SELF-EM­PLOYED TAX OP­TIONS

CityPress - - Business -

Dur­ing pe­ri­ods of weaker eco­nomic growth, com­pa­nies are more open to us­ing free­lancers or con­trac­tors so that they can re­duce their cost-to-com­pany spend. It also cre­ates em­ploy­ment in an eco­nomic en­vi­ron­ment where em­ploy­ers are less likely to hire full-time staff be­cause it al­lows them to be more flex­i­ble in terms of em­ploy­ing the skills they need when they need them. Free­lancers, in turn, have the flex­i­bil­ity to adapt their work hours to suit their lifestyles.

Whether you are a free­lancer by choice or ne­ces­sity, un­der­stand­ing your tax obli­ga­tions is im­por­tant be­cause far too many free­lancers land up in fi­nan­cial trouble af­ter not mak­ing pro­vi­sion for their tax.

City Press spoke to Lesedi Se­foro, tax project man­ager at the SA In­sti­tute of Char­tered Ac­coun­tants, about the best tax prac­tices for free­lancers.

Should you form a com­pany or reg­is­ter as a sole pro­pri­etor?

Se­foro says the de­ci­sion over what le­gal form you should use should not only be de­ter­mined by tax, but also by other com­mer­cial con­cerns such as lim­i­ta­tions of personal li­a­bil­ity. In the case of a sole pro­pri­etor, you are the le­gal en­tity; in the case of a com­pany, the com­pany would be the le­gal en­tity and would hold the li­a­bil­ity.

From a tax per­spec­tive, how­ever, it may not make sense for a one-per­son con­sul­tancy to reg­is­ter as a com­pany. Se­foro says the main con­sid­er­a­tion as far as in­come tax is con­cerned has to do with the rate of tax levied on a com­pany ver­sus a sole trader.

Most free­lancers use the fees they charge as their in­come and do not nec­es­sar­ily rein­vest in the busi­ness be­cause the na­ture of their busi­ness does not re­quire cap­i­tal. In this case, Se­foro says the tax ef­fect is neutral as no in­come tax will be paid in the com­pany on this amount be­cause the full salary will be a tax de­duc­tion.

The sce­nario is dif­fer­ent if the in­di­vid­ual wishes to rein­vest money into the busi­ness. For ex­am­ple, a con­sul­tant reg­is­tered as a sole pro­pri­etor with a profit of R1.5 mil­lion that they want to rein­vest in the busi­ness will pay about R520 000 in in­come tax. If the owner-man­ager forms a com­pany and keeps the money in the com­pany, the com­pany will pay a lower com­pany tax rate of 28% – about R420 000 in­come tax would be payable.

You also need to take into con­sid­er­a­tion spe­cial anti-avoid­ance pro­vi­sions that ap­ply to com­pa­nies that have a sin­gle per­son ren­der­ing ser­vices. Se­foro says this sce­nario will limit the tax de­duc­tions the com­pany can claim, mak­ing this kind of small com­pany un­vi­able.

“From a tax per­spec­tive, it is there­fore usu­ally less favourable to have a com­pany where a con­sul­tant as the owner-man­ager is solely ren­der­ing ser­vices, but rather usu­ally ad­vis­able to wait un­til the busi­ness has three or more un­con­nected em­ploy­ees to fall out­side this anti-avoid­ance pro­vi­sion,” says Se­foro, who adds that the com­pany will only be able to ac­cess the more favourable small busi­ness tax rates when it has several em­ploy­ees be­cause personal ser­vices are ex­cluded un­less it meets the three or more em­ployee thresh­old.

In ad­di­tion, the pay­ment of VAT is more favourable for a sole pro­pri­etor than a com­pany be­cause a com­pany has to pay VAT on an in­voice ba­sis, while a sole pro­pri­etor works on a pay­ment ba­sis.

