined when you lodge your income tax return, which is due by October 31 each year (or later if using a registered tax agent).

However, most sole traders don’t pay their entire tax bill in one lump sum. Instead, they pay in quarterly instalments using the pay-as-you-go (PAYG) system, which spreads tax payments throughout the year.

This quarterly system helps you manage your cash flow effectively and avoid a large lump sum payment when you lodge your tax return.

GST obligations for sole traders

As a sole trader, your GST obligations depend on your annual turnover:

Under $75,000: GST registration is optional
$75,000 or more: You must register for GST.

If you’re registered for GST, you need to:

Charge GST (currently 10%) on your taxable sales
Claim GST credits for GST included in your business purchases
Lodge regular Business Activity Statements (BAS)
Keep records of all transactions.

Separating business and personal finances

One of the most important steps you can take as a sole trader is to separate your business and personal finances by:

Setting up a dedicated business bank account
Using a separate business credit card for business expenses
Reimbursing yourself from your business account if you use personal funds for business expenses
Maintaining clear records of any personal use of business assets.

Consider using cloud accounting software to simplify your record keeping. Many solutions can connect to your bank account and automatically categorise your transactions, saving time and reducing errors.

Frequently asked questions about sole trader tax

Should I lodge a tax return if my sole trader income is below the tax-free threshold?

Yes, you must lodge a tax return even if your income is below the tax-free threshold of $18,200. This is a legal obligation for all sole traders.

Can I claim a deduction for personal superannuation contributions?

Yes, most sole traders can claim a tax deduction for personal superannuation contributions, subject to contribution caps and eligibility criteria. This can be an effective way to save for retirement while reducing your taxable income.

How much tax does a sole trader pay?

A sole trader pays tax on their total taxable income at the individual income tax rates. The tax percentage varies based on income levels, from 0% on income up to $18,200 to 45% on income over $190,001, plus the 2% Medicare levy.

Do I need to register for an ABN as a sole trader?

Yes, you need an Australian Business Number (ABN) to operate as a sole trader. Without an ABN, other businesses must withhold 47% from payments to you.

How do I calculate my taxable income if I have multiple income sources?

Your taxable income is the sum of all your assessable income (including business profits, employment income, and investment income) minus your allowable deductions.

What home office expenses can I claim as a sole trader?

Depending on your circumstances, you may be able to claim deductions for:

Occupancy expenses (rent, mortgage interest, rates)
Running expenses (electricity, phone, internet)
Depreciation of office equipment and furniture.

You must base these claims on the portion of your home used exclusively for business purposes. But remember to consider claims from a capital gains tax perspective if you’re using your family home to produce income. See our articles on WFH tax deduction methods and paying capital gains tax on your property sale for more information.

Where can I find more information on paying tax as a sole trader

For more information on operating as a sole trader, check out our article ‘Sole trader – is it for you?‘, and for more information on what you can claim as part of this year’s tax return, check out ‘What can I claim in my 2024-25 tax return?‘.

Need help understanding your sole trader tax obligations?

Sole trader taxation can be complex, but we’re here to help. At Davidsons, our experienced team can help you:

Optimise your tax position
Identify all eligible deductions
Ensure compliance with tax legislation
Plan for future tax obligations
Determine if your current business structure is right for you.

Our personal income tax return specialists and small business advisors can support you virtually or at our Geelong or Torquay offices.

You can reach out to us by:

completing an enquiry form
calling us on 03 5221 6399
emailing via info@davidsons.com.au.

Download our free income tax return resources

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This article was written by Tax and Business Services Director Kylie McEwan.

Disclaimer: The information provided in this article is factual in nature and objectively ascertainable and, therefore, does not constitute financial product advice. Importantly, the factual information that has been supplied does not take into account your personal circumstances, objectives or goals.

Sole trader tax guide: How to calculate and pay sole trader tax