How are you taxed on your 'side-hustle'?

By Isabelle Coetzee

In addition to working a full-time job, many South Africans work part-time as freelancers or contractors to make ends meet. Colloquially known as a ‘side-hustle’, this kind of work is usually done in the evenings or over the weekends.

But what impact does this have on their taxes? This week Justmoney got in touch with several tax specialists to find out how this would be calculated and how to ensure you remain tax compliant.

According to Christiaan Scheepers, who is a tax consultant for small businesses and part-time employees, all individuals in South Africa are taxed according to the same income tax tables.

The most recent figures are based on the 2020 tax year (1 March 2019 – 29 February 2020):

​Taxable income (R)

​Rates of tax (R)

0 – 195,850

18% of taxable income

195,851 – 305,850

35,253 + 26% of taxable income above 195,850

305,851 – 423,300

63,853 + 31% of taxable income above 305,850

423,301 – 555,600

100,263 + 36% of taxable income above 423,300

555,601 – 708,310

147,891 + 39% of taxable income above 555,600

708,311 – 1,500,000

207,448 + 41% of taxable income above 708,310

1,500,001 and above

532,041 + 45% of taxable income above 1,500,000

 

“The difference between the tax of salaried individuals and freelancers lie in the way the total tax liability for the year is collected by the South African Revenue Service (SARS),” says Scheepers.

First things first: Employee’s Tax

Full-time employees receive a payslip at the end of each month, which indicates their gross salary and the amount of tax that was deducted to calculate their net salary.

“The employer pays the amount deducted for tax across to SARS on a monthly basis and at the end of the tax year, which runs from March to February, you will receive a summary of the tax paid over to SARS on your behalf from your employer – called IRP5,” says Scheepers.

He explains that the amount of tax which gets deducted from your monthly salary is calculated by taking your monthly salary and multiplying it by 12 to get to the yearly equivalent. The total is then compared to the tax tables mentioned above to determine your annual tax liability.

“This is then divided by 12 to calculate the monthly instalment you have to pay in order to have paid off your full annual tax liability at the end of the tax year. This monthly instalment gets deducted from your gross salary on a monthly basis and paid over to SARS by your employer,” says Scheepers.

Additional Freelancer’s Tax

Freelancers do not receive consistent paycheques. They pick up work from different employers who pay them varying amounts. As a result, it is impossible to determine your total annual income, and therefore your applicable tax bracket, ahead of time.

“To work around this problem, SARS allows employers to deduct a flat 25% of tax from freelancers and pay this across to SARS. At the end of the tax year, you will get an IRP5 certificate from each of the employers who deducted this 25% tax from you, and you will use this to submit your income tax return,” says Scheepers.

He explains that the total income earned from all these various freelancing jobs is then added together and the tax thereon is calculated according to the same tables as if you were employed full time. The tax you paid during the year – in the form of all the 25% tax deductions – is then subtracted from the total tax you are supposed to pay.

“If there is a shortfall, you will have to pay the difference to SARS. If you paid more than you should have paid, SARS will refund you the difference,” adds Scheepers.

To add to this, Danielle Luwes, manager of Tax & Advisory at Hobbs Sinclair, explains that South African taxpayers are taxed on their combined worldwide incomes – irrespective of their sources.

“If you earn R500,000 per annum as a full-time employee and you do part-time work valued at R100,000 per annum, your total taxable income for that year is R600,000,” says Luwes.

Based on these numbers, assuming you are under 65, and ignoring all rebates and tax credits, the below table outlines how much would be taxed:

Tax payable on R600,000

R165,207

Tax payable on R500,000

R127,875

Difference

R37,332

 

“The above table shows that R37,332 additional tax would be payable to SARS on the additional R100,000 part-time income earned,” says Luwes.

How to be a provisional taxpayer

According to Scheepers, it’s important to note that employers will not deduct 25% if you applied at SARS to be provisionally taxed at a lower rate in the form of a tax directive and can provide the employer with paperwork confirming the lower percentage.

Luwes adds that should you meet the SARS requirements to register as a provisional taxpayer, your additional tax would be settled during the tax year. If you are not required to become a provisional taxpayer, the amount would be settled once you have filed your income tax return.

“Non-provisional taxpayers who earn additional income are advised to ensure they have saved sufficient funds throughout the year to be able to pay any additional tax,” says Luwes.

According to Naomie Fourie, tax consultant at Mazars, provisional tax is payable as follows:

  • The first provisional tax payment must be made within six months of the start of the year of assessment. For the year of assessment starting in March, this will be 31 August.
  • The second payment must be made no later than the last working day of the year of assessment. This will be 28 or 29 February.
  • The third payment is voluntary and may be made within seven months after the end of the year of assessment to avoid interest accruing. In other words, it should be made no later than 30 September and before the annual return is submitted and assessed.

Setting your own taxes aside

Scheepers points out that some clients might not be registered as employers with SARS, or they might prefer not to have anything to do with the tax of a freelancer, so they will ask you to send them an invoice for your time and pay you the full amount.  

“This does not mean that you don’t have to pay tax on these amounts. It is your responsibility to declare this income to SARS and pay the tax thereon when the SARS annual filing season opens in July each year,” says Scheepers.

He advises putting away 25% of each invoice in a separate bank account for the taxman, since this is what would have been deducted off your pay in any case if the client was registered as an employer with SARS.

“Doing this prevents nasty surprises when you submit your tax return and can similarly end up being a pleasant mid-year bonus if all of the money you put away for tax ends up being more than your actual tax liability,” says Scheepers.

Tips and Tricks to stay tax compliant

Scheepers believes it is best to find someone who is trained in this field who can take care of this chore for you, while you do what you do best.

“A tax professional does not necessarily have to cost an arm and a leg, and it is money well spent if it gives you the peace of mind that all your tax affairs are in order,” says Scheepers.

“I usually tell my clients to find a system of record keeping which is simple and effortless. There are some slick products available on the market, but it can really be just a folder on your computer where you save all the invoices you send to clients, and a concertina file which you keep in your car for all expenses,” says Scheepers.

Fourie agrees that it is important to keep track of your funds. She suggests keeping documentary evidence of all your expenses incurred in the production of your freelance/contracting income.

“Work with a registered tax practitioner to ensure you remain compliant with legislation but at the same time ensuring that you claim all allowable expenditure,” says Fourie.

Have a look at the following article to find out how much it would cost to hire a tax practitioner. 

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