As Se­foro ex­plains, the stan­dard rule is that VAT ven­dors are sub­ject to VAT on an in­voice ba­sis, which means that they must pay VAT to the SA Rev­enue Ser­vice (Sars) based on in­voices is­sued dur­ing a par­tic­u­lar pe­riod, even if those in­voices have not yet been paid by the client. This can be­come a risk for a free­lancer who has formed a com­pany be­cause the longer a client takes to pay the free­lancer, the more likely the free­lancer will ex­pe­ri­ence cash flow prob­lems.

The alternative is the pay­ments ba­sis, where VAT is payable to Sars only once pay­ments have been re­ceived from clients. This is avail­able to sole traders who make less than R2.5 mil­lion a year, but it is not ac­ces­si­ble to free­lancers trad­ing through com­pa­nies.

When should you ap­ply for a tax di­rec­tive?

As a free­lancer or con­sul­tant, you can ap­ply for a tax di­rec­tive so that you will not pay more in­come tax dur­ing the year than what your fi­nal tax de­ter­mi­na­tion will be. In other words, this will equal out your monthly tax pay­ments so that you are not over­pay­ing your tax.

This is usu­ally a re­sult of vari­able in­come pay­ments, such as com­mis­sion or project pay­ments.

A tax di­rec­tive can be ap­plied for if you are not deemed to be fully in­de­pen­dent. If you get more than 80% of your work from one client, work at the client’s premises or un­der their su­per­vi­sion and have less than three full-time em­ploy­ees, you will be clas­si­fied as a personal ser­vice provider, and pay-asyou-earn (PAYE) tax will have to be de­ducted.

If you earn com­mis­sion or a vari­able fee, you can ap­ply for a tax di­rec­tive and your client/em­ployer will be in­structed by Sars to deduct a spe­cific rate or amount of PAYE.

If you are not an em­ployee be­cause no client makes up 80% of your in­come and you are not un­der their su­per­vi­sion, no PAYE will be de­ducted and you will pay tax in your bian­nual pro­vi­sional tax re­turn.

In this case, it is im­por­tant to make sure that, at the end of each month, you put your es­ti­mated tax away in a sav­ings ac­count so that the pro­vi­sional tax bill does not come as a shock.

If you use a home of­fice, what are le­git­i­mate ex­pense claims?

For a home of­fice, one must re­mem­ber that the of­fice must be specif­i­cally used as such.

“A per­son can­not work in their liv­ing room or from a desk in their bed­room and claim of­fice ex­penses from Sars,” says Se­foro, who adds that, for a le­git­i­mate home of­fice, most of the house­hold ex­penses can be claimed from Sars, but only the por­tion that re­lates to the home of­fice.

This ap­por­tion­ment can be done on a square me­tre ba­sis – you divide your of­fice’s square me­treage by the to­tal home square me­treage and mul­ti­ply that by le­git­i­mate house ex­pense claims.

Ex­am­ples of le­git­i­mate ex­pense claims would be rent (if rent­ing), interest on your bond (if you own the prop­erty), elec­tric­ity, levies, wa­ter, other mu­nic­i­pal charges and your do­mes­tic worker’s wages. You will also be able to claim re­pair ex­penses in­curred on the home of­fice.

Money spent at cof­fee shops or other spa­ces where you work will have to meet the tax re­quire­ments, which include that th­ese ex­penses are in the pro­duc­tion of your in­come and in the course of your trade, and not for your personal main­te­nance. Gen­er­ally, such ex­penses in­curred dur­ing client en­gage­ments qual­ify un­der such re­quire­ments.

Do you have to fill in a log­book or can you work on deemed kilo­me­tres?

Keep­ing a log­book is im­por­tant for a free­lancer as they do not re­ceive a travel al­lowance from an em­ployee.

His­tor­i­cally, one used to be able to work with deemed kilo­me­tres, but now one has to keep a log­book of all busi­ness-re­lated travel to claim petrol and car main­te­nance ex­penses.

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