Sole Trader Tax Rates Australia: How Much Tax You Pay (2025-26)

A sole trader in Australia pays individual income tax rates on business profit, not a separate business tax rate. For the 2025-26 financial year the first $18,200 is tax-free, then rates run from 16% up to 45%, plus the 2% Medicare levy. On $90,000 of profit that works out to about $18,588 in tax, an effective rate near 20.7%. Here is how the brackets, the Medicare levy and PAYG instalments fit together.

The single most common misunderstanding is that being "a business" means a business tax rate. It does not. When you run a business as a sole trader, the Australian Taxation Office (ATO) treats your profit as your personal income and taxes it with the same brackets that apply to a salaried employee. Your tax deductions reduce that profit, so keeping clean records with a receipt scanner directly lowers the number the rates get applied to.

How is a sole trader taxed in Australia?

As a sole trader you and your business are the same legal entity. There is no separate company return. You report your business income and expenses in your individual tax return using the business and professional items schedule, and your net profit is added to any other income you earn, such as wages or interest.

That combined figure is your taxable income, and the ATO applies the resident individual tax rates to it. business.gov.au draws the contrast: a company is a separate entity that lodges its own return and pays a flat 25% or 30% on its profit, while a sole trader reports business income in their individual return and pays personal marginal rates that rise with income. A company pays that rate from its first dollar of profit, where a sole trader gets the first $18,200 tax-free.

Two practical consequences follow. First, you pay tax on profit you have earned, not on the money you draw out of the business, so taking a smaller "wage" for yourself does not lower your tax. Second, because business profit stacks on top of other income, a side business run by someone with a full-time job is taxed at that person's top marginal rate from the first dollar of profit.

Sole trader tax rates for 2025-26

These are the resident individual income tax rates that apply to your taxable income for the 2025-26 financial year (1 July 2025 to 30 June 2026).

These rates do not include the 2% Medicare levy, covered below. They also assume you are an Australian resident for tax purposes for the full year: foreign residents are taxed from the first dollar with no tax-free threshold.

The word "marginal" matters. A rate applies only to the income inside its band, not to your whole income. A sole trader on $50,000 does not pay 30% on the lot. They pay nil on the first $18,200, 16% on the next $26,800, and 30% on only the $5,000 that sits above $45,000.

How much tax will a sole trader pay in practice?

Take Priya, a freelance web developer in Melbourne. After deductions, her net business profit for 2025-26 is $90,000, and she has no other income. Her tax is built up band by band.

• Income tax on $90,000: $4,288 plus 30% of the $45,000 above $45,000, which is $4,288 + $13,500 = $17,788.
• Less the small business income tax offset (explained next): −$1,000.
• Plus the Medicare levy at 2% of $90,000: +$1,800.
• Total tax payable: $18,588.

So Priya keeps $71,412 of her $90,000 profit. Her effective tax rate is about 20.7%, well below the 30% marginal rate that headline calculators often quote. That gap is the point worth remembering: the marginal rate is what your next dollar is taxed at, while the effective rate is what your whole profit averages out to once the tax-free threshold and lower bands are counted.

Deductions move this number more than most sole traders expect. Every $1,000 of legitimate expense Priya records takes $1,000 off her taxable income, and because she sits in the 30% band, each $1,000 deducted saves $300 in income tax plus $20 of Medicare levy, $320 in all. Claiming an instant asset write-off on a work laptop, or tracking small purchases through an expense tracker instead of losing the receipts, is money back at your marginal rate.

The Medicare levy and the small business income tax offset

Most Australian residents pay a Medicare levy of 2% of taxable income on top of their income tax. Low-income earners pay a reduced levy or none at all, below thresholds the ATO indexes each year, so a sole trader with a small profit may pay less than the full 2% or nothing. Higher earners without private hospital cover can also face the separate Medicare levy surcharge, which is a different charge from the levy itself.

Working in your favour is the small business income tax offset. If your business has an aggregated turnover under $5 million, the ATO gives you an offset worth 16% of the income tax attributable to your net small business income, capped at $1,000 per year. The ATO calculates it automatically from your return, so you do not claim a dollar figure yourself. For most sole traders earning a moderate profit the offset lands at the full $1,000 cap, as it did for Priya.

How and when do you pay sole trader tax?

