Do you know your VAT from your PAYE, your UIF from your SBC or even your IRP5 from your TT03? Navigating tax as a business owner can feel like you’re drowning in a sea of acronyms, forms and deadlines. Here are the basics you need to understand.
Unless you have a strong financial background, handling your tax can be one of the most complex aspects of running your own business. If not managed correctly, it could cripple your business and crush your dreams of being an entrepreneur. This list covers the basics every business owner should know.
1. Your business and personal tax are combined if you're a sole proprietor
If you choose not to register your small business, all income and expenses are attached to you. The same is true when it comes to tax. Your business or side hustle is not recognised as a separate entity, meaning you are required to include income from your business in your personal tax return. SARS will consider the total amount (income from your business plus your salary if you are earning one) to determine the tax bracket you fall into and the individual tax rates that apply. As a business owner you must submit provisional tax returns and payments twice a year, usually in August and February.
2. When you register your company, it's registered with SARS
Once your business is registered as a legal entity (usually a private company) with the Companies and Intellectual Property Commission (CIPC), it will automatically be registered with SARS, and you should receive a tax registration number for your business. Unlike with a sole proprietorship, your business is treated as a separate legal entity and the tax is handled separately from your personal tax return.
But, as a business owner, you are still responsible for your individual tax return in addition to that of your business. In most cases, you will submit provisional tax returns and payments in August and February.
3. Turnover tax is a good option for small businesses who qualify
Staying on top of all the different tax obligations can be overwhelming. Turnover tax offers a simpler route, but it is only applicable to those small businesses whose annual turnover does not exceed R1 million.
Turnover tax replaces income tax, VAT, provisional tax, capital gains tax and dividends tax, and the rates are much lower than the standard tax systems. It is calculated as a percentage of your business's turnover, not profit. This means you won't have to keep record of all your expenses, but you will have to track all income received as well as assets and liabilities over R10 000.
You will need to make two payments in August and February based on your estimated annual turnover, and a final payment based on the actual figures during the normal tax season (between July and January the following year). You can take SARS' test to check whether you qualify for turnover tax.
4. Small Business Corporations (SBCs) get better tax rates
Companies usually pay a flat rate for income tax of 28%. Registering as an SBC affords you reduced tax rates on taxable income up to R550 000 and other benefits such as a faster depreciation allowance. But there are specific criteria for your business to qualify.
- Your annual turnover should not be more than R20 million
- All shareholders need to be natural persons (i.e. no trusts or companies)
- Directors/shareholders may not hold shares in any other private companies
- Your business has to be registered as a legal entity
- No more than 20% of your turnover can be obtained from investment income
- You may not be a personal service provider, this includes professional services such as practicing law, accounting, auditing or any other service that could see the person providing the service as an employee of the client
5. Registering for VAT is only mandatory if your turnover exceeds R1 million in a year
Should the income earned by your business in any consecutive 12-month period exceed R1 million, you are required to register as a VAT vendor. You can opt to register for VAT if you earn less as this is often a requirement when engaging with large corporates and government departments, but your annual income needs to be R50 000 or more.
Registering for VAT means adding a levy of 15% of the value of the goods or services supplied. It also allows you to claim VAT back on your expenses, but it significantly increases the amount of admin you need to do.
6. You and your employees are subject to PAYE tax
If your business has one or more employees who earn at least R40 000 per year, you are required to register your company for Pay As You Earn (PAYE) tax. Every month you should deduct PAYE from your employees' salaries and pay it over to SARS within seven days after month-end.
You are also required to issue an IRP5 certificate to your employees at the end of the tax period to summarise their income and deductions. In addition, you will have to produce a reconciliation statement displaying the total amount of tax deducted or withheld.
Note: If your payroll is higher than R500 000 per month, you need to register for and deduct the Skills Development Levy (SDL).
7. UIF registration is a must
As an employer, you need to register any employee who works for you for more than 24 hours per month with the Unemployment Insurance Fund (UIF). You are then required to pay 2% of the employee's salary (1% is your contribution and 1% deducted from their salary) over to SARS on a monthly basis.
If you have yet to register your business with the CIPC, the good news is you can register for PAYE and UIF at the same time.
8. Your expenses cannot offset your tax liability
Unless your business is loss-making, you will most likely have to pay in when completing your tax return (and you should ensure that you put money aside regularly to cover these payments). Taxable income is, simply put, your business's gross income minus qualifying deductions.
What's a qualifying deduction? Typically, a business expense incurred to be able to run your business. These include:
- Material and equipment repair costs
- Employee costs and administration costs
- Business/office rental costs
- Office supplies
- Telephone costs
- Travel and transport
- Uniforms (if needed)
- Wholesale purchase costs for goods resold
- Financial charges (such as bank fees)
- Legal fees (if not capital in nature)
- Insurance fees
- Marketing, advertising and promotion costs
- Rent or mortgage
- Rates and taxes
- Repair costs to the premises
- Education and training expense
- Client entertainment expenses
- Net operating losses carried forward from prior tax years
To be able to claim these expenses, you need to ensure that you keep records and supporting documentation.
9. Don't stick your head in the sand
There is a lot to understand and implement to ensure your business is tax compliant. And to make it more complicated, the rules, thresholds, requirements and rates change regularly. As a business owner, you should try to stay up to date with these changes. The SARS website is loaded with useful information, guides, how-to videos, updates, newsletters and FAQs to help. SARS also hosts live webinars on various topics that you might find helpful.
10. Hire a pro
But even with the information and guides you'll find, tax can feel like a foreign language - one you can hire an expert to help you translate. The fee you pay to a tax practitioner will save you money in the long term as tax errors can incur high penalties and interest. The South African Institute of Taxation is a good place to start your search for a professional, accredited tax specialist.