As a sole trader, nobody withholds tax from your business income. Your profit is added to any other income, such as wages, and taxed at your personal rates when you lodge your return. If you haven't put money aside during the year, the whole bill arrives at once.
This article shows how to estimate that bill for 2026-27 and turn it into a simple percentage to set aside each time you're paid. The examples use the same tested logic as Quillroo's free sole trader tax calculator, so you can check them and then run your own figures.
What makes up a sole trader's tax bill
For an Australian resident for the full year who is entitled to the full tax-free threshold, four things make up most of the bill.
1. Income tax at resident rates. The 2026-27 rates are:
| Taxable income | Tax on this income |
|---|---|
| 0 to $18,200 | Nil |
| $18,201 to $45,000 | 15c for each $1 over $18,200 |
| $45,001 to $135,000 | $4,020 plus 30c for each $1 over $45,000 |
| $135,001 to $190,000 | $31,020 plus 37c for each $1 over $135,000 |
| $190,001 and over | $51,370 plus 45c for each $1 over $190,000 |
The first rate drops from 16% in 2025-26 to 15% in 2026-27, so the base amounts are lower too (in 2025-26 they were $4,288, $31,288 and $51,638). (ATO: Tax rates, Australian resident.)
2. Low income tax offset (LITO). $700 if your taxable income is $37,500 or less. Between $37,501 and $45,000 it's $700 minus 5c for every $1 over $37,500. Between $45,001 and $66,667 it's $325 minus 1.5c for every $1 over $45,000. It can reduce your tax to $0, but any unused amount isn't refunded. (ATO: Low income tax offset.)
3. Small business income tax offset (SBITO). If your business's aggregated turnover is under $5 million, the offset is 16% of the income tax on your net small business income (that income's share of your taxable income), up to $1,000 a year. Wages aren't small business income, and a business loss is treated as zero. The ATO works it out from your tax return. (ATO: Small business income tax offset.)
4. Medicare levy. 2% of taxable income. A single person pays nothing at or below $28,011 and a reduced levy up to $35,013. Those are the latest thresholds the ATO has published, and they're labelled 2025-26. The 2026-27 thresholds may be different (new thresholds are usually set in the following Budget), so the calculator uses the published figures for both years and says so. (ATO: Medicare levy reduction for low-income earners.)
Worked example 1: $50,000 business profit plus $20,000 wages (2026-27)
- Taxable income: $50,000 + $20,000 = $70,000
- Income tax: $4,020 + 30% × ($70,000 − $45,000) = $4,020 + $7,500 = $11,520
- LITO: taxable income is above $66,667, so $0
- SBITO: the business share of the tax is $11,520 × 50,000 ÷ 70,000 = $8,228.57. 16% of that is $1,316.57, which is over the cap, so the offset is $1,000
- Medicare levy: 2% × $70,000 = $1,400
- Total for the year: $11,520 − $0 − $1,000 + $1,400 = $11,920
How much of that comes from the business? Work out the bill on the wages alone. On $20,000, income tax is 15% × $1,800 = $270, LITO wipes it out, and there's no Medicare levy because $20,000 is under $28,011. That's $0, so the business adds the full $11,920.
Set-aside: $11,920 ÷ $50,000 = 23.84%, or about 24 cents from every dollar of profit.
Any tax your employer withheld from the wages comes off that total at tax time; the calculator has an optional field for it. For comparison, the same income in 2025-26 comes to $12,188, which is $268 more because of the old 16% first rate.
Worked example 2: $60,000 business profit, no other income (2026-27)
- Taxable income: $60,000
- Income tax: $4,020 + 30% × $15,000 = $8,520
- LITO: $325 − 1.5% × $15,000 = $325 − $225 = $100
- SBITO: all of the taxable income is business income, so 16% × $8,520 = $1,363.20, capped at $1,000
- Medicare levy: 2% × $60,000 = $1,200
- Total: $8,520 − $100 − $1,000 + $1,200 = $8,620
Set-aside: $8,620 ÷ $60,000 = 14.37%, about 14 cents per dollar of profit.
The two businesses earn similar profits but need very different set-aside rates. In example 1 the wages already use the tax-free threshold, so the business profit is taxed at higher rates and gets no LITO.
The $1,000 cap doesn't always apply. With $10,000 of business profit and $40,000 of wages, tax on $50,000 is $5,520, the business share is one fifth ($1,104), and the offset is 16% of that: $176.64.
A simple set-aside rule of thumb (general guidance)
- Best option: run your own numbers in the sole trader tax calculator at the start of the year and whenever your income changes. Each time you're paid, move that percentage into a separate tax account. The percentage is of profit, so applying it to whole payments (excluding GST) saves a little extra, which is the safe direction.
- If you haven't run the numbers yet: setting aside your top marginal rate plus 2% for the Medicare levy is a cautious starting point. For taxable income between $45,001 and $135,000 that's 30% + 2% = 32%. It usually saves more than you need, because it ignores LITO and the small business offset; example 2 needed 14.37%.
- Check it each quarter when you do your BAS, and adjust if your income has moved.
This is general guidance, not an ATO rule. It doesn't cover HELP repayments, the Medicare levy surcharge or family Medicare reductions.
PAYG instalments: the ATO may collect it during the year
After you lodge a return with business income, the ATO may put you into PAYG instalments. Individuals, including sole traders, are entered automatically if their latest return shows instalment income of $4,000 or more, tax payable of $1,000 or more and estimated (notional) tax of $500 or more. Most people pay quarterly, and the instalments are credited against your tax when you lodge. You can also enter voluntarily, which the ATO suggests if you're new to business. (ATO: Starting PAYG instalments.)
Instalments are a prepayment of the same tax, not an extra tax, so your set-aside account is where they come from. If you pay using the instalment rate, the amount is your instalment income (T1) × your rate (T2). The PAYG instalment calculator does that sum.
GST is separate money
If you're registered for GST, the GST in your prices isn't your income and isn't part of the percentages above. It belongs on your BAS (one eleventh of your GST-inclusive taxable sales). You must register within 21 days of your GST turnover reaching $75,000, measured on the current 12 months or the projected next 12. (ATO: Registering for GST.) The GST registration checker runs both tests.
If you'd like income, expenses and GST tracked in one place so your profit figure is easy to find, Quillroo's paid AU GST & BAS Workbook is built for that.
What these figures leave out
The examples assume an Australian resident for the full year with the full tax-free threshold. They don't include the Medicare levy surcharge, family Medicare reductions, HELP or student loan repayments, the seniors offset, non-resident rates, or PAYG instalments already paid. A business loss is treated as $0; it reduces other income only if you meet the non-commercial loss rules.
Run your own numbers: Sole trader tax calculator (2026-27 and 2025-26). It runs in your browser, and nothing you type is sent anywhere.
General information, not tax advice. Your situation may differ, so check with the ATO or a registered tax agent. Rates and thresholds checked against ATO pages on 17 Oct 2026. Quillroo makes the tools linked here, including the paid workbook.
Published by Quillroo, a small Australian automation studio. Questions: ledgerlinetools@proton.me
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