How to pay yourself as a sole trader or a business owner

If you’re a sole trader, you’ll wear many hats throughout your average working day – and you deserve to take home your fair share of pay. But between your tax obligations, super contributions and insurance, knowing exactly how to correctly and accurately pay yourself can be a valuable skill to have.

This guide will give you some tips and tools that will enable you to take home a salary while still growing your business.

What is a sole trader?

A sole trader is the simplest and most common business structure in Australia. It refers to an individual who owns and operates a business on their own. As a sole trader, you are the business, meaning there’s no legal separation between you as the owner and the business entity itself. This means you have complete control over all decisions and profits. However, you also take full personal responsibility for any debts, losses, or legal obligations the business incurs.

Sole trader vs. Company

Set up

One of the main advantages of being a sole trader is its ease of setup. You can register for an Australian Business Number (ABN), choose a business name, and start trading relatively quickly without the complex paperwork or compliance requirements that come with forming a company. It’s a flexible structure suited for freelancers, consultants and small business owners who want to operate independently.

Taxes

From a tax perspective, all business income you earn as a sole trader is treated as personal income. You report this through your individual tax return, and you’re taxed at your personal marginal rate rather than a corporate rate.

Paying yourself

Between a sole trader and a company, the way you pay yourself also differs:

• As a sole trader, you don’t take a formal salary. Instead, you draw money from business profits, known as a “personal draw.”
• As a company owner or director, you can pay yourself a salary (through payroll) or receive dividends from profits, which are taxed differently.

How much should I pay myself as a sole trader?

Determining how much to pay yourself as a sole trader can be tricky. Unlike company owners who can issue a formal salary, sole traders take money directly from business profits. The goal is to balance your personal financial needs with the cash flow and sustainability of your business. Paying yourself too much can leave the business short of funds for expenses, while paying yourself too little can impact your personal finances.

Step 1: Understand your business profits

Before deciding how much to draw, calculate your business profits. This is the amount from which you can safely pay yourself without jeopardizing the business. Keep in mind that profits are not necessarily the same as cash on hand; some may be needed for upcoming bills, tax obligations or reinvestment in the business.

Step 2: Account for tax obligations

Even though you don’t pay yourself a salary, all business profits are considered personal income and are subject to tax. Key considerations include:

• Income tax: Profits are taxed at your individual marginal tax rates, which increase as your income rises. Planning ahead prevents unexpected tax bills at the end of the financial year.
• GST (Goods and Services Tax): If your turnover exceeds the GST threshold (currently $75,000 in Australia), you must collect GST on sales and remit it to the Australian Taxation Office (ATO). Make sure you don’t accidentally use GST funds for personal draws.
• Medicare levy: Usually applies at 2% of your taxable income. Keep this in mind when calculating how much you can safely withdraw.

Step 3: Consider superannuation

While sole traders are not legally required to pay themselves superannuation, it’s highly recommended to make voluntary contributions. Planning for retirement now ensures you’re financially secure later. You can choose a regular percentage of your profits or set aside a fixed amount each month.

Step 4: Balance business and personal needs

Once tax and super obligations are accounted for, determine how much money you need for personal living expenses. This will guide your “draw” from the business. A good approach is to:

• Set a baseline monthly personal budget.
• Compare this with available business cash flow.
• Withdraw an amount that meets personal needs without compromising the business’s ability to operate and grow.

Once you’ve worked out how much to pay yourself, the next challenge is managing your income so it remains consistent and sustainable.

Managing cashflow effectively as a sole trader

For sole traders, managing cash flow is critical to sustainably paying yourself. Even if your business is profitable on paper, irregular income or unexpected expenses can leave you short of funds, making it difficult to cover both personal living costs and business obligations. Good cash flow management ensures you can pay yourself consistently, stay on top of tax obligations, and maintain a healthy buffer for emergencies.

Track expenses and income closely

The first step to managing cash flow is accurate tracking. Keep a detailed record of all business income and expenses. Knowing exactly how much money is coming in and going out helps you identify periods of high or low cash availability and prevents over-drawing from the business.

Consider using accounting tools to help you manage you cashflow. Software like Xero or MYOB can automatically track income, expenses and GST; while designing a budgeting spreadsheet can help you to project cash flow and plan in advance.

Review cash flow regularly

Income for sole traders can be irregular, especially if clients pay at different times. Review your cash flow monthly (or even weekly) to understand how much you can safely draw without leaving the business short. Adjust your personal withdrawals accordingly: in slow months, reduce draws; in profitable months, you may be able to pay yourself a bit more.

Common mistakes sole traders make when paying themselves

Paying yourself as a sole trader may seem straightforward, but many business owners fall into common traps that can hurt both their personal finances and the health of their business. Understanding these pitfalls can help you avoid unnecessary stress and financial strain.

1. Not keeping personal and business finances separate

Mixing personal and business money is one of the most frequent mistakes. Without separate accounts, it’s easy to lose track of profits, expenses and tax obligations. This can lead to overspending, missed deductions and cash flow problems.

Possible solution: Open a dedicated business account and use it exclusively for business transactions. Transfer only what you’ve calculated as your draw to your personal account.

2. Failing to plan for tax or super contributions

Many sole traders take money out of the business without setting aside funds for income tax, GST or superannuation. This can result in a surprise tax bill at the end of the year or missed super contributions.

Possible solution: Regularly set aside a percentage of your profits for taxes and optional super. Consider creating a separate “tax savings” account to make this automatic.

3. Paying themselves too much too early

It’s tempting to take large personal draws when the business starts generating profit, but doing so can leave the business underfunded. This may prevent you from covering operating costs or investing in growth.

Possible solution: Start with a conservative draw based on cash flow, and gradually increase it as the business stabilises.

4. Ignoring business reinvestment needs

Sole traders sometimes overlook the importance of reinvesting profits into the business. Skipping reinvestment can limit growth, prevent upgrades to equipment or software, and reduce your competitive edge.

Possible solution: Allocate a portion of profits for business reinvestment before deciding on your personal draw.

Are you ready to start your own small business?

Becoming your own boss and starting a business can be a highly rewarding experience for those with an entrepeneurial spirit. While it does come with its challenges, it can still be a worthwhile endeavour that gives you freedom to work the way you want.

By following a few simple tips on managing your cashflow, you can pay yourself a sustainable wage as a sole trader while still ensuring your business remains profitable.

Another way to help safeguard the longevity of your business is to invest in business insurance. BizCover makes it fast and easy for sole traders just like you to quote and compare multiple insurance policies from selected leading Australian insurers. Get a quote today and find out how much you could save.