5 Min. Read

What is Personal Services Income (PSI)?

November 30, 2021

This guide to personal services income is a great resource for those who are looking to grow their own business. It provides an overview of what PSI is, how it’s taxed, the results test related to PSI, and more.

This article will provide readers with invaluable insights on taxation issues relating to PSI. It also provides information about what PSI is and how it can be calculated. This article also covers some of the most common mistakes that people make when calculating their taxes resulting in overpayment or underpaying their taxes owed. If you’re concerned about personal services income, this is the article for you!

Here’s What We’ll Cover:

What Is Personal Service Income?

What Is the “Results Test” Related to Personal Service Income?

What are Some of the Most Common Mistakes When Calculating Personal Service Income?

Do You Need an ABN for Personal Services Income?

Key Takeaways

What Is Personal Service Income?

Personal service income is essentially any type of taxable income related to professional services. It can include activities performed by doctors, a law firm, accountants, architects, some medical practitioners and many more. In general, this includes personal services businesses.

Personal Service Income can be derived from independent contractor work, consulting fees, self-employment income and more.

How Is Personal Service Income Taxed?

While there are many different types of incomes (such as capital gains or business income), PSI is taxed in a special manner. If an individual receives PSI, the amount they receive will be added to their ordinary income. The amount they receive will then be subject to ordinary income tax rates and thresholds.

What Is the “Results Test” Related to Personal Service Income?

The results test related to PSI is a two-pronged test that must be passed. This test reveals whether or not income is labeled as PSI.

If the taxpayer passes the first step of the results test, they will then need to pass a second step.

The first step is passed if the taxpayer:

Takes steps to ensure continuity of income,
Engages in a pastime for recreational purposes or takes part in a hobby rather than making a profit
Receives PSI from an employer and not as a result of an independent contractor relationship.

If the taxpayer passes the first step, they will need to pass the second step.

The second step is passed if the taxpayer’s primary purpose for engaging in said activity was for income generation. If their primary purpose was recreational or had no intended business-related outcome, then the income is considered as PSI.

In many cases, taxpayers can fail both steps of this test, resulting in income being labeled as PSI. In these situations, it is important for individuals to know how to calculate PSI.

What are Some of the Most Common Mistakes When Calculating Personal Service Income?

People have a tendency to overpay their taxes when they fail to correctly calculate their personal service income. There are many factors that can lead individuals to incorrectly labeling earnings as PSI. These include:

Paying for certain personal items such as clothing and food using their business accounts
Using tax preparation software to prepare the return without consulting with a professional
Mismanaging deductions
Improperly calculating capital gains or losses
Miscalculating business expenses and more

It is not always easy to correctly calculate PSI. This is why it is important for individuals to choose a tax professional that they can trust.

Do You Need an ABN for Personal Services Income?

First of all, what is an ABN? An ABN is an Australian Business Number. It gives businesses and individuals the ability to conduct business in Australia.

The requirements for an ABN vary depending on whether you’re running a business or not. If you intend to provide personal services, then you will need an ABN. You will also be registered with the ATO as a business. This is because an individual will not need an ABN if they provide personal services as part of their employment.

Next, do you need an ABN for personal services income? This is a good question to ask when you are unsure of the legalities of your independent contractor work. The answer to this question depends on whether or not you want to use your own company name for contracts and invoices.

If you plan on using your own company name, then you will need an ABN.

Key Takeaways

The personal service income tax is a complicated topic. There are many nuances to the PSI that should be considered before declaring your earnings as such.

You also must consider whether or not your primary intent for engaging in this activity was for making money. If it is, then you are more likely to have problems with PSI being considered as such.

Also keep in mind. If you plan on doing business in your name, not your company’s name, then you will be required to get an Australian Business Number. Hopefully this article helps you understand Personal Service income better.

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