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As a Sole Trader. What money is mine and what belongs to my business?

This is a question that I have been frequently asked. When a new businesses is started it can be a common question, how can you access money in your businesses in other words you may be unsure how to get paid.

In this Blog we will look at how you get paid from your business and the effects on your ability to pay your tax liability.

The business has started but where are my wages?

As a self employed person you don’t follow the same rules as an employee. An employee receives a wage each (week/month) gross wage less PRSI, USC, PAYE and a net wage is paid, and the employer pays PSRI @ 10.75% on amounts over €376.00 per week. This tax is collected by revenue each quarter via the P30.

A Sole Trader wages is called Drawings. This is any money you have taken out of the business for personal reasons. E.g. Lunch paid for with the business card = drawings, cash taken out to pay your house rent, = drawings. Cash or expenses taken out of the business for personal reasons as outlined in Section 81(2) (a)–(o) TCA 1997

As a Sole Trader Drawings are not tax deductable expenses.

Here are some simple examples.

Business A                                                   Business B

Sales           €100,000                       Sales                   €100,000

Expenses     (€60,000)                      Expenses              (€80,000)

Drawing       (30,000)                        Drawings               (15,000)

Left In Bank          €10,000               left In Bank           €5,000

We have two businesses, in Business A the owner has drawings of €30,000 and in business B drawings were €15,000.

Both businesses have funds in the bank at year end.

A Sole trader is only taxed on the profits their business makes at the end of a financial year.

Therefore the following Case I profit will look like this,

Business A                                                   Business B

Profit           €40,000                         Profit           €20,000

Tax Note 1      € 10,576                      Tax note 1      €2,160

 

Points to note,

Business A has €10,000 in the bank and now has a tax bill of €10,576 for the year, and may have to pay preliminary tax for next year, in theory this could total €21,152. This could but severe pressure on the business to pay.

Business B has €5,000 in the bank and can cover the tax bill. With a preliminary tax payment this business still has enough cash in the bank to cover its tax bill.

Note 1

Assuming a single individual, subject to tax at standard rate €33,800 and marginal rate, normal USC rates and PRSI @ 4% applies.

Conclusion

You are capable to take as much drawings out of your business as you want, however consideration should be taken to your cash flows and your tax bill requirements. There is nothing more stressful than getting a tax bill and not having the funds to pay it. Having up to date financial information can help business owners decided how much they can afford to take from the business without putting the financial stress on the business owner.

Planning for something is better than reacting to something.

I hope you find some benefit from this post.

Be sure to make contact if you got benefit from this post or have a question?

Regards

Martin

www.mbaccountants.ie

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Author by StartUps.ie


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