How to manage your tax affairs running a business in your own name as a sole-proprietor
By Marc Sevitz · Updated
To register or not to register as a company?
The choice to operate a business as a company formally registered with CIPC or as a non-registered sole-proprietorship in your own name should always include the amount of tax you would pay as either of these entities. While there is no income threshold above which a small business MUST register as a company, companies do benefit from a lower tax rate on profits than would be paid by an individual in their own name.
For example (assuming no other income):
Taxable income / profit: R100 000
Individual: R100 000 x 18% = R18 000 – R11 440 (Primary rebate) = R6 560
Small Business: R100 000 – R63 556 (non-taxable portion) x 7% = R2 551.08
Taxable income / profit: R400 000
Individual: using the tax tables = R99 000
Small Business: R20 051 (tax charged on amounts below R350 000) + R50 000 x 28% = R20 051 + R14 000 = R34 051
If you are prepared to go through the somewhat complicated and lengthy process of registering formally, then this option could be for you. Formal registration will allow you to get a company bank account and eventually sell the business much more easily than if you used your personal account and own name. However, if this option does not appeal to you, don't worry, as an individual who runs their own small business you can benefit from several tax deductions that help you keep more of your profits. In fact, even if you earn a salary and run your business on the side, you will still be entitled to these deductions that reduce the income tax you will have to pay. If this is the case though, and you are making a profit greater than R20 000 per year from your business, you will need to register as a provisional taxpayer with SARS.
Allowable tax deductions for business expenses
One of the basic principles behind income tax is that of only being able to claim a deduction for an expense that was actually incurred in the production of income. Money spent on things for the business that are needed to make money is allowed to be claimed as a deduction in your tax calculation. However ONLY business-related expenses are allowed to be claimed as a tax deduction. A lot of people have expenses that are part-business and part-personal - such as cell phone, rent, and petrol - and try to claim these in their entirety as a deduction. SARS is on the lookout for these claims and will heavily punish any chancers, so make sure only business expenses are claimed.
Perhaps you are thinking, “What if I do use my cell phone for both work and personal use, and I work from an office in my home. How do I deduct those costs?” The first step in good management of your small business’ tax affairs is to keep records of all incomes, expenses and assets that belong to the business. This can be as simple as an Excel spreadsheet on your computer or just a list on a piece of paper - the important thing is to keep a monthly record of everything business-related. Proper financial records will also help should you apply to the bank for business finance one day or if you decide to sell. Make these records based on your actual invoices and expense slips, and then confirm these amounts by checking them against your bank statement. If you can keep a separate business bank account then this process becomes much easier. For those expenses like petrol and cell phone which are mixed, you will need to identify exactly what portion relates to business use and which portion is personal. Ideally a written record or logbook (in the case of a vehicle) should be used for the calculation because SARS might one day want you to prove your estimation. If no records are available you can just make an educated estimate. Once you have decided on the ratio of business to personal use for a particular expense, you can claim the business portion in your ITR12 tax return and in doing so reduce your taxable income :) Doing the above calculation right is a chore, but your business can only stand to benefit, will have a greater valuation, and will allow you ultimate confidence that you have filed your return correctly come tax season.
So remember the following simple guidelines:
1. Keep separate sets of records for business and personal;
2. Keep records of ALL your incomes and expenses;
3. A separate bank account makes things easier;
4. Only business-related expenses, or a portion-thereof can be deducted against income earned.
When to pay:
A sole-proprietor who is NOT registered for provisional tax pays tax manually to SARS once-per year during tax season (1 July to 23 November) while filing their ITR12 return.
A sole-proprietor who IS registered for provisional tax pays tax manually to SARS twice (and optionally a third time) throughout the year (deadline 31 August and end February), then files a single ITR12 return by end of January. Confused? See an in-depth explanation of provisional tax here.
