It’s pretty common to want to save money as a sole trader, particularly on your tax bill.
However, it’s highly unlikely that buying extra things you don’t really need for your business and claiming them as tax deductions is going to save you money in the long run. Hate to break it to you!
Firstly, it may be that not everything you purchase is a valid tax deduction in the eyes of the IRD. Secondly, you don’t receive money back for every expense you claim – that’s just not how it works.
When it comes down to it, spending on business expenses solely to save on tax means spending more to save less. The math ain’t mathing.
How do tax deductions work?
Claiming business expenses as tax deductions doesn’t mean you receive a refund for the value of all your expenses throughout the financial year. Instead, it reduces the amount of income on which you’re taxed. As in, it lowers your taxable income.
Let’s say you earn $83,000 a year. In the most recent financial year, you claimed business expenses as tax deductions (smart move).
These were things like:
- 40% of your phone bill (your business usage)
- A percentage of your rent because you use part of your home for a home office
- Milage for kilometres travelled for work-related purposes (pesky in-person meetings across town)
- Software subscriptions required to do your work
- New equipment for your home office
Ok! All of these expenses came to a total of $7,534.20.
If we deduct this from your income of $83,000 we’re left with a total of $75,465.80 as taxable income. This is the total amount you’re taxed on.
Income tax on $83,000: $17,268 Income tax on $75,465.80: $14,861 Income tax saved after claiming expenses: $2,407!
📖 For more on how tax deductions work, check out our guide to business expenses.
Why buying more doesn’t mean saving more
Spending up big purely to reduce your tax bill doesn’t actually make much sense.
This is because claiming business expenses doesn’t directly reduce your tax bill, only your taxable income (we literally just went over this). In fact, you spending all this money on items to claim, in an effort to save, effectively means you’re spending a lot to save a little. It’s definitely not ideal.
Instead, you want to make sure all your business expenses are genuinely worth it and add value to your business. Otherwise, that’s money down the drain.
📖 See how it all works in action using our sole trader tax calculator. Enter your income and expense amounts for an estimation of tax savings. Easy!
Claim expenses using Hnry.
The best way to make sure you’re on the right track is to claim each and every business expense through the Hnry app. From there, we manage your expenses for you, so we can pass on the tax relief in real time (no need to wait for the IRD at the end of the financial year!).
For just 1% +GST of your self-employed income, capped at $1,500 +GST a year, we’ll calculate, deduct, and pay your:
We also file your tax return every year, all as part of the service. Oh, and we chase-up late paying clients on your behalf. And we manage and claim every expense you raise, so you get all the tax-savings you’re entitled to in real time.
Basically, we make it so that you never have to think about taxes again.
Save time, save money, join Hnry today.
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