You do not wait until the end of the year to pay the whole bill in one hit. Once your business is established, the ATO usually moves you into PAYG instalments, where you prepay your income tax in quarterly amounts across the year. Those instalments are credited against your final assessment, so they are a prepayment, not an extra tax.

The ATO enters an individual into PAYG instalments automatically when the latest tax return shows instalment income of $4,000 or more, tax payable of $1,000 or more on the notice of assessment, and notional tax of $500 or more. All three tests have to be met. Until you cross them, you pay your tax as a lump sum after you lodge.

If you are registered for GST, that is a separate obligation reported on your Business Activity Statement, and it does not change your income tax rate. Your income tax return is where your profit is taxed at the rates above, and it is due on 31 October unless you lodge through a registered tax agent.

Sole trader tax rates are changing in 2026 and 2027

The government has legislated two cuts to the lowest tax bracket. From 1 July 2026 the 16% rate that applies to income between $18,201 and $45,000 drops to 15%, and from 1 July 2027 it falls again to 14%. The bracket thresholds and the higher rates (30%, 37% and 45%) are unchanged by these measures.

For a sole trader earning above $45,000, each cut is worth up to $268 a year once fully in, because it only touches the band between $18,201 and $45,000. It is a modest saving, but it is automatic: you do not apply for it, and the rate that applies is set by the financial year the income falls in.

Common sole trader tax mistakes

Believing there is a flat "sole trader tax rate". There is not. Your rate depends on your total taxable income and rises through the brackets. Two sole traders with different profits pay different effective rates.

Paying company tax rates by mistake. The 25% and 30% figures belong to companies. A sole trader who copies them will over- or under-estimate their bill, sometimes badly, because a sole trader on a low profit pays far less than 25% and one on a high profit pays more.

Forgetting the profit stacks on other income. Run a business alongside a salaried job and the profit is taxed at the marginal rate your salary already reaches. The tax-free threshold is used up by the job, so the first dollar of business profit is taxed.

Not setting money aside. With no employer withholding tax for you, the bill arrives at lodgment or as PAYG instalments. Putting aside a share of every payment, guided by the effective rate for your income, prevents a nasty surprise. Recording income and expenses as you go, rather than reconstructing them in October, keeps that estimate honest.

How SparkReceipt helps at tax time

Your tax rate is fixed by the ATO, but your taxable income is not: it is your income minus every deduction you can prove. SparkReceipt captures receipts and invoices the moment you get them, reads the vendor, date, total and GST with AI, and sorts each expense into a tax category, so the deductions that lower your taxable income are recorded instead of lost. At lodgment you export a tax-ready report with the images attached, ready for you or your accountant. You can estimate your bill first with our sole trader tax calculator, then get started keeping the records that back it up.

Frequently asked questions

How much tax does a sole trader pay on $60,000? For 2025-26, income tax on $60,000 is $8,788 ($4,288 plus 30% of the $15,000 above $45,000). After the $1,000 small business income tax offset and the $1,200 Medicare levy, the total is about $8,988, an effective rate near 15%.

Do sole traders get the tax-free threshold? Yes. As an Australian resident sole trader you pay no income tax on the first $18,200 of your total taxable income. A company gets no tax-free threshold, which is one reason low-profit businesses often stay as sole traders.

Is there a separate tax rate for ABN holders? No. Holding an ABN does not create a business tax rate. Your business profit is taxed at the individual income tax rates that apply to your total taxable income.

How much should I set aside for tax as a sole trader? There is no single answer because the rate rises with income. A common approach is to save a portion of each payment based on the effective rate for your expected profit, then reconcile at lodgment. Once you enter PAYG instalments, the quarterly amount does the saving for you.

Do I pay GST and income tax separately? Yes. GST is a separate tax you collect and remit on your BAS if you are registered. It does not change the income tax rate applied to your profit.

Key takeaways

• A sole trader pays individual income tax rates on business profit. There is no separate business or ABN tax rate.
• For 2025-26 the first $18,200 is tax-free, then rates run 16%, 30%, 37% and 45%, plus a 2% Medicare levy.
• Rates are marginal: each rate applies only to the income inside its band, so your effective rate is lower than your top rate.
• On $90,000 of profit, tax works out to about $18,588 after the small business income tax offset, an effective rate near 20.7%.
• The 16% bottom rate falls to 15% from 1 July 2026 and 14% from 1 July 2027.
• Deductions cut the profit the rates apply to, so recording every expense is the most direct way to lower a sole trader's tax bill.