Sole Trader or Company? What Actually Changes for a Contractor

Structure & setup

Almost every new contractor asks the structure question in the first week: should I just invoice as myself, or set up a company? The honest answer is that for most people starting out, it doesn't matter nearly as much as the internet makes it sound — and for a growing number of higher earners, it matters a lot.

What a sole trader actually is

As a sole trader, you and the business are legally the same thing. You get an ABN, invoice under your own name (or a registered business name), and every dollar the business earns is added straight to your personal taxable income. There's no separate tax return for the business, no separate bank account requirement, and no ongoing registration fees beyond your ABN.

The trade-off is that your personal income tax rate applies to every dollar of profit, and those rates climb quickly. Once your contracting income pushes your total taxable income past roughly $135,000–$190,000 (2024–25 brackets), you're paying 37–45 cents on every additional dollar, plus the Medicare levy.

What changes with a company

A company is a separate legal entity. It pays company tax on its profits — currently 25% for a "base rate entity" (broadly, a company with under $50 million turnover that earns mostly active business income) — and then you're taxed personally only on what the company actually pays you, whether as wages or dividends.

This is where the appeal comes from: if a company earns $300,000 and only pays you $120,000 in wages, the remaining $180,000 is taxed at 25% inside the company rather than at your marginal rate. The catch is that money doesn't disappear — if you eventually pay it out to yourself as a dividend, you're taxed again personally, with a credit (franking credit) for the company tax already paid. The strategy works when you can genuinely leave profit inside the company to reinvest, or spread income to a lower-earning spouse as a director, not as a way to permanently dodge your own marginal rate.

The costs nobody mentions upfront

• Company registration and annual ASIC review fees
• A separate company tax return, on top of your personal one
• Ongoing bookkeeping discipline — company money isn't your money, even though it feels like it
• Accounting fees that are typically a few hundred to a couple of thousand dollars higher per year than a simple sole trader return

If your accountant's fee increase and admin overhead eat most of the tax saving, the switch isn't worth it yet.

A rough rule of thumb

This isn't advice for your specific situation, but as a general pattern: sole trader tends to make sense while your contracting income is modest, irregular, or your only income. A company structure starts becoming worth investigating once you're consistently earning well above the top individual tax bracket threshold, want to split income with a spouse, or want to retain earnings in the business between contracts rather than pay yourself everything immediately.

What doesn't change either way

Regardless of structure, you still need to put aside money for tax as you go — nothing is withheld automatically the way it is for an employee. You still need to track deductible expenses. And you still need to think about superannuation, because unlike an employee, nobody is required to pay it into your fund for you.