Employee vs Sole Trader vs Company — Which Structure Pays More?

Quick Comparison Table

The three most common structures in Australia each have distinct characteristics across tax, super, liability, and administration:

Employee

As an employee, your employer handles PAYG withholding, superannuation contributions (12% SG), workers' compensation insurance, and payroll tax. You receive the National Employment Standards protections: 4 weeks annual leave, 10 days personal/carer's leave, notice of termination, and redundancy pay.

Employees pay individual income tax at marginal rates from 0% to 45%, plus the 2% Medicare levy. The tax-free threshold of $18,200 applies, and the Low Income Tax Offset (LITO) provides up to $700 in additional relief for incomes under $66,667.

Best for: Workers who value stability, paid leave, employer-funded super, and minimal administrative burden. Most Australians are best served as employees unless their income or business circumstances specifically favour another structure.

Sole Trader (ABN)

A sole trader operates under their own name or a registered business name using an Australian Business Number (ABN). The sole trader and the business are legally the same entity — there is no separation between personal and business assets or liabilities.

Sole traders pay individual income tax at the same marginal rates as employees. Business income is reported on the individual tax return, and deductions for business expenses reduce taxable income. The key differences from employment are:

• No employer super — Super contributions are optional but highly recommended. You can claim a tax deduction for personal super contributions up to the $30,000 concessional cap
• GST registration — Required when annual turnover reaches $75,000. Below this threshold, registration is optional but may be beneficial for claiming GST credits on business purchases
• BAS lodgment — Quarterly (or monthly) Business Activity Statements reporting GST collected and paid, plus PAYG instalments on expected income tax
• No leave entitlements — Time off means no income. Factor in 4-6 weeks of non-earning time when comparing to employment
• Business deductions — Home office, vehicle, tools, equipment, professional development, and other business-related expenses reduce taxable income

Best for: Freelancers, contractors, and small operators earning under $120,000 who want simplicity and full control over their work. Setup is free (ABN registration is instant), and accounting costs are typically $1,000-$2,500 per year.

Company (Pty Ltd)

A proprietary limited company (Pty Ltd) is a separate legal entity from its directors and shareholders. The company earns income, pays tax, and can hold assets independently. This separation provides asset protection — creditors of the company generally cannot access the personal assets of directors.

The base rate entity company tax rate is 25% for companies with aggregated turnover under $50 million. This flat rate is significantly lower than the top individual marginal rate of 45% + 2% Medicare levy = 47%.

Paying Yourself from a Company

Company directors typically pay themselves through a combination of:

• Salary/wages — Taxed at individual marginal rates. The company claims a deduction and must pay 12% SG on the director's salary
• Dividends — Distributed from after-tax profits. Franked dividends carry franking credits that offset the individual's tax liability
• Retained earnings — Profits left in the company are taxed at 25% and can be reinvested or distributed later

Setup and Ongoing Costs

• ASIC company registration: $576 (2025-26)
• Annual ASIC review fee: $310
• Accountant fees (company tax return, BAS, bookkeeping): $2,500-$5,000/year
• Total first-year setup: approximately $800-$1,200 including registration and initial accounting

Best for: Businesses earning consistently over $120,000-$135,000 that want asset protection, the ability to retain profits at 25%, and a more professional structure for clients and contracts.

Take-Home Pay Comparison

The following table compares approximate take-home outcomes at three income levels. The employee column assumes the employer pays SG on top. The sole trader column includes self-funded super. The company column assumes paying a $70,000 salary and retaining/distributing the rest.

*Company figures combine personal tax on the $70K director salary with 25% company tax on retained profits, plus franking credits on dividends. Actual outcomes vary based on dividend timing and personal deductions. These are simplified illustrations — consult an accountant for precise modelling.

When to Switch Structures

Switching from sole trader to company makes sense when several conditions align:

• Consistent income above $120,000-$135,000 — The 25% company tax rate starts saving money compared to the 37% and 45% individual brackets
• Asset protection needs — If your business carries liability risk (client work, physical services, product supply), a company shields personal assets
• Retaining profits — If you do not need all business income personally, leaving profits in the company at 25% tax allows reinvestment
• Multiple income streams — A company can split income through dividends to shareholders (within tax laws) and employ family members
• Professional credibility — Some clients and government contracts require engaging with a company rather than a sole trader

Do not switch solely for tax reasons at lower income levels. The additional accounting costs ($2,500-$5,000/year), ASIC fees ($310/year), and compliance burden (separate bank accounts, company tax returns, director obligations) can outweigh any tax benefit below $120,000.

Related Resources

• Contractor vs Employee Guide — Understand the legal distinction and ATO tests
• Contractor vs Employee Calculator — Compare take-home pay for both arrangements
• Gig Economy Pay Guide — Tax and super for platform-based workers
• Income Tax Calculator — Calculate individual tax at any income level
• Superannuation Guide — SG obligations and voluntary contribution strategies

Frequently Asked Questions