Very simply, tax is calculated on business profits. And how exactly are business profits calculated? Again, it couldn’t be simpler. A hint: It’s not what you have left in the bank!

Profit = Sales (ex VAT) minus allowable business expenses (also ex VAT). That’s your profit, and that’s the basis of the tax calculation.

So if tax is based on profit, which is based on sales minus business expenses, the key thing is to be very sure to claim all allowable business expenses. So what do people commonly forget about? It’s easy to remember things like wages, telephone, insurance, but there’s also:

· Interest on loans
· Capital Allowances (Depreciation)
· Lease payments
· Putting your spouse or children on the payroll
· Sharing tax bands effectively between spouses

Note that loan repayments, a sole trader’s own wages, and business entertainment expenses are not allowed in your profit calculation! Check out the Irish Revenue Starting in Business Guide for more info.

Once we have the profit, what’s the tax? Unfortunately there is no mysterious magical formula, and I know you hope there is something your accountant knows that you don’t to make it smaller. Tough, there isn’t! So the key thing is to make absolutely sure your profit figure has taken into account each and every bit of business expense you are possibly allowed.

Once you are sure of your profit, here is the tax calculation:
First you need to get your cut off point and tax credits – the bands are here: www.revenue.ie/index.htm?/leaflets/it1.htm
Tax below your cut off is 20%, above the cut off is 41% and self employed PRSI is 5%.

A: If your profit is less than or equal to your cut off:
Tax & PRSI = (Profit * 25% minus tax credit)

B: If your profit is more than your cut off:
Calculate the low rate first: Tax & PRSI = (Cut Off  x  25%)
The  high rate: Tax & PRSI = (Profit minus Cut Off ) x  46%
Then subtract the tax credit .

So for a single person’s allowances for 2007: 34,000 cut off and 1,760 tax credit, and profit of 50,000, here’s how to calculate the tax due on October 31st, 2008.

The profit is more than the cut off so we’ll go with B.
Low rate first: 34,000 x 25% = 8,500
High rate next: 50,000 - 34,000 = 16,000 so 16,000 x 46% = 7,360
8500 + 7360 = 15,860: subtract the tax credit of 1760 = Total tax and PRSI = 14,100

Try the SortMyBooks Self-Employed Tax calculator to check out your own situation.