Navigating the world of freelancing comes with its own set of challenges and responsibilities, and one crucial aspect is understanding how to pay taxes as a freelancer in South Africa.
From registering your business to keeping track of your income and expenses, and finally calculating and paying your taxes, this guide will walk you through the process step by step.
Do Freelancers Have to Register as a Business in South Africa?
Absolutely! If you’re a freelancer in South Africa, you’re required to register with the South African Revenue Service (SARS) to obtain a tax number if your taxable income exceeds the tax threshold for the given year of assessment.
The tax threshold for the 2022 assessment year is R87,300 if you’re under the age of 65.
Most freelancers operate as sole proprietors, meaning their businesses are not distinct legal entities.
Before you embark on your journey as an independent contractor, it’s essential to formalize your business structure, such as choosing to operate as a sole proprietorship.
While having a separate business bank account isn’t obligatory, it’s a wise practice recommended by accounting professionals to maintain a clear line between personal and business finances.
Furthermore, freelancers need to meticulously track their business expenses and create a self-calculating Excel sheet detailing different cost categories.
Additionally, freelancers are required to register as provisional taxpayers and independently file their tax returns.
Legal Requirements for Freelancers in South Africa
Freelancers in South Africa need to adhere to various legal requirements based on the nature and scope of their work. Here are some key aspects to consider:
Paying taxes is an inevitable part of freelancing life. Freelancers must register for tax with SARS and pay income tax on their earnings.
The taxation method depends on their status as either independent contractors or employees.
Additionally, they are responsible for maintaining records of their income and expenses and filing annual tax returns.
Freelancers might also be eligible for deductions and allowances like retirement annuity contributions, medical aid contributions, home office expenses, and more.
Freelancers have various business registration options, including sole proprietorship, private company, personal liability company, or non-profit company.
Selecting the right option depends on individual preferences, goals, and needs.
Each choice has its pros and cons concerning setup ease, costs, liability, credibility, and protection.
Registering a business involves a fee of R175 and compliance with administrative, accounting, and legal obligations.
Clear contractual agreements are essential for freelancers.
These agreements outline the terms and conditions of services, including scope, fees, payment methods, and more.
Well-structured agreements protect both parties’ interests and minimize misunderstandings and disputes.
Using service level agreements (SLAs), quotations, invoices, and receipts formalizes these agreements.
To delve deeper into creating effective contractual agreements, the Hello Contract blog and the Contracts4biz website offer invaluable insights.
Remember, while these are fundamental legal requirements for freelancers, specific obligations might arise depending on the freelancer’s field of work.
Professions like legal advice, accounting, or medical services could involve additional regulations from professional bodies or associations.
When in doubt, seeking guidance from a professional advisor or lawyer is highly recommended.
How to Pay Tax as a Freelancer in South Africa
Paying taxes as a freelancer in South Africa might seem daunting, but with the right knowledge and approach, it’s manageable.
Here’s a step-by-step guide to ensure tax compliance while sidestepping penalties:
1. Determine Your Tax Status
Begin by discerning whether you qualify as an independent contractor or an employee for tax purposes. SARS provides guidelines to help you make this determination.
Factors like the level of control, contract duration, and nature of work are considered.
Independent contractors enjoy more autonomy but also shoulder more responsibility. Employees must pay PAYE (pay as you earn) tax, which is deducted by their employer.
What is the tax rate for freelancers in South Africa
If you are a freelancer in South Africa and earn taxable income which is above the tax threshold for the particular year of assessment, you will be subject to a tax rate ranging from 18% to 45%.
However, freelancers are responsible for paying their own taxes, and the tax rate can vary depending on various factors such as income level, expenses, and deductions.
Freelancers should keep track of their income and expenses and consult a qualified accountant or bookkeeper for expert tax advice.
2. Register for Tax
Next, register for tax with SARS and secure a tax reference number.
This can be done online through [eFiling] or at a SARS branch. If you’re an independent contractor or if your total income surpasses the tax threshold, register for provisional tax.
This method entails paying your income tax ahead of time, based on your projected annual income.
You’ll need to submit two provisional tax returns and make two payments during the year, by August 31st and February 28th.
Your final tax assessment occurs when you file your annual income tax return.
3. Keep Detailed Records
Maintain meticulous records of your freelancing-related income and expenses. Issue invoices to clients and retain copies, along with any payment proofs.
Track all business running costs, including accounting fees, office rent, and other expenses that contribute to your income generation.
These costs are tax-deductible, reducing your taxable income.
Utilize a spreadsheet or accounting software to organize this information.
4. Calculate and Pay Your Tax
Calculate your taxable income and settle your tax obligations accordingly.
Your taxable income equals your gross income minus allowable deductions.
Freelancers can claim deductions for various expenses, such as retirement annuity contributions, medical aid payments, home office expenses, and more.
Online tax calculators or tax consultants can assist in this process.
Ensure you pay provisional tax on the specified dates mentioned earlier and submit your annual income tax return by the designated deadline (usually between July and November).
SARS enables online submission through eFiling or at a SARS branch. If you owe additional tax or are due for a refund, SARS will notify you post-assessment.
In summary, paying taxes as a freelancer in South Africa entails a series of steps, from determining your tax status to keeping comprehensive records and making accurate calculations.
At What Salary Do You Start Paying Tax in South Africa?
The threshold for paying taxes in South Africa hinges on your age and the specific tax year. For the 2023 assessment year (March 1, 2022, to February 28, 2023), the tax thresholds stand as follows:
- R91,250 if you’re under 65 years old.
- R141,250 if you’re between 65 and 75 years old.
- R157,900 if you’re 75 years or older.
In essence, if your taxable income falls beneath these thresholds, you’re exempt from paying income tax.
However, surpassing these thresholds mandates the payment of income tax in line with the applicable rates and rebates corresponding to your income bracket.
For a comprehensive understanding of these rates and rebates, resources like the SARS website and the Deloitte Quick Tax Guide offer valuable insights.
In the dynamic world of freelancing, navigating tax obligations is a crucial aspect.
Armed with the information provided in this guide, you can confidently embark on your freelancing journey, ensuring both financial success and compliance with South African tax laws.
Remember, it’s always wise to seek professional advice when in doubt, so don’t hesitate to consult experts in the field to ensure you’re making the most informed decisions for your freelancing career.