Taxing Sole Traders

What is a sole trader?

A sole trader is a person trading on their own. They control, manage and own the business. A blogger who owns an online trading business or receives money from advertising (ex. Google Adsense) can be considered as a sole trader. Unless one considers receiving money as donation.

How does it work?

A sole trader usually has no formal or legal processes to set up the business. The owner/manager is personally entitled to all profits, but is also personally liable for all business taxes and debts.

Drawings

If you are a sole trader you're probably not paying yourself a wage, but simply taking money from the business when you need it for personal use. These takings are called "drawings". Drawings are not a deductible business expense when calculating your profit. Drawings are a part of your profit and taxed accordingly.

Record your drawings in your cashbook so that you can reconcile your cashbook with your bank statements, ensuring that there is enough money in the business to cover any bills owing.
Tax rates for sole traders

A sole trader is taxed at the individual rates as shown below.

Taxable income ($) = Rate of tax

• up to $38,000 = 19.5 cents
• $38,001 to $60,000 inclusive = 33 cents
• $60,001 and over = 39 cents

Example

Sales = $177,000
less all deductible expenses = $108,500
Net profit (taxable income) = $ 68,500

Tax to pay ($)

Net profit between $0 and $38,000 inclusive:
$38,000 x 19.5% = 7,410
Net profit above $38,000 up to and including:
$60,000 22,000 x 33% = 7,260
Net profit over:
$60,000 8,500 x 39% = 3,315

Tax on taxable income of $68,500 = $17,985

Source: IRD NZ