How do I declare business income for tax?

When you start a small business or create your own income stream, your first profits are hard-won. It is hard to come to terms with the idea that you should pay some of it over to the tax authorities.

But whether you earn income as a salary, as a freelancer, consultant, independent professional or by selling goods or services, you are obliged to pay tax and failing to declare your income for tax purposes is a criminal offence.

Failing to declare your income for tax purposes can create many problems for you. As you grow into offering your services more widely or your business becomes bigger, you may need finance and/ or want to pursue bigger contracts.

That is when you could be asked to prove your tax compliance and setting things right after-the-fact is likely to be more costly than doing them right from the beginning.

The South African Revenue Service (SARS) receives information from institutions like your bank and may therefore become aware that you are earning.

If you are earning money doing work on a freelance or contract basis with a South African company, it might add you to the payroll, deduct a withholding tax and provide an IRP5 at the end of the tax year to you and to SARS, which will then be aware of your earnings.

SARS can use the information it receives to assess your income and the tax you owe if you fail to file a tax return.

It can also investigate your income and the tax you should have paid in previous tax years, impose penalties and charge you interest.

How to comply when trading in your own name

If you are doing business in your own name or in a partnership, you need to be registered for tax and declare your business income.

If you are already registered for tax because you were previously employed and you are operating the business in your own name as a sole proprietor, there is no need to register again.

In the Local Business section of your personal income tax return, declare:

• The income you receive before any deductions – your gross income or business turnover;
• The cost of any sales you make; and
• The expenses you incurred to earn that income.

Your return will reflect the profit your business activities have made.

You will be asked to declare any partnerships you are in and the profit will then be split between the partners accordingly.

The income you declare, less the expenses that SARS allows as a deduction, will be taxed according to the tax tables at your marginal tax rate. Read more: How do the income tax brackets work and what is my marginal tax rate?

If your business is a micro business, you can also register it for turnover tax – see below.

If you earn more than the tax threshold from your business or your freelance work, you may be liable for provisional tax. Check the tax threshold here. Read more: What is provisional tax? and Should I be registered for and paying provisional tax? 

How to comply if you register a company

When you have registered a company with the Companies and Intellectual Property Commission (CPIC), the company must be registered for tax in its own name.

Your gross income or turnover must be declared, and you can deduct the cost of sales and expenses incurred in the production of income. The resulting net profit is then taxed at a flat rate of 28%.

However, there are two alternative ways in which your small business could choose to be taxed as long as it meets the qualifying criteria:

1. Micro businesses can pay turnover tax

Turnover tax is a simple tax system designed to make things easier for the owners of smaller businesses as they only have to declare their turnover or revenue for the year.

Your turnover must be less than R1 million for the year.

You can pay turnover tax whether you are running your business as a sole proprietor, partnership, company or close corporation (CC).

How it works

• You need to register for this tax at the start of the tax year.
• You don’t have to record all your business expenses or claim tax deductions – you only have to declare your turnover or business revenue.
  • You don’t have to register for provisional tax but you must declare your turnover (or estimated turnover) twice a year – the first time six months into the tax year on the last business day in August, and the second on the last business day of February.
    
    
  • Thereafter you must file your income tax return during tax filing season in the following tax year and declare your final turnover. If you need to, you must pay in any difference in tax on your final turnover.
    
    
  • The tax rate that applies depends on how much your turnover is, increasing as your turnover increases. There is an initial amount that is tax free. Then there are three tiers, where tax rates of 1%, 2% or 3% apply, depending on your turnover. Check the latest rates in the tax tables.
    
    
  • You can’t use the turnover tax system if you are what is known as a personal service business, providing a professional service to a company as a contractor and getting paid regularly. Earning more than 80% of your income from that contractor and employing less than three people means you are personal service business.

You may be regarded as providing a professional service in any of these fields: accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting, draftsmanship, education, engineering, entertainment, health, information technology, journalism, law, management, performing arts, real estate, research, secretarial services, sport, surveying, translation, valuation or veterinary science services.

• You can decide whether or not to register for Value Added Tax (VAT).
  
  
• If you make any capital gains, you must declare 50% of the gain as part of your turnover.
  
  

2. Register for small business tax concessions

If your business is registered as a company or close corporation it must also be registered for tax and will pay tax on profits at a flat rate of 28%.

However, if your business is either a private company, close corporation, co-operative or personal liability company, it may qualify as a small business corporation that is entitled to certain tax concessions.

The qualifying criteria are:

• The annual gross income of the business may not exceed R20 million;
• The shareholders of the business may not be shareholders in other unlisted companies;
• All shareholders must be individuals or natural persons – that is not a trust or another company;
• The business may not earn more than 20% of its income from investments or by rendering a personal service (with some exceptions).

Small business corporations are taxed at rates of 0 to 27%, depending on how much taxable income they earn.

Taxable income below a certain threshold attracts no tax, income earned above that threshold attracts tax at 7% until the ceiling for that income band, when tax at a rate of 21% applies. Above a certain threshold for these companies, all income is taxed at the company tax rate of 27%.  Check the latest rates in our tax tables.

In addition to favourable tax rates, small business corporations can claim deductions for depreciation on certain assets at an accelerated rate.

If the assets were used in manufacturing or a similar process, you can depreciate 100% of the cost in the tax year in which the asset is first used.

Other qualifying assets can be depreciated as follows:

• 50% of the cost in the year of assessment in which the asset was first used;
• 30% in the first succeeding year, and
• 20% in the second succeeding year.