How self-employed people are taxed in Australia
If you run your own business in Australia as a sole trader, you and your business are the same legal person. There is no separate business tax return and no company tax rate. Instead, your net business profit (income after allowable deductions) is added to any other income you earn and taxed at the ordinary individual resident rates through your personal tax return.
This is the simplest structure available and the most common for freelancers, contractors, tradespeople and small operators. You trade under your own Tax File Number (TFN), usually register for an Australian Business Number (ABN), and lodge one return each year covering the income year from 1 July to 30 June. The 2026 income year runs from 1 July 2025 to 30 June 2026, so the figures below are the official 2025-26 rates confirmed by the Australian Taxation Office (ATO).
Income tax rates for sole traders in 2025-26
Australia uses a progressive system, so only the slice of income that falls inside each band is taxed at that band's rate. The first $18,200 you earn is completely tax free. The following resident rates apply to your taxable income for 2025-26 (these exclude the Medicare levy, which is covered separately below).
| Taxable income | Marginal rate | Tax on this band |
|---|---|---|
| $0 to $18,200 | 0% | Nil (tax-free threshold) |
| $18,201 to $45,000 | 16% | 16c per $1 over $18,200 |
| $45,001 to $135,000 | 30% | $4,288 + 30c per $1 over $45,000 |
| $135,001 to $190,000 | 37% | $31,288 + 37c per $1 over $135,000 |
| $190,001 and above | 45% | $51,638 + 45c per $1 over $190,000 |
Because of the tax-free threshold and the graduated bands, your average (effective) tax rate is always well below your top marginal rate. Note that from 1 July 2026 the 16% band is legislated to drop to 15%, but for the whole of the 2025-26 year the rate stays at 16%.
The Medicare levy and social contributions
On top of income tax, most residents pay the Medicare levy of 2% of taxable income to help fund the public health system. For a sole trader, this is calculated on the same profit figure as your income tax.
Low-income earners get relief. For 2025-26, a single person with taxable income at or below $28,011 pays no Medicare levy, and a reduced (shaded-in) levy applies just above that lower threshold before the full 2% kicks in. Higher earners without adequate private hospital cover may also face the separate Medicare Levy Surcharge, which is a different charge from the standard 2% levy.
A key point that surprises many new sole traders: there is no compulsory superannuation on your own business drawings. Employees receive employer super at the Superannuation Guarantee rate of 12% in 2025-26, but as a sole trader you are not required to pay super to yourself. You can make voluntary personal contributions, which may be tax-deductible up to the concessional cap, and doing so is a sensible way to build retirement savings while reducing taxable income. If you hire staff, however, you must pay the 12% Superannuation Guarantee on their behalf.
GST: the $75,000 registration threshold
Goods and Services Tax (GST) is a 10% tax on most goods and services. You must register for GST once your annual business turnover reaches $75,000 or more, or if you expect it to. Below that threshold, registration is optional.
Once registered, you add 10% GST to your sales, claim back the GST on your business purchases, and report the net amount to the ATO on a Business Activity Statement (BAS), usually quarterly. GST is separate from income tax: it does not increase your profit or your tax bill, because you are collecting it on behalf of the government. Ride-share and taxi drivers are a notable exception and must register for GST regardless of turnover.
PAYG instalments: paying tax through the year
In your first year of self-employment you typically pay your whole tax bill after you lodge your return. After that, the ATO usually moves you into Pay As You Go (PAYG) instalments, a system of quarterly prepayments toward your expected tax. You are generally entered automatically once your latest return shows business or investment (instalment) income of $4,000 or more and tax payable of $1,000 or more.
There are two ways to calculate each instalment. The amount method gives you a fixed dollar figure set by the ATO each quarter, which for 2025-26 was uplifted by a GDP adjustment factor of 4%. The rate method gives you a percentage to apply to your actual quarterly income, which suits businesses with variable earnings. If your income drops, you can vary an instalment down, but varying too low can trigger interest, so estimate carefully. PAYG instalments are not an extra tax; they are simply your income tax paid in advance, and they are credited against your final assessment.
A worked example at $80,000 profit
Suppose your net sole trader profit for 2025-26 is $80,000, with no other income. Here is how the tax is built up band by band:
- First $18,200 at 0% = $0
- Next $26,800 ($18,201 to $45,000) at 16% = $4,288
- Next $35,000 ($45,001 to $80,000) at 30% = $10,500
That gives income tax of $14,788. Add the Medicare levy of 2% on $80,000, which is $1,600. Your total liability is about $16,388, leaving roughly $63,612 after tax. That is an effective rate of around 20.5% of profit, even though your top marginal rate is 30%.
This example ignores offsets and deductions that could lower the figure, such as the Low Income Tax Offset or a deductible personal super contribution. It also assumes you have set aside enough to meet the bill, which is why many sole traders keep 25% to 30% of each payment received in a separate tax savings account.
Deductions and record keeping
You only pay tax on profit, so claiming every legitimate business deduction directly reduces your bill. Common deductions include tools and equipment, a portion of home-office and internet costs, motor vehicle expenses for business travel, professional insurance, accounting fees, and depreciation on assets. Small businesses may also access instant asset write-off concessions for eligible purchases. Keep records for at least five years and separate business and personal spending with a dedicated bank account, as clean records make lodgement faster and protect you if the ATO reviews your return.
Closing note
Being a sole trader keeps tax simple: one return, individual rates, a 2% Medicare levy, and no compulsory super on your own earnings. The main things to plan for are GST once you cross $75,000 in turnover, PAYG instalments after your first profitable year, and setting money aside so the annual bill never comes as a shock. The rates and thresholds in this guide are the official ATO figures for the 2025-26 income year, but tax law changes and your own situation may differ. Use the BizTaxCalc Australia sole trader calculator to estimate your own numbers, and confirm anything significant with a registered tax agent or the ATO before you act.