The Guide to Small Business Tax

Introduction to Small Business Tax


Entrepreneurs who want to start a business need to be aware of the tax obligations of running a business whether it is in the form of a legal entity (i.e. a registered company) or in their personal capacity. It is also important to note the various options with regard to reducing some of the administrative requirements to make tax compliance easier as well as the different tax incentives and rates that may apply in certain instances.

Business Tax refers to a tax levied by the South African Revenue Services (SARS) on the profits made by businesses. Small Businesses are required to follow the same tax processes as medium or large businesses, but small businesses often experience the tax process as stressful due to not being as formalised as these larger entities. The complex and strict nature of tax returns is often intimidating and can be quite a burden to small businesses.

The information in this guide is aimed at alleviating tax-related stress for you and your small business whether it is a registered company or your trade in your own name.

 

Sole Proprietors


A sole proprietorship is a business in the name of and operated by one individual. The individual may also call themselves an “independent contractor” or “freelancer”.
This form of business where one person owns all the assets of the business means that if the business fails, any of your assets, including your personal assets, can be seized to pay for all the liabilities owing.

In spite of the above, for many entrepreneurs with small businesses, it makes sense to run a partnership or sole proprietorship, which are the simplest businesses to maintain. The reporting and legal requirements are far less demanding than they are for a registered company, and the administrative costs are minimal.

Keeping that all in mind, you might need a more formal business structure if you’ll need to take on debt to grow your business or if you want to pitch for business from government and large companies.
So, it may make sense to register a business when you want to:

  • Bring other shareholders on board
  • Limit your personal liability for company debts
  • Reduce personal exposure to the business’s risks
  • Formalise your business before seeking investment or a loan
  • See opportunities to minimise your tax burden or take advantage of tax incentives for companies
  • Create a business that can becomes sellable

 

Business Registration Process

Registering as a sole proprietor with CIPC is not required (this is because the owner and the business are the same legal person) so you may simply begin trading.  The owner will generally be responsible, in civil and criminal law, for actions conducted in the course of the business.
Most sole props have a “trading as name” which can be used when opening a bank account for your business.  

 

Sole Proprietor Tax

Managing small business tax and finances is a lot simpler with a sole proprietorship than compared to a registered company.  There is no need to register the business with SARS as the sole proprietorship itself is not separately taxed on its income. Instead, all of its income and expenses get added to your own personal annual income tax return to be taxed together with any other income you may earn (e.g. salary, etc.). 

Let’s look at the tax matters you need to know about…

 

Registering With SARS

Assuming you are already registered with SARS personally, then by default your sole proprietorship will also be registered.

If you are self-employed and earn taxable income above the tax threshold which is R83 100 for the 2021 tax year, you need to register for Provisional Tax. You will also need to register if you are employed (i.e. you earn a salary) and run a business on the side and your total income exceeds the tax threshold. Please look on page 29 for more info on Provisional tax, how to register and how to make payments to SARS.

Registering For VAT

You should register as a VAT vendor if you expect your turnover to exceed R1 million in a 12-month period. As soon as your turnover hits R1 million, you are required by law to become a VAT vendor. VAT returns can be tricky and time-consuming to do, so this is another area where you might value the help of a tax practitioner or accountant.

 

 

Employee Tax & Obligations

Should you decide to employ staff, SARS may require you to register as an employer in order to pay over PAYE, UIF and SDL. You can do this quickly and easily online via eFiling.
In order to register as an employer with SARS you would need to change your SARS eFiling profile from an Individual to an Organisation Profile. You can do this by logging into eFiling and under the “Home” tab, click “Website Profile”. Thereafter log back into eFiling, click on the “Returns” tab and under “SARS maintained registered details” you can register there.
Let’s take a closer look at PAYE, UIF & SDL to see which are relevant to you.

 

PAYE (Pay as you earn)

PAYE is payable if your employee/s earns more than R83 100 for the 2021 tax year. Below is the 2021 tax table for individuals.

Taxable income (R)

Rates of tax (R)

0 – 205 900

18% of taxable income

205 901 – 321 600

37 062 + 26% of taxable income above 205 900

321 601 – 445 100

67 144 + 31% of taxable income above 321 600

445 101 – 584 200

105 429 + 36% of taxable income above 445 100

584 201 – 744 800

155 505 + 39% of taxable income above 584 200

744 801 – 1 577 300

218 139 + 41% of taxable income above 744 800

1 577 301 and above

599 464 + 45% of taxable income above 1 577 300

** Note: Even though the figure shows R0 – R205 900 an employee under the age of 65 years only pays tax if they earn more than R83 100. This is because all individuals under age 65 receive an annual tax rebate of R14 958.

