1) Can I pay myself a salary as a sole trader?
To answer this question, we must first define what a salary is:
“A salary is a fixed regular payment, typically paid on a monthly basis but often expressed as an annual sum, made by an employer to an employee.”
As a Sole Trader, you are no longer an employee and you no longer will have an employer – you are self-employed. So – how do you pay yourself then?
2) What’s the short answer?
The answer is – you pay yourself from the profits of the business (drawings). That is the money that is left over -all the sales less expenses. You will have to pay income tax on these profits and then you get to keep the rest.
3) When can I take money out?
It doesn’t matter when you take money out of the business (e.g. physically withdraw or transfer funds out of the business bank account) – you are taxed as and when profit is earned.
4) What about tax?
As a self-employed individual you pay tax under the self-assessment system. To set up as a sole trader you must register for income tax with Revenue as a self-employed sole trader. You do this using Revenue’s online service.
Once registered, you will receive a “Notice of Registration” confirming that you are registered for income tax. You pay Preliminary Tax (an estimate of tax due) on or before 31 October each year and make a tax return not later than 31 October following the end of the tax year.
You must keep proper records to allow you to fill out your annual tax return. You pay the Universal Social Charge directly to Revenue when you make your annual tax return.
5) Don’t forget you get tax credits too
Earned Income tax credit: In 2020, as a self-employed trader you can claim an Earned Income tax credit of €1,500. However, if you also qualify for the PAYE tax credit, the combined value of these 2 tax credits cannot exceed €1,650.
6) What records do I need to keep?
You must keep accounts which record:
- All purchases and sales of goods and services and
- All amounts received and all amounts paid out
- You must keep supporting records of the above such as invoices, bank and building society statements and receipts.
You may claim certain business expenses against tax as well as your contributions to your personal pension. Further information on tax is available on in our document, Tax for self-employed people and on the Revenue website.
7) What about subcontractors?
If you are a self-employed subcontractor working in construction, forestry or meat processing there is detailed information about Relevant Contracts Tax on the Revenue website.
8) What about PRSI?
If you are self-employed you pay Class S PRSI contributions. This entitles you to a limited range of social insurance payments. Class S PRSI contributions are paid at a rate of 4% on all income or €500 whichever is the greater. If you earn less than €5,000 from self-employment in a year you are exempt from paying Class S PRSI but you may pay €500 as a voluntary contributor.