Calculating your provisional tax

10

May

For business owners or those who are self-employed, your income tax is paid in several instalments instead of a lump sum at the end of the year. This is referred to as provisional tax.

Provisional tax must be paid for individuals who owed more than $2,500 of tax at the end of the year for their previous return. It is then payable in the following year after the individual tax return has been completed. The income that provisional taxpayers often earn includes self-employed income, rental income, overseas income, or income earned as a contractor or from a partnership.

Provisional tax payments are based on your business profits during a certain payment period. There are a number of ways to work out provisional tax. These include:

Standard option:
Calculated by either last year’s residual income tax + 5%, or your residual income from two years ago + 10%, the standard method is useful if your income is steady or will increase over the next year.

Estimation option:
When you know that your income will decrease over the next year, the estimation method is used. Add up all the taxable income that you expect to receive in the next year, then work out the tax on this amount and deduct any PAYE and other income tax credits you would be entitled to.

Using each of these methods to calculate provisional tax is followed by filing your return and commence making provisional payments through myIR.


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