The issue of paying yourself money from your business can be confusing.
Technically, a Sole Trader cannot employ themselves. Money a sole trader takes out of the business for personal use is classified as “drawings” and is not considered wages for tax purposes. Drawings are not allowable deductions for the business.
Transactions that you record using the account Drawings are not reported in Activity Statements that are lodged with the Australian Taxation Office.
This is also the case for someone who has their business set up as a Partnership. At law, you cannot be an employee.
If your business is set up as a Company, you can be an employee of the company. You can pay yourself wages and would therefore withhold PAYG withholding tax if your wages are above the tax free threshold. Unlike drawings, wages are allowable deductions for the business.
Transactions that you record using your “Wages” accounts are also not reported in the “Goods & Services Tax” section of your Activity Statements – only the “PAYG tax withheld” section.
Because Drawings and Wages are both outside of the GST system the tax codes to use in your accounting software are as follows:
Xero = BAS Excluded
MYOB = N-T
Reckon Accounts = leave the tax code blank
You might also like: