In this blog post, we will talk you through how you need to pay yourself now that you are a sole trader, as well as some of the common pitfalls to avoid.
You have taken the leap, started a business and gone out on your own. The first feeling you may have is a feeling of financial vulnerability. When you had a 9-5 job you knew with certainty how much was going to be in your back account at the end of the month, but this may not be the case anymore.
Now as a sole trader planning your finances will become something that is vitally important, you and your business will be intertwined.
So what are you entitled to take as a salary as a sole trader?
Firstly, it is important that we talk about how a sole trader is taxed. For this we will use an example of Jane’s Beauty Salon.
Jane set up her Beauty Salon at the start of 2021 and the business got off to a great start – here is a breakdown of her businesses financials for her first year:
| Profit and Loss Account | € |
|---|---|
| Turnover | €110,000 |
| Overhead Costs | €45,000 |
| Profit | €65,000 |
| Drawings throughout year ( €500 per week) | €26,000 |
| Cash in Business Bank Account at Year End | €39,000 |
Jane’s business made a profit of €65,000 in the year – when it comes to doing her annual tax return (Form 11) this profit of €65,000 will be her Case I taxable income.
Jane is entitled to take as much of this profit amount as she wants as a salary or as more commonly referred to as drawings (she has used €26k). It is important to note that drawings are not considered a business overhead and therefore not a deductible expense when working out the businesses taxable profits. Jane will also have to make sure that she has set enough aside to pay any taxes that will be due (including preliminary taxes for the following year).
This is completely difference to owners of a limited company who will have to pay themselves either through the company payroll or through company dividends.
Jane will pay tax on this full profit amount even if she does not take all of it as drawings. The cash left in the business bank account at the end of the year is still taxed even though she has not taken it as drawings.
The dreaded tax bill..
Jane ended up having a tax bill of €20,052 for the current financial year and another €20,052 in preliminary tax for the next financial year. This caused her to panic as she did not have enough cash left in the business straight away to pay these liabilities.
This is something that you should be planning for as a sole trader, this often catches people out and they have to resort to getting short term loans to cover their tax bills.
Discipline is key
Discipline is very important when you transition to being a sole trader, your first step should be setting up a separate bank account for your business to keep personal and business separate. Secondly, your ability to plan will depend on how well your bookkeeping is maintained.
There are many cloud based accounting packages that are very easy to use such as Sage One which will cost you approximately €30 per month including VAT. There are also free software’s if you have a tight budget or as an alternative if your business is quite simple to tracker there are lots of Excel templates you can find on markets such as Etsy.
If you lack prior experience it may be advisable to get the help of a professional to help you set budgets and manage your finances to avoid any headaches and distractions from you running your business.
Disclaimer: this blog post is for informational and educational purposes only and should not be construed as financial advice.