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How will I be taxed as a freelancer on retainer?

Posted 3 November 2014 under Tax Questions



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Hi there!

I am currently full-time employed as an editor, but would like to go freelance next year. I am busy putting a proposal together to encourage my current employer to keep me on retainer for a portion of my current duties, for a portion of my current salary from January 2015, so that I can at least be guaranteed a basic salary for the first year or so of being a freelancer while building up a client base.

As far as tax goes, my understanding was that the burden was on freelancers to submit quarterly or annual tax returns, and that employers using freelancers were not necessarily obligated to deduct tax on their fees. But I recently read that employers are in fact obligated to deduct provisional tax of 25% off every payment to freelancers.

Is this dependent on the number of hours per week the freelancer works on retainer for a single client? Or is that the standard deduction, regardless of hours?

I'd appreciate any help you can give me, as I need to fine-tune the numbers in my proposal before I present it to my employer. If I am going to be taxed on the retainer fee every month, I obviously need to quote a different (gross) figure as my fee, as opposed to if my employer were simply paying me a "net" amount without deducting tax.

Thank you! :)

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TaxTimTaxTim says:
3 November 2014 at 11:16

Can you describe the details of the work you will be doing for them? Same as you are now, but just on a freelance basis? Will you be working from their offices, under their supervision?


Miche says:
3 November 2014 at 11:26

Hi,

Thanks for making contact!

I will be doing about 60% of my current work load - sub-editing and writing. About 40% of my time is spent proofreading, and this is the portion of my duties I am proposing to no longer fulfil, and, if my proposal is accept, the company will need to hire a part-time proofreader to take over that role once I have left.

I am proposing to work from home, using my own resources and in my own time (although a standard turnaround time will be agreed upon). While I will be willing to attend meetings, I will no longer be working from the office or under their supervision.

(The reason for requesting a retainer contract or deal is that it will work out cheaper for my employer than if I bill hourly or by page or article, and this is key to their accepting my proposal.)

I have a separate but related question (totally understand if you can't respond to this here and it is not an urgent query, I can always address this later) - from what I've read, as a freelancer working from home, a large portion of my expenses will be tax deductible (% of rates, electricity, bandwidth, cell phone, etc), which is great. Currently, my husband, who is full-time employed, pays most of these bills for us. Would it make sense to transfer the debit orders to my own account for me to benefit from the deductions? Or will the fact that my husband who lives with me pays these bills, and that they come out of our household expenditure, be enough for me to claim them back against tax?

Thanks for your response, I so appreciate it.


TaxTimTaxTim says:
3 November 2014 at 14:01

The biggest question is whether or not you will be "free" in a sense and also how much income you will be earning from them compared to the overall income and whether your rates are based on number of hours for a predetermined outcome. So for example, accountants who work for many clients and have their own turn around time and charge per hour or per item and do not have any "relation to the customer" other than the work being done will not have to have PAYE deducted. However will you be performing a set task for the publication based on agreed upon outcomes or do you have to work regardless of the actual outcomes - basically will you be doing your old job just at home with your own tools?

The issue gets complicated, but in most cases yes 25% will need to be deducted unless you get your own directive from SARS asking for an 18% deduction. It won't make a difference to you being able to deduct expenses against this income.


Miche says:
3 November 2014 at 14:32

Thanks for this!

To answer your question - what I am hoping for is for my current employer to be one of a few clients. The idea is that I will work for a certain amount of time ( - 60% of a full day) on my current employer's work and the remaining time on other clients' work. So my thinking was that there would be a agreed-upon outcomes and I'd be performing a set task for my current employers based on these outcomes. I wouldn't have to work regardless of the outcomes. I would not be doing the same job as I am doing now, as a) my current contract prevents me from working for other employers or clients while in this job; b) I would not be bound by the number of hours I'd need to put in per week - I would only work according to the amount of time the job took; and c) I would not get any of the benefits of full-time employees, such as paid sick and annual leave. it would be a totally different contract.

So, yes, I would be "free", in a sense. I would look to get other clients to increase my income, just as the accountants in your example would work for a number of different customers - the only difference being that one customer (current employer) would pay me more than the others as I will need to do more work for them than the others.

If this still sounds like I'd need to be taxed 25% (or 18%) by my current employer, could you give me more info on what you mean by "it won't make a difference being able to deduct expenses against this income"? Do you mean I won't be able to deduct expenses at all?

Thank you so much for your help. Sorry that this is getting so long-winded.


TaxTimTaxTim says:
3 November 2014 at 22:56

No need to apologise, this particular issue is quite a difficult one and is very contentious. Just to clarify, even if you are taxed upfront as an independent contractor you would still be allowed to deduct all your expenses that were incurred in generating your income so that will not make a difference.

It is going to be very difficult substantiating to your old employer that you are now completely independent and they should not be withholding PAYE of at least 18%, but if you are able to demonstrate to them that you do not meet the various tests AND that you are not earning the majority of your income from them then it can be done. Our tax director can assist further here.

Regarding your other question, you would need to be paying the bills yourself for SARS to allow the deduction.


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