Income Tax – Don’t Stress Yourself into an Ulcer this Tax Season
Member feature: by Corné of Virtually Centered Solutions
The tremendous need for finance and tax-related information for sole proprietors and individuals are undeniable! AND with the South African Revenue Services’ need for extra moola to make up for their horrific shortfall (again) in the previous financial year, I’m certainly not going to take any chances with my tax submissions. Income tax is a grey area and a headache for a lot of new virtual assistants, freelancers, and sole proprietors.
Transitioning from employment where all these issues were handled for you by your previous employer’s HR department, to being the Sole Proprietor or business owner responsible for declaring your business activities to the South African Revenue Service can give you an ulcer – if you don’t know at least the basics.
In this blog, we’re going to look at what you should know when you’re first starting out, not just from a pay-Caesar-what-you-owe-him perspective, but especially from an optimization point of view. I wholeheartedly agree with paying Caesar, but not one cent more than I must.
If you’re 100% Self-employed
# 1 Paying Caesar
So, what do you need to pay the proverbial Caesar, in our case the South African Revenue Service or better known as SARS?
If you’re a sole proprietor (or individual) you’ll first of all need to be registered as a provisional taxpayer. Sole proprietors are personally liable for all business debts and will pay tax according to their personal income tax rate on the profits of their business. Business profits will need to be included in the owner’s ITR12. Lastly, you need to keep in mind that personal income tax works on a sliding scale, which means the more you earn the more tax you’re liable to pay.
Jargon-free this means if you’re a self-employed, work from home individual/ sole proprietor all the income you receive will be taxable because it will all be seen by SARS as profit – except if you’ve got business and/ or home office expenses.
This is the fun part! This is where you can determine which of your business expenses are in fact deductible, so you’ll only be paying tax on your actual profit – and not a cent more this tax season!
Determining if you can deduct home office expenses
Please answer the following questions:
- Are you employed by an employer? Answer – No
(Tip: If your answer is yes, this section is not for you)
- Do you work for yourself? Answer – Yes
(Tip: You don’t work for a company that deducts PAYE from your income)
The good news is – Yes, you may deduct all your home office expenses.
#2 Calculating what is deductible
Direct business expenses are 100% deductible.
Isn’t that awesome news! That means any expenses that you specifically incur to enable you to do your work is deductible from your taxable income.
These types of expenses could include (but are not limited to) the following:
Laptop
Desktop
Monitor (s)
Printer
UPS
Desk
Office Chair
A filing cabinet or other office equipment and furniture (shredder, laminator etc.)
Hardware – Internet installation (if it is installed specifically for business purposes)
Internet Wi-Fi Subscriptions
Stationary
Paper
Subscriptions, Software & programmes to manage and perform your work
Repairs & Maintenance (i.e. Wi-Fi equipment/ printer/ computer etc.
Telephone Costs
Home Office Expense – a calculated percentage is allowed as a deduction
For this part of the deduction, you need to do a simple calculation.
Office space: Rent, Mortgage Bond, Interest, Rates, Water & Electricity, Repairs to the Office, Cleaning Staff Expense, Short Term Insurance
Example:
Tumi operates her virtual assistant business from home. For this purpose, she has a dedicated area (her study) that serves as her office and is exclusively used for this purpose.
The surface of their house is 240m2. Tumi’s study/ office surface is 4m x 3m = 12m2
(12m2 / 240m2) x 100% = 5%
The percentage that Tumi can deduct for her office space expenses are 5%.
For the household:
Rent R 7,000.00
Water R 500.00
Electricity R 1,500.00
Cleaning Staff R 2 000.00
Short Term ins R 400.00
Monthly Total for the household – R11,400.00 x 5% = R 570.00 p.m.
Tumi may deduct R 570.00 p.m. for her office space
In Conclusion
So now that we’ve looked at your deductible business expenses you may realize with a shock that you didn’t keep track of your expenses during the financial year as you should have.
If that’s the case, please don’t deduct any of the expenses which you don’t have supporting documents for when submitting your tax return. Why? Cause SARS just loves auditing these types of returns and to be truthful they’re often flagged for auditing. And it’s definitely not worth it to get flagged cause you didn’t have your paperwork in order!
Rather make sure that you set up your business process for your finances, so you’re not caught unaware again!
Disclaimer: This blog by no means claim to give tax or financial advice of any nature. Please refer to the SARS official website or visit your tax practitioner should you have any enquiries.
For more on Corné and how her business Virtually Centered Solutions can assist you, please do visit our members page.