 

UIF (Unemployment Insurance Fund)

If you have an employee that works more than 24 hours a month, you as the employer are required to pay over UIF to SARS each month. This is equal to 2% of their salary (1% should be deducted from the employee’s salary and the other 1% should be contributed by the employer).
Note:  Besides registering for UIF with SARS, you also need to register with the Department of Labour. You can register your business by completing a U1-8 form, and each new employee needs to be registered using a UI-19 form. You can obtain these forms from the Department of Labour or online at www.labour.gov.za

SDL (Skills Development Levy)

SDL is a levy imposed to encourage learning and development in South Africa and is determined by an employer's salary bill. The funds are to be used to develop and improve skills of employees. SDL is only payable if your estimated salaries for the year total more than R500 000 for the year. It is equal to 1% of the total amount paid in salaries to employees.

As soon as you have registered for PAYE, UIF and SDL (if applicable), you need to set your eFiling profile up to submit the EMP201 (the monthly employees tax return on which you declare PAYE, UIF and SDL).

You can follow these 3 steps:

Step 1
Log into your eFiling profile, click on “home”, click on “Change website profile”, in the new personality box, please select “Organisation” and then click “Submit”, after this log out and log back in.







Step 2
Next you will need to register as an Employer which you can do on SARS eFiling by following these easy steps:

Log back into your eFiling profile, click on SARS Registered Details and then click on Maintain SARS Registered details.


 


 



 2.2 Select My Tax Products and the Select Payroll Taxes.

2.4 Add New Product Registration: SARS should issue you with a PAYE, UIF and SDL number within 24 hrs.

Step 3

Now click on organisations, then click on tax types and select the EMP201, EMP501 and UIF then type in your new PAYE number SARS issued you then select your SARS registered office and click on register please. SARS usually takes 24 hours to authorise this, once the tax number is loaded on your eFiling account, you can submit and pay your PAYE via eFiling before the 7th of each month. If the 7th falls on a weekend or public holiday, then you need to file before. There will be an automatic late filing penalty equal to 10% of the tax due if you file late!

Select Organisations at the top of the page:




Select Organisation on the left then Organisations Tax Types:







Scroll up to EMP201 - PAYE and complete tax number, then scroll down to the bottom to register to activate.





 

 

Hiring Freelances & Independant Contractors

As a sole proprietor you can make use of freelancers and independent contractors should you not wish to employ permanent staff and hassle with PAYE & UIF. Though bear in mind that the lines between freelancers & independent contractors and employees may blur sometimes and you must ensure you are treating them correctly for tax purposes. Here are the basic guidelines on hiring freelancers and independent contractors.

Freelancers

Freelancers are generally hired on a project basis and have a very straight forward client relationship. Freelancers will invoice you for each project and are expected to manage their own taxes.  Freelancers do not receive employee benefits from the companies they work with.

Independent Contractors

An independent contractor is someone that renders a service to you and employs three or more full-time employees (non-family members) that are engaged in his or her business throughout the particular tax year.
However, if they don’t employ three or more full time employees they can still be an independent contractor as long as:

  • They don’t operate through a Company (Pty) Ltd whereby more than 80% of their income comes from one client only and where they perform the work at the clients premises as if they were an employee of the company and,
  • They control their own hours and work location and are free to build their own client base

Considering the information provided to you, as a sole proprietor you will have three options:

  • Deduct no PAYE if worker is a true independent contractor; or,
  • Deduct PAYE at 25% if SARS views the worker as an independent contractor but certain conditions are not met; or
  • Deduct PAYE per tax tables – SARS views independent contractor as an employee.

If employees’ tax of 25% is deducted (option 2), then it is mandatory for the contractor to be issued with an IRP5 certificate at the end of the tax year. But, what is extremely important is that the gross income paid to the independent contractor must be disclosed under code 3616 (independent contractors), and not 3601 (income – taxable).
Check out the decision tree on Taxtim’s website to see whether the staff you employ are true “Independent contractors” for tax purposes or if in fact, they should be treated as employees.
Link: https://www.taxtim.com/za/tax-guides/chats/am-i-an-independent-contractor  
Applying the correct tax treatment for independent contractors, can be tricky so do consult a tax practitioner if you are unsure.

 

Expenses & Deductions

A sole proprietor can claim all typical business expenses.

What Are Considered As Business Expenses?

