This guide is for Australian sole traders, freelancers, contractors, gig workers and small-business owners. It covers how to work out your tax, what else you owe, which deductions apply, and how the US system differs. Figures are for the 2025-26 financial year unless stated.
Key Takeaways
- Australia taxes a sole trader's net business income at personal rates, with no separate self-employment tax.
- Your bill depends on taxable income, residency, other income, deductions, offsets and the Medicare levy.
- PAYG instalments, GST, super and record keeping are separate obligations to plan for.
- Don't apply US concepts such as Schedule SE or the 92.35% base to an Australian return.
Is There a Separate Self-Employment Tax in Australia?
No. A sole trader is an individual, not a separate legal entity for income-tax reporting. Business income and deductions go in your individual return and are taxed at personal rates, as the ATO's structure guidance explains. The Medicare levy is separate, generally 2% of taxable income, with relief for low incomes.
Who counts as self-employed?
An ABN or a contract labelled "independent contractor" doesn't settle the question. The ATO looks at the contractual rights and obligations in the real arrangement, following the High Court's 2022 decisions in Personnel Contracting and Jamsek. Fair Work applies a separate whole-of-relationship test to constitutionally covered businesses from 26 August 2024.
Other distinctions matter too:
- Business or hobby: a business generally involves repeated activity with an intention to make a profit.
- Personal services income (PSI): earnings mainly from your own skills or effort can trigger special rules.
- Employment income: if you're really an employee, PAYG withholding and super apply.
What determines your effective tax burden?
Your marginal rate is the rate on your last dollar. Your effective rate is total tax divided by total income, and it's always lower. Resident rates for 2025-26 (excluding the Medicare levy):
| Taxable income | Tax |
|---|---|
| $0-$18,200 | Nil |
| $18,201-$45,000 | 16c per $1 over $18,200 |
| $45,001-$135,000 | $4,288 + 30c per $1 over $45,000 |
| $135,001-$190,000 | $31,288 + 37c per $1 over $135,000 |
| $190,001+ | $51,638 + 45c per $1 over $190,000 |
Foreign residents get no tax-free threshold (30% from the first dollar to $135,000) and don't pay the Medicare levy. Wages, rent, investments and foreign income all stack on top of your business profit.
Sole trader versus company or trust
- Partnership: files a return allocating income; partners report their shares.
- Company: separate legal entity taxed at 25% for base rate entities and 30% otherwise.
- Trust: reports net income and distributions; beneficiaries generally return their share.
Don't choose a structure on the headline rate alone. Liability protection, compliance costs, retained profits, super and long-term plans all count.
How to Calculate Tax on Self-Employment Income for 2026
Start with gross business income
Include invoices, cash, contract income and online or platform income. Gross business income excludes GST.
Platforms report to the ATO under the Sharing Economy Reporting Regime, so the ATO may already know your figures. Keep private receipts and non-business income out of the business calculation.
Calculate net business income
Net business income is assessable business income less allowable deductions. Claim only the business-use portion of mixed costs. Private costs aren't deductible, and capital items are generally depreciated or claimed under a write-off rather than as running expenses.
Account for personal services income and losses
If at least 75% of your PSI comes from one individual's efforts, you may need to pass the results test to be a personal services business. That test requires payment for a specific result, supplying your own tools, and fixing defects at your own cost.
Business losses can be deferred under the non-commercial loss rules. For 2025-26, your adjusted income must be under $250,000, and you must also pass one of four tests:
- business assessable income of at least $20,000
- a tax profit in 3 of the past 5 years
- business real property of at least $500,000
- other business assets of at least $100,000
Apply individual income-tax rules
Combine net business income with other assessable income, subtract eligible deductions, then apply the rates and Medicare levy. The Medicare levy generally isn't charged on taxable income of $28,011 or less, and a reduced levy applies up to $35,013. The Medicare levy surcharge can apply without private hospital cover once single income passes $101,000.
Illustrative calculation
This is a hypothetical example, not a 2026 rate. Assume a resident sole trader with no other income and no offsets, with $120,000 of GST-exclusive income and $30,000 of allowable expenses.
- Net business income: $120,000 - $30,000 = $90,000
- Taxable income: $90,000
- Income tax: $4,288 + 30% × ($90,000 - $45,000) = $17,788
- Medicare levy at 2%: $1,800
- Total before credits or PAYG instalments: $19,588
The result shifts with residency, other income, deductions and offsets.
Plan for future financial years
The 16% bracket rate falls to 15% from 1 July 2026 and 14% from 1 July 2027; the ATO states these cuts are law. Thresholds, Medicare settings and super rules can also change. Check the ATO page for the relevant year before relying on any estimate.
What Other Obligations Apply to Australian Self-Employed Workers?
PAYG instalments and annual filing
You're generally entered automatically when you meet all of these thresholds:
- Instalment income of at least $4,000
- Assessed tax of at least $1,000
- Estimated tax of at least $500
Quarterly due dates are 28 October, 28 February, 28 April and 28 July. Instalments are credited against your final assessment.
Varying instalments is risky. A variation that ends up below 85% of actual year-end tax can attract the general interest charge (GIC) and possibly a penalty, unless you took reasonable care.
