Four things self-employed people need to know about super contributions
On average, self-employed Australians retire with 50% less in their super accounts than their employed friends, and 20% retire with no super at all.
I started my first business after having my first child, and like many small business owners, I let my superannuation drift to the bottom of my to-do list.
At tax time, worried that I would get in trouble, I asked my accountant if I would get a fine for not contributing to my super.
He told me that super contributions were not mandatory for self-employed people and that was it.
Knowing what I know now about superannuation, I cannot believe that is all the information I was given.
Just because self-employed people do not have to contribute does not mean that their superannuation is less important.
In fact, if you are self-employed, it is vital that you take care of your super.
On average, self-employed Australians retire with 50% less in their super accounts than their employed friends, and 20% retire with no super at all.
This is a huge problem. Especially when you consider that, as a result of changing worker preferences and technology, the rate of self-employment is widely expected to rise.
Here are four things I wish my accountant had told me back in the day.
Superannuation is tax-deductible
If you own a company or small business that employs people, the superannuation you pay your employees is a cost of doing business. The same applies even if you are flying solo.
Whenever you contribute to your super fund, you have the option of claiming it as a tax deduction. If you do this, your contribution will be taxed at a rate of 15%.
However, if you just make the contribution without claiming a deduction, it will count towards your annual taxable income and be taxed at the rate applicable to your income bracket. That could be as high as 45%.
To put it another way, the average Australian needs to earn $1.45 in order to contribute $1 to their super after tax, but if you claim it as a tax deduction, you only need to earn $1.18.
The only catch to claiming your contributions as a tax deduction is that there is some admin involved, and every super fund does it differently.
So, do not leave it until June 30. Find out in advance what hoops you’ll need to jump through to get the job done with your fund.
You might be eligible for a co-contribution
If you personally contribute up to a thousand dollars into your super account, the government will match it 50 cents to the dollar.
However, this only works if you earn below a certain amount, and you cannot double-dip by claiming the contribution as a tax deduction.
Like so many tax-related things, the government superannuation co-contribution works on a tiered system.
If you earn below $39,837 in the 2020/2021 financial year, you are eligible for the full co-contribution — that is $500 if you put in $1,000 of your own money.
The co-contribution amount tapers off after that up until $54,837.
If you have been neglecting your super recently, this could be a way to give the balance a nice little boost.
Check your insurance
Lots of self-employed Australians continue using whatever super fund they had when they left the traditional workforce.
Unfortunately, these are typically not set up to handle the needs of self-employed people very well, and one area that can have serious consequences is regarding insurance.
Most super funds offer life and income protection insurance that can be paid for out of your super balance.
However, sometimes when you read the fine print, these insurances do not actually cover self-employed people in their definitions.
That means you could be paying premiums for insurances that you might have difficulty actually claiming on in the event you’re no longer able to work.
Contact your super fund to find out if your insurances are still relevant to your situation, and if not you might want to consider cancelling them or moving to a fund whose insurances do cater to self-employed people.
Every little bit counts
Because superannuation is all about the future, it is easy to slip into thinking that it is a problem you can deal with later. The longer you put off taking care of your super, however, the lower your balance will be at retirement.
Because the amount of super our employee friends currently get from their bosses is 9.5%, a lot of self-employed Australians feel daunted at the prospect of sacrificing that much of their cashflow into something that can’t be accessed until many years later.
When you are self-employed you can put as much or as little as you like (or can afford) into your super as there is no mandatory 9.5% like with employees.
You can contribute as little as 1%, or even ten bucks a week. Whatever works for you.
One thing is for certain though, irrespective of the size of the contribution, your future self will thank you. It is all about starting, and then building the habit.
When you are self-employed, superannuation can feel like a minefield, but if you tackle it one step at a time, the results will pay off.
Information in this article is provided by GigSuper, which is a Corporate Authorised Representative of APP Financial Advisers (AFSL 412302) and is general advice only. You should consult a professional adviser to help you form your own opinion of the information and on whether the information is suitable for your individual objectives and needs as an investor.
