Your First Year as a Freelancer or Sole Trader?
By Viresh Harduth
Seaso’s tax return started this week and millions of South Africans plan to file their annual tax returns within the given timeframe.
If you are one of the many people who left corporate employment to start a business or join the gig economy, you may face the challenge of filing a return under your new status for the first time.
“Whether they’re driving for Uber, doing freelance programming or graphic design services, or making craft and cooking at home, we’re seeing more and more South Africans pursuing their entrepreneurial passions as a full-time job or a side business. ”Says Viresh Harduth, Vice President: Acquisition of new customers (start-up and small business) at Sage Africa & Middle East.
“If you are one of them, it is important that you properly manage your finance administrator so that you can improve your tax efficiency while staying on the good books of the South African Revenue Service (SARS). It’s also important to plan for tax payments and track expenses so you don’t get into financial trouble. ”
Harduth answers some of the most common questions he hears from the new self-employed.
How will my tax status change if I’m not in formal employment with a company?
If you are a sole trader – in other words, you have not registered a formal company – you will need to register as a provisional taxpayer. In addition to filing an ITR12 – the annual tax return for natural persons – you must file a provisional tax return by August 31st and February 28th each year. With each of these returns, you will make provisional tax payments based on your estimated income for the period.
If you file the final tax return during the tax season, SARS will refund you if you overpaid income tax for the tax year or request payment of the outstanding amount if you underestimated the tax due on your provisional tax returns. You can face a fine of up to 20% of the underestimated amount if:
- The sum of your first and second provisional payments is less than 90% of your estimated income tax as a person earning less than R1 million
- The sum of your first and second provisional payments is less than 80% of your estimated income tax as a person earning less than R1 million
If you are an employee and are making money from a side business as a sole proprietorship, you must also register for the provisional tax.
How do I register and archive?
If you have not already done so, you should register for SARS eFiling so you can request your IRP6 return and make your submissions and payments online. You can also call the SARS Contact Center on 0800 00 SARS (7277) to request an IRP6 return or to learn more about the new provisional tax procedure.
If you hate paperwork and can afford it, it may be worth asking a SARS registered tax advisor for assistance. He or she will take care of the filing for you and help you prepare your annual income tax return. Typically, tax advisors can give you advice on how to be more tax efficient and how the time they save on you more than justifies the cost.
Do I have to register for VAT?
You should register as a VAT seller if you expect your sales to exceed R 1 million in a 12 month period. Once your sales reach R1 million, you are legally required to become a VAT seller. VAT returns can be difficult and time consuming. This is another area where you may find the help of a tax advisor or tax advisor.
Which tax deductions can I claim and which documents do I need?
You can claim tax deductions for expenses you incur in generating income for your business. Some examples are:
- Business travel and accommodation expenses
- Telecommunication services
- Office rental
Upon request, you should be able to view SARS with the receipts for the expenses you claim and justify them as a business expense. Some capital costs – for example, if you need an expensive lathe or delivery vehicle – are written off over several tax years. For example, if you are buying a truck for the exclusive use of the company, you are requesting the four tax year tax deduction.
As a sole proprietorship, the lines between your personal and business expenses often blur. For example, you might have an Internet line that you use for work and that your family uses. You can only claim that part of the costs that relate to business use as a deduction. For this reason, it is important to keep accurate records such as vehicle usage logs or information about business or personal use of your mobile phone.
There are also the personal allowances that you as an employee may have taken – for example, the tax deductions for your contributions to pension funds and medical aid funds. Don’t forget to take advantage of the generous SARS offers for your pension contributions – a tax-efficient way to save for the future.
How should I track my expenses and income?
It is recommended that you have separate business and personal accounts. This makes it easier for you or the person doing your bookkeeping to add up your expenses and income. There are simple, easy-to-use accounting packages – many of which are available as online services – that you can use to keep track of your expenses, income, and generate quotes and invoices. It’s also a good idea to scan your receipts and file them every month instead of just throwing them in a drawer or shoebox.
When should you apply for a tax policy?
The purpose of a tax policy is to help you avoid underpaying or overpaying taxes when customers withdraw PAYE on your behalf. Hopefully, this means you won’t have to make the expected large payment on your tentative returns, or you won’t have to wait for a tax refund during the filing season. Usually, you get one if you:
- Get more than 80% of your work from a customer
- Work for the customer or under his supervision
- Have fewer than three full-time employees
In that case, you would be seen as a personal service provider and your customer would deduct PAYE.
Should I register a company and what are the advantages and disadvantages?
This is a question to ask an accountant as everyone’s situation is different.
For many entrepreneurs with small businesses, it makes sense to partner or run a sole proprietorship, which are the simplest businesses. The reporting and regulatory requirements are far less demanding than for a registered business, and the administrative costs are minimal. However, you may need a more formal business structure if you need to take out debt to grow your business, or if you want to advocate for the business of governments and large corporations.
Therefore, it can make sense to register a company if you:
- Bring other shareholders on board
- Limit your personal liability for corporate debt
- Reduce personal risk
- Formalize your business before applying for an investment or loan
- See ways to optimize your tax burden or use incentives
- Create a business that you can easily sell