Self employment and sole trading – what you need to know

No manager to answer to, no annoying colleagues and no one to tell you when you can clock on and off – sounds appealing, right?

For many, the benefits of being their own boss far outweigh the challenges, making self employment an appealing option for many Western Australians. In fact, as of June 2023, there were 150,000 non-employing businesses in the state.

Being self employed means having the flexibility to decide when, where, how, and for whom you work. You can run your business on your own terms with the flexibility to set your own hours, choose the clients or projects you work on, and shape the business to reflect your personal values and goals. This independence can be incredibly rewarding, but it also means you're fully responsible for managing the day to day operations and long term success of the business. 

What many people don’t realise is that being self employed means that you are running a small business.

Understanding self employment as a business

If you are self employed, and meet other criteria that separates your enterprise from being a hobby, you are by default running a business. This applies to:

• freelancers and contractors
• consultants
• tradies and subcontractors working independently
• artists and creatives selling their work
• online content creators and bloggers earning income
• delivery drivers

Does being self employed make you a sole trader?

The majority of people who are self employed may define themselves as a sole trader. This business structure is the simplest and most common structure for self employment because:

• setting up as a sole trader is straightforward and affordable, with minimal regulatory requirements and lower costs compared to other business structures. 
• The tax process is also simplified, as you can use your individual tax file number (TFN) to lodge returns.
• If your business grows or your needs change, transitioning to a different structure, such as a company, is relatively easy.
• As the sole decision maker, you have complete control over the direction of your business, allowing you the flexibility to adapt to changes and pursue new opportunities as they arise. 

Being a sole trader can be a great structure to start with as it allows you to scale your operations and take on more projects or clients without losing the autonomy and control that comes with being your own boss. It also doesn’t stop you from hiring staff, so you can delegate tasks and focus on growing the business, all while retaining the simplicity of the sole trader structure.

Considerations and potential drawbacks

While there are many benefits to operating as a sole trader, there are also drawbacks, including: 

• As a sole trader, you face unlimited liability, meaning you are personally responsible for all business debts and obligations. 
• You have reduced flexibility in tax planning compared to other business structures like companies or trusts. In these more complex structures, owners can distribute income or profits among family members or shareholders, which can reduce the overall tax burden. 
• You may therefore have a higher marginal tax rate, especially as your business grows and generates more profit. 

You carry full responsibility for all aspects of the business, from financial management to ensuring compliance with relevant regulations. This includes managing the financial health of your business, such as handling cash flow, invoicing, paying suppliers, and ensuring that tax obligations are met on time. You'll also need to stay on top of bookkeeping, managing expenses, and ensuring that your records are accurate and up to date, as you are personally accountable for the financial performance of the business.

Sole trader tax facts

Sole traders operate under their own Australian Business Number (ABN) and are responsible for their own:

• taxes
• Goods and Services Tax (GST), if applicable
• Superannuation