Business expenses, also referred to as operating expenses, are the ordinary and necessary expenses incurred in the operation of the business. The business needs to be actively trading so trying to sell something or offer a service and the expenditure must be ‘in the production of income.
Typical overheads could include:

  • Accounting and bookkeeping costs
  • Internet: Costs to run and maintain the system or send emails etc.
  • Insurance costs: Professional Indemnity Insurance or Insurance on your office building.
  • Licences: Those that apply to the business.
  • Maintenance and repairs of business equipment or the office.
  • Motor vehicle costs: Maintenance, repairs and licences (costs should be allocated between personal and business usage based on mileage recorded in a logbook).
  • Postage including stamps and mailing expenses.
  • Printing and stationery: Letterheads, business cards.
  • Delivery and freight
  • Depreciation: For business assets that lose value while in use by a business.
  • Entertainment: Expenses – normally food and beverages paid for by the business to entertain people important to the business, such as customers and suppliers. These would not be your personal meal costs.
  • Electricity and water: Costs associated with the business’s premises and the equipment use.
  • Rent/Rates and taxes: For leasing your business’s premises.
  • Rent: For any leased equipment, signage used by the business..
  • Security: Costs for security services such as alarm monitoring, armed response, armed guards.
  • Subcontractors: Other parties that have provided services for your business related to the product, services and sales.
  • Telephone and Fax/Communication: Fixed line and cellular phone costs.

A lot of entrepreneurs may 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. In order to do this, you will need to identify exactly what portion relates to business use and which portion is personal. Keep a record of your calculations as well as all invoices/receipts as it is very likely that SARS will want to review these in order to verify your business expenses that you claimed.

Working From Home

As a sole proprietor, you can claim all your business expenses, but there are specific requirements for claiming a deduction for occupying a portion of your home for the purposes of trade. This means that a portion of your home must be specifically equipped to allow you to work and trade and must be used regularly and exclusively to run the business. Your work related activities must also be mainly performed in that portion of your home.
Typical home office expenses include:

  • Rent on the premises
  • Interest on the mortgage bond (note, it’s just the interest portion and not the whole monthly mortgage/bond payment!)
  • The cost of repairs to the home office
  • Electricity, water, rates and taxes
  • Cleaning costs
  • Security

When you claim a deduction for these expenses, they need to be in proportion to the floor area of your home office against the total floor area of your home. Keep an accurate record of all expenses, as SARS may want to check the information.

 

What are the pros and cons of operating as a Sole Proprietor?

Pros:

  • Simple to set-up
  • Fewer formalities required (e.g. business registration, financial statements, etc.)
  • Tax paid to SARS may be less if just starting out and Turnover isn’t very high.

Cons:

  • The Sole Proprietor’s own assets which are unrelated to the business are subject to claims of business creditors.
  • The proprietor carries the full risk of failure and this can result in sequestration (a process where the assets of the individual are taken by a trustee to be distributed between creditors) of his or her personal estate.
  • Perpetual existence is not possible. If the owner dies the proprietorship comes to an end.

 

 

Partnership

A partnership has similar elements to a sole proprietorship but it joins two or more people together to run a business. A partnership is also not a separate legal person or taxpayer. The profits are taxed in the hands of each partner according to the relevant share of the partnership profits. Each person may contribute money, property, labour or skills, and each expects to share in the profits and losses of the partnership. It is similar to a sole proprietorship except that a group of owners replaces the sole proprietor.

Typical Characteristics

  • A partnership between two & up to 20 individuals
  • Partners contribute something toward the business such as money, labour or experience.
  • Each partner shares in the profits.

 

Registration Process & Tax

Partnerships follow the same rules as a sole proprietor except that the expenses of the business and the revenue is split between the partners.

 

 

Independant Contractors & Freelancers


Some individuals freelance for a handful of clients and consider themselves “independent contractors”. They usually invoice clients themselves and receive “gross” income i.e without any tax deductions. They pay provisional tax twice a year and declare their income and expenses within the Local Business Section of their Tax Return as though they were sole proprietors.

Usually, employers are not liable to pay employees’ tax to the South African Revenue Services (SARS) in respect of payments made to independent contractors. But, due to the breadth of the SARS definition of an independent contractor, employers may find that they are liable for employees’ tax payable in respect of independent contractors, and for the interest and penalties associated with the failure to pay over employees’ tax, so it is easier for the employer to pay tax on the contractor’s behalf.

If employees’ tax is deducted, then it is mandatory for the contractor to be issued with an IRP5 certificate at the end of the tax year. But, what is extremely important is that the gross income paid to the independent contractor must be disclosed under code 3616 (independent contractors), and not 3601 (income – taxable).

These taxpayers need to be aware that under certain circumstances, SARS will treat them as employees for tax purposes and therefore require that their employers deduct monthly PAYE from them. If this is the case, depending on certain factors, PAYE should be deducted at a flat rate of 25% or else per the sliding tax table for individuals.

Check out the decision tree here to see whether you are a true “Independent contractor” for tax purposes or if in fact, you should be treated as an employee.