Freelancers have it tough. You are out there on your own in a tax environment that is probably more complex than you imagined it ever would be. For the regular nine to fivers, a paycheck arrives at month end, with a neatly deducted amount and SARS is magically paid up. Then once a year they have to submit a return and that’s SARS off their backs.
For a freelancer though, life is a different story. Sure you get to work from your favourite coffee shop and sleep as late as you want. But when it comes to admin, such as tax, the reason you’re sleeping late is because you’re up all night staring at the ceiling wondering when SARS are going to break down the door and haul you up in Pollsmoor for evasion.
Firstly, relax. Secondly, we’ve compiled a list of the most common tax issues of which freelancers should be aware. So roll up your jeans, pat your pet bull dog and listen up.
A common problem is not being registered for tax in the first place. As a freelancer, running your business is a full time job and admin such as registering for tax gets left behind. Then when work starts coming in, it’s small amounts and you figure you may fall under SARS radar anyway. As your business grows, your bank balance grows with it. But so does the backlog of admin, unpaid tax, consequences, fear and sleepless nights.
Unfortunately this is not one of those problems that just goes away by itself – like dub step. Fortunately, the first step to sorting it out is to get registered for tax.
Registration has to be done in person at a SARS office, and this will probably involve waiting in a long line. You will need:
- A bank statement,
- Your ID document, and
- proof of address.
The next step is grappling with your financial history. This can be daunting, depending on how good your records are and how long you’ve ignored the problem.
The good news is that once registration is done, most tax concerns can be dealt with online via the SARS e-filing service. Depending on a person’s tax history, one could also apply for the SARS voluntary disclosure programme. This programme provides the opportunity to come clean on outstanding tax issues without having to pay penalties. But the first step to redemption is registration.
Getting your refund
Don’t think of registering for tax as just a legal requirement. For freelancers, there may also be a significant financial benefit. Most freelancers will be all too familiar with the annoying 25% tax that gets withheld by clients on certain jobs.
This 25% is, roughly speaking, tax which you prepay to SARS based on what you would land up paying over the course of a year. Basically, SARS guesses you are going to pay 25% of your earnings each year, so it holds that amount back. But since everybody’s business is different and certain business expenses are tax deductible, the chances are that when you file your return at the end of the year, you should get some of that money back.
So you can almost thank SARS for paying your bonus each year.
Tax directive application
Another benefit of being in the tax system is that you will be in a position to ask SARS for a tax directive. If the previous year’s business shows that the 25% tax is too high, a tax directive allows you to get paid without getting the full 25% deducted. You must apply for a directive every year if you want the reduced tax, but it is a relatively simple process and will result in better cash flow for the business.
Choice of taxpayer type
There are lots of different forms a business can take. Your business may run as a sole proprietor or a company. The benefits of these options will ultimately depend on the nature of your business, your turnover and your types of expenses.
SARS has introduced various tax regimes with a focus on small businesses. The Micro Business and Small Business Corporation regimes make things easier for smaller businesses with simplified tax rules and lower tax rates.
There are lots of options which could lead to serious savings. But none of these are possible if you fly under the radar and ignore your tax requirements.
For a business owner, these two words are almost more beautiful than “I love you”. Once you’re in the tax system, the aim is to pay as little tax as possible. To reduce your tax bill, certain genuine business expenses can be deducted from your income. These are called tax deductions (I love you).
For instance, studio rent, computers, business travel, phone bills or stationary may all be tax deductions. If you’re not registered for tax, then you’re paying your 25% tax and not claiming ANY deductions. You’re basically losing money each month. Nice. But if you are doing things properly, then you’re paying for the things you need, paying less to SARS and are basically a lean mean freelancing machine.
For certain jobs you’ve been asked for your VAT registration number in order to become an approved vendor for your client. And you’ve been like my what, what now?
VAT (Value-Added tax) is a tax on the supply of certain goods or services. Businesses are only required to register as VAT vendors if they will have a turnover of more than one million Rand in a 12 month period. If this is you and you’re not tax registered, then consult a tax practitioner IMMEDIATELY. But the unfortunate likelihood is that it’s not. So while you may voluntarily chose to register for VAT, it is not a requirement.
The benefit of VAT registration is that you may be able to claim back money you spend on VAT from SARS. A disadvantage is that you may have to charge VAT (of 14%) on your fees. If you are not VAT registered, then just tell your clients that and if they require a VAT registration, then it may not be a job worth taking. Ultimately the decision to register for VAT voluntarily will come down to weighing the potential benefit of claiming back VAT against the increased administration costs.
One of the benefits of freelancing is that you have the ability to work from almost anywhere – sometimes outside of South Africa.
However, as the age old saying goes: as certain as death, there is taxes. Some countries may want you to pay tax if you do work there and conversely, even if you’re working abroad, SARS may still want its cut.
South Africa has tax treaties with various countries that determine which country may tax which income. This can get complicated. So the best advice we can give is if you do freelance work outside South Africa, you should probably consult with a tax practitioner.
When does this become a problem?
You may be thinking, this seems like a lot. It’s always worked out before, so I don’t see why it won’t continue to work out. Well our freelancing friend – death and taxes. It’s literally a saying.
Firstly, your business won’t stay small forever. All your hard work and savings will hopefully lead to growth and wealth and when it does – SARS will be waiting.
Secondly, ever wanted to buy a property? Well, it’s unlikely you will be able to get a bond and fulfill that dream without your taxes being sorted.
These are just two examples. There are many more.
Paying tax actually isn’t the worst thing in the world. Essentially, those highways we like, those health services our country relies on, the government grants we apply for – are all payed for out of tax payers’ money.
It’s possible that this fact won’t convince you to pay your taxes, but your tax status is closely linked to your commercial success. If you’re not okay with SARS, then at some point you will take a hit. The question is do you want that to be now, at the start of your career, or later when the consequences are more severe.
Legalese is a creative legal agency which has redesigned legal services to suit creative and start-up businesses by making them accessible, affordable and understandable.
Authors : Alvhin Adendorff & Eitan Stern
We also have a few accountants signed up onto Freelance Cape Town who would gladly assist you – have a look here.