GST and business activity statements
GST is 10%. Register within 21 days of reaching $75,000 GST turnover. Taxi and ride-sourcing drivers must register regardless of turnover. GST you collect isn't your income; you report and remit it through the BAS, usually quarterly.
A tax invoice is needed on request within 28 days, except for sales of $82.50 or less including GST.
Superannuation considerations
You aren't compelled to pay super for yourself, but you can contribute voluntarily. The 2025-26 concessional cap is $30,000, with carry-forward of unused caps for up to 5 years if your balance was under $500,000. To claim a deduction, lodge a valid notice of intent and get the fund's acknowledgement.
If you're a contractor engaged mainly for your labour, the other party may owe you super despite your ABN. The SG rate is 12%.
Record keeping and business accounts
Keep most records for 5 years. A working checklist:
- invoices, receipts and bank statements
- car logbook (12 continuous weeks, odometer readings, trip purpose)
- home-office hours for the full year
- GST records and contractor paperwork
- prior returns
Separate personal and business accounts where you can.
Employees and subcontractors
Hiring staff adds PAYG withholding, super, Single Touch Payroll reporting and workers' compensation. Payroll tax is state-based, and some contractor payments can be taxable. These sit apart from your own income-tax calculation, so review them before you hire.
Deductions and Tax-Planning Steps for 2026 and Beyond
Common deductions and apportionment
- Car: 88 cents per km, capped at 5,000 business km, or the logbook method.
- Home office: 70 cents per hour fixed rate, with hours recorded for the whole year.
- Instant asset write-off: $20,000 per asset for small businesses (turnover under $10 million), business-use portion only. The ATO says the measure is now law and permanent from 1 July 2026.
- Simplified depreciation: 15% in the first year and 30% of the pool balance after.
The most common error the ATO flags is claiming private costs or not apportioning mixed-use items.
Avoid confusing deductions with tax elimination
A deduction reduces taxable income; it doesn't erase the cost. Spending $1,000 on a deductible item saves tax at your marginal rate, not $1,000. It also doesn't remove GST, PAYG or super duties. Never create expenses just for a deduction, and keep evidence of commercial purpose.
For context, the ATO's small business tax gap was 17.4% in 2022-23, covering companies and individuals with turnover up to $10 million.
Build a year-round planning process
- Reconcile your books monthly.
- Forecast cash flow, including a tax set-aside.
- Review profit each quarter and adjust PAYG instalments.
- Write down an expense policy.
- Ask annually whether your structure still fits.
When you want help running that process, VJM Global provides accounting outsourcing and tax-compliance support for Australian businesses, including input tax credit assistance. The firm can take on bookkeeping and BAS preparation, though it cannot guarantee any ATO outcome.
How Australian Self-Employment Tax Compares With the US
Why US search results use different terminology
In the US, self-employment tax is a Social Security and Medicare contribution calculated separately from income tax. Schedule C, Schedule SE, FICA, SECA, Social Security wage bases and the 92.35% base don't belong on an Australian return.
Compare the two systems
| Item | Australia | United States |
|---|---|---|
| Separate SE tax | None; profit taxed as individual income | 15.3% (12.4% Social Security + 2.9% Medicare) |
| Medicare | Levy of generally 2% | Included in the 15.3% |
| Earnings cap | None for this purpose | Social Security base $184,500 (2026) |
| Base | Net income after deductions | 92.35% of net profit |
The IRS self-employment tax guidance confirms the 15.3% rate and the $400 earnings trigger.
Cross-border income and business activity
An Australian resident serving US clients must still report worldwide income in Australia. Rules that often matter:
- For US sourcing, where the work is performed generally controls, not where the client sits
- Foreign tax paid may qualify for a foreign income tax offset
- US citizens living in Australia generally still file with the IRS
- Under the totalization agreement, they don't pay US Social Security on self-employment income and can request an exemption letter
Get specialist advice if you have US clients, US citizenship, or entities in both countries.
Frequently Asked Questions
What is the self-employment tax rate in the US?
It's 15.3%: 12.4% Social Security plus 2.9% Medicare, generally on 92.35% of net earnings. An additional 0.9% Medicare tax may apply above income thresholds; Australian sole traders are not charged this US rate on local earnings.
How much tax will I pay if self-employed?
There's no single figure. Your bill depends on net business income, residency, other income, deductions, the Medicare levy, and PAYG instalments already paid. GST collected for the ATO sits outside your income-tax bill.
What is the current Social Security tax rate in the US?
The self-employed rate is 12.4% on earnings up to $176,100 in 2025 and $184,500 in 2026. Employees pay 6.2% through withholding, and the employer pays the other half.
What is the difference between self-employment tax and income tax?
US self-employment tax funds Social Security and Medicare, while income tax applies to taxable income. In Australia, the Medicare levy forms part of the income-tax assessment rather than a separate 15.3% charge.
How can an S corp save on taxes?
A US S corporation owner must take reasonable compensation before distributions. Payroll, filing and compliance costs still apply, and savings are not guaranteed. S corporations exist only under US tax law.
Why is self-employment tax calculated on 92.35%?
Schedule SE applies 92.35% to net profit before the 12.4% and 2.9% rates. The IRS form states that formula without a separate rationale, and the adjustment applies only under US Schedule SE rules.
