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What is personal service income(PSI)
Personal service income (PSI) refers to income earned from services performed in a business or company as an individual instead of as an employee. If you are earning personal services income in Australia, you may be subject to personal services income rules and PAYG withholding obligations.
Some key factors that determine if income is classified as personal services income include:
- Whether tools and equipment are provided by the client
- Level of control and direction by the client over how services are performed
- Risk of profit or loss
- Whether services are provided to the client personally or through an intermediary
If you earn personal services income, you will need to withhold PAYG tax installments from the income at the top personal tax rate throughout the year. This is similar to having PAYG withholding applied if you are an employee.
You must report any personal services income and pay PAYG installments on your tax return each year. Failure to properly withhold and remit PAYG may result in penalties from the ATO.
What’s the different between personal service income and sole trader income?
While personal service income and sole trader income may seem similar, there is an important distinction:
Personal service income refers to income earned by an individual for services performed through their own private company or business entity. The individual is essentially acting like an employee but using a company structure.
Sole trader income is income earned by an individual who operates their own unincorporated business as the sole owner. A sole trader reports their business income and expenses on their individual tax return.
The key differences are:
- Personal service income rules look to identify situations where an individual is essentially an employee but using a private company to obtain a lower tax rate. Sole traders genuinely carry on a business on their own account.
- Personal service income is taxed at the individual’s top marginal tax rate while still in the company. Sole trader income is taxed only after being drawn from the business as personal income.
- Individuals earning personal service income may be subject to PAYG withholding obligations. Sole traders are not subject to these obligations on business income earned through their unincorporated business.
What’s the different between personal service income and sole trader income?
If you have earned income that qualifies as personal services income, here are the steps to calculate the tax:
- Determine your total personal services income for the financial year. This includes all income invoices issued for services performed through your business or company structure.
- Calculate a reasonable estimate of deductions related to earning that personal services income. Allowable deductions include work-related expenses like travel, tools, subscriptions, uniforms and self-education.
- Subtract the estimated deductions from your total personal services income to get your net personal services income amount.
- Use the ATO’s tax rates and thresholds tables to identify your personal marginal tax rate based on your total taxable income for the year including the net personal services amount.
- Multiply your net personal services income by your marginal tax rate as a percentage to calculate the amount of personal services income tax owing.
(For example, if your net personal services income is $80,000 and your marginal tax rate is 37%, the personal services income tax would be $80,000 x 37% = $29,600)
- Add any other components of your taxable income and calculate your total tax payable.