There are many differences between being an employee and a freelancer, from potential perks like flexi working hours to the way in which you pay your tax. Justmoney takes a look at how important it is to make the correct classification for tax purposes.
When it comes to the law, ignorance is simply no excuse. When one typically starts a new business venture it is fair to say that a reasonable amount of in-depth research has gone in to the idea, in the same way it is expected that you do the necessary research in ensuring you are tax law compliant.
If you are starting out, chances are you may not be able to afford an accountant as yet. In this case it is advisable to contact your local South African Revenue Services (SARS) office to enlist their help.
The most common issue stems from not being registered as a freelancer. Many a time in the initial stages you are caught up in getting the business off the ground and the administration tends to fall behind. Then when work starts trickling in, at first it may be few and far between, and you may figure that it’s not worth declaring to SARS, but this is not the case.
“It’s simple, you pay tax when you begin to earn an income of more than the agreed amount that year and you pay it all your working life up to the age of 65. This, whether you are an employee or a freelancer,” states SARS.
To register as a taxpayer, you need to complete a registration form. Once you’ve completed the form you need to go along to your local SARS branch with your ID and they’ll complete the registration.
There are lots of different forms your business can take, you may choose to run as a sole proprietor or a company. This is usually informed by the nature of your business, your turnover and your types of expenses.
According to the SA Institute of Chartered Accountants, the decision over which legal form you should use should not only be determined by tax, but also by other commercial influences like the 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. 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,” Lesedi Seforo, tax project manager told Fin24. “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.”
In addition to registration SARS expects you to submit various tax returns at stipulated times of the year.
According to the revenue authority tax applies on everything, from income from business activities, income from directorships, income from trusts, investment income and rental income to royalties income, certain capital gains and when you are older on annuities and pensions.
The good news is that once registration is done, your tax concerns can be dealt with online via the SARS e-filing service.
A tip would be to ensure you set aside time to deal with any tax issues sooner rather than later. This will prevent you from having to run from pillar to post come tax season.
Another key point to remember is if you earn commission or a variable fee, you can apply for a tax directive and your client or employer will be instructed by SARS to deduct a specific rate or amount of PAYE. However, 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 instead you will pay tax in your biannual provisional tax return.
It is vital that you record your income and keep track of all your business documentation. Remember that you can deduct all the business expenses that were incurred in order to earn the income as the tax is on the "profit" of the business, iterated Tax Tim.
Despite popular belief, paying tax isn’t the worst thing in the world as it contributes to the betterment of our public transport and health portfolios, to name but a few. If that doesn’t quite convince you yet, the danger of being found guilty of tax evasion might.
Tip: Enlist help in sorting out your taxes through Justmoney today.