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.
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
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.
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…
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 R 91 250 for the 2023 tax year (2022: R 87 300), 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.
You should register as a VAT vendor if you expect your turnover to exceed R 1 million in a 12-month period. As soon as your turnover hits R 1 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.
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 and do the necessary registration on the RAV01.
Let’s take a closer look at PAYE, UIF & SDL to see which are relevant to you.
PAYE is payable if your employee/s earns more than R 91 250 for the 2023 tax year. Below is the 2023 tax table for individuals.
|
Taxable income (R) |
Rates of tax (R) |
|
1 – 226 000 |
18% of taxable income |
|
226 001 – 353 100 |
40 680 + 26% of taxable income above 226 000 |
|
353 101 – 488 700 |
73 726 + 31% of taxable income above 353 100 |
|
488 701 – 641 400 |
115 762 + 36% of taxable income above 488 700 |
|
641 401 – 817 600 |
170 734 + 39% of taxable income above 641 400 |
|
817 601 – 1 731 600 |
239 452 + 41% of taxable income above 817 600 |
|
1 731 601 and above |
614 192 + 45% of taxable income above 1 731 600 |
** Note: Even though the figure shows R 0 – R 226 000 an employee under the age of 65 years only pays tax if they earn more than R 91 250 for the 2023 tax year This is because all individuals under age 65 receive an annual tax rebate of R 16 425 for the 2023 tax year.
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).
Important 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 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 R 500 000 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 step on how to register for PAYE, UIF and SDL on eFiling :
You will need to ensure that your eFiling profile is an Organisation profile before you can proceed with the registration process.
SARS will send you a notification was the registration has been finalised or if they require additional documents to finalise the registration.
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 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.
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:
Considering the information provided to you, as a sole proprietor you will have three options:
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).
Please refer to our Am I an Independent Contractor decision tree to see whether the staff you emply are true “Independent contractors” for tax purposes or if in fact, they should be treated as employees.
Applying the correct tax treatment for independent contractors, can be tricky so do consult a tax practitioner if you are unsure.
A sole proprietor can claim all typical 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:
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.
As a sole proprietor, you can claim all of your home office expenses. You can simply reflect the relevant portion of home office expenses within the "Local Business, Trade and Professional Income" section of your ITR12. (Note, this is different to salaried employees who need to work thorugh a stringent set of conditions in order to claim these costs).
Typical home office expenses include:
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.
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.
Partnerships follow the same rules as a sole proprietor except that the expenses of the business and the revenue is split between the partners.
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 our Am I an independent contractor decision tree to see whether you are a true “Independent contractor” for tax purposes or if in fact, you should be treated as an employee.
