How do you pay yourself as a sole trader vs a company in Australia?

How you pay yourself depends fundamentally on your business structure, and getting this right has significant tax and legal consequences.

Sole trader: There is no legal separation between you and your business. Your business income is your personal income — you simply withdraw money from the business (called 'drawings'). You do not pay yourself a salary or wages. All business profits (net of deductible expenses) are reported on your personal tax return and taxed at your marginal individual income tax rates. You also pay the Medicare levy. If your taxable income exceeds A$45,000, you may need to pay PAYG instalments quarterly. As a sole trader you cannot split income with family members in the same way a trust or company can.

Company: A company is a separate legal entity. To pay yourself, you can: (1) pay yourself a salary or director's fees — the company deducts this as a business expense and you pay income tax on it as an employee; (2) pay yourself dividends — dividends are paid from after-company-tax profits and come with franking credits (for tax already paid at the company 30% rate). The combined tax on company profits and dividends can be efficient if your marginal rate is high. You must run PAYG withholding on your salary and pay super on it.

Tax rates: The company rate is 25% for base rate entities (turnover under A$50 million) or 30% otherwise. Individual rates go up to 47%. Running income through a company can defer tax if profits are retained, but you pay tax when you extract them. The tax saving on extraction depends on your individual rate and whether dividends are fully franked.