The Medicare levy and the surcharge for sole traders: what you pay and how private health fits in
If you have only ever been an employee, the Medicare levy is a line on your payslip you never think about. As a sole trader, nobody withholds it. It arrives as part of the tax bill after you lodge, and there is a second charge, the Medicare levy surcharge, that depends on your income and your health insurance. Many first-year sole traders are caught by one or both. This guide explains how they work, what counts as income for them and how to plan for them. Rates and thresholds are reset regularly, so use the ATO figures for the year.
Updated 25 October 2026. General information only, not tax advice.
What the Medicare levy is
The Medicare levy helps fund the public health system. For most resident taxpayers it is a flat percentage of taxable income, added to the tax on your assessment. It is separate from the income tax rates, so a figure for tax on its own will understate what you pay.
Because the levy is based on taxable income, your business deductions reduce it. A sole trader who has a $90,000 profit before a $10,000 deduction pays the levy on $80,000.
Reductions and exemptions
People with low taxable income can pay a reduced levy or none, using income thresholds that vary with family circumstances. Some people are also exempt for part or all of the year, such as certain foreign residents and holders of particular visas. Whether you qualify depends on your own facts, and the ATO Medicare levy reduction and exemption pages are the place to check.
Why it surprises sole traders
In employment, the levy is built into the PAYG withholding scale, so it is paid with every pay. In business, nothing is withheld unless you are on PAYG instalments, and then the instalment rate is meant to cover income tax only as the ATO sets it. When your return is assessed, the levy comes as an additional amount owing.
Setting aside money for tax should therefore include the levy as well as income tax. Many people use one combined percentage. See setting aside money for tax.
The Medicare levy surcharge
The surcharge is a separate, additional charge. It applies if your income for surcharge purposes is above a threshold and you, and your family where relevant, do not have an appropriate level of private patient hospital cover. The rate steps up with income. The thresholds change each year and are higher for families, so use the current table on the ATO site.
Income for surcharge purposes is broader than taxable income. It includes items such as reportable fringe benefits, reportable super contributions and net investment losses. A sole trader who makes personal super contributions to reduce tax should check the effect on this test. See sole trader super contributions.
How private health cover interacts
Hospital cover that meets the ATO’s requirements, held for the whole year or the relevant part of it, avoids the surcharge. Cover that only includes extras such as dental and optical does not. A policy with a high excess may fail the test, because the excess is capped for this purpose.
The premium for personal health insurance is not a business deduction. If you pay it yourself, you may be eligible for the private health insurance rebate, either as a reduced premium or as a tax offset, depending on your income. The policy statement your insurer sends after 30 June gives the details for your return.
Planning around the thresholds
When your income is close to the surcharge threshold, the order of events matters. Check your profit before the end of the financial year, see whether hospital cover is worth comparing with the surcharge, and remember that buying a policy part way through the year gives credit only for the days covered. Do not buy a policy only to dodge the surcharge without comparing the costs, because the premium may be higher than the surcharge it avoids. Ask a registered tax agent if you are close.
Records to keep
Keep your private health insurance statement, your income records and anything that supports a reduction or exemption claim. See what to give your accountant at tax time.
How FlowFi helps
FlowFi’s tax set-aside figure is based on your real transactions and an estimated effective rate, so it gives you a rough picture of income tax and levy together. It does not test the surcharge, which depends on your household and your cover, so check that against the ATO calculator.
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Frequently asked questions
Is the Medicare levy a business expense?
No. It is a personal tax on your taxable income, charged on your return. It is not deductible and does not appear on your BAS.
Do I pay the levy if I make a loss?
The levy is based on taxable income, so if your total taxable income is zero or below, there is nothing to charge. A business loss may reduce other income, subject to the loss rules.
Is the surcharge applied to the business or to me?
To you as an individual, based on your income and cover for the year, and in some cases your family’s. It is worked out when your return is assessed.
General information only, not tax advice. Check your own situation with a registered tax agent or the ATO.
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