How much tax do sole traders actually pay in Australia?

Last updated: July 2026 · 2026–27 resident tax rates

If you're a freelancer, contractor, or small operator trading under your own ABN rather than a company, the ATO treats your business income as your personal income. There's no company tax rate, no separate sole trader bracket, and no automatic withholding like a payslip. Everything below is what actually determines your bill.

1. Income tax on your profit, not your revenue

You're taxed on profit — what's left after deducting legitimate business expenses from what you earned — not on the total amount that landed in your account. A freelancer who invoiced $90,000 but spent $15,000 on software, equipment, and a home office deduction is taxed on $75,000, not $90,000.

That profit is added to any other income you have and taxed using the standard resident individual brackets:

These are marginal rates, so only the portion of your profit inside each bracket is taxed at that rate — earning $50,000 doesn't mean all of it is taxed at 30%, only the slice above $45,000.

2. The Medicare levy

On top of income tax, most residents pay a 2% Medicare levy. It phases in gradually above a low-income threshold (around $27,222 for 2026–27) and applies in full once your income passes about $34,027. If you don't hold private hospital cover and your income is high enough, you may also owe the Medicare Levy Surcharge — an extra 1–1.5% designed to encourage taking out private cover.

3. The low income tax offset (LITO)

If your profit is modest, the low income tax offset reduces your bill directly — up to $700 for incomes at or below $37,500, tapering down to zero by around $66,667. It's applied automatically; you don't need to claim it separately.

4. PAYG instalments — paid quarterly, not as one lump sum

Once your income crosses the ATO's instalment threshold, you don't just pay everything at tax time. The ATO asks you to prepay your estimated tax in four quarterly instalments through the year, based on your prior return. This trips a lot of new sole traders up — the July–September quarter's payment can arrive before you've mentally braced for it. Budgeting a percentage of every invoice as it lands, rather than waiting until BAS time, is the difference between this being routine and being a scramble.

5. Do you need to register for GST?

Only once your turnover — not profit, turnover — reaches $75,000 in a 12-month period, or you expect it to. Below that, GST registration is optional. Above it, it's compulsory, and you'll need to charge GST on your invoices and lodge a BAS. If you're close to the line, it's worth checking where you actually stand:

6. What you can actually deduct

The general test the ATO applies is whether an expense was incurred in earning your assessable income. In practice, that commonly covers:

• Software, subscriptions, and tools used for the business
• A reasonable portion of home office costs if you work from home
• Work-related vehicle and travel costs (not your regular commute)
• Professional development directly related to your current work
• Insurance, accounting fees, and other running costs of the business

Two tools that make the biggest deduction categories concrete rather than guesswork:

7. The most common mistake

By far the most common issue isn't miscalculating the rate — it's not setting money aside as income arrives. Because nothing is withheld automatically, the tax on a good quarter is just as real as the tax on a bad one, and it's still owed even if the cash has already been spent on rent or new equipment. The simplest fix is mechanical, not clever: move a fixed percentage of every invoice into a separate account the day it's paid, based on your effective rate, and never touch it. It removes the decision entirely.