Your business and personal tax are combined if you are a sole trader
Your business and personal finances are combined when you trade as a sole proprietor. The profit you make on business transactions and salary (if you pay yourself one) are considered as your personal income.
You will then have to pay tax based on the tax bracket your total income falls into. As an individual who runs a business as a sole proprietor/trader, you are a provisional taxpayer and must submit provisional tax returns and make payments twice a year, in August and February.
When you register your company, it is registered with SARS
Once your business is registered as a legal entity (usually a private company (Pty) Ltd) 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.
Your business is treated as a separate legal entity and the tax is handled separately from your personal tax return. This is a very important principle that you must understand as a businessperson. You and your business are separate, even if you’re the only person in your business.
As a business owner, you are responsible for your individual personal income tax return and for your business. Your business is a provisional taxpayer and provisional tax returns and payments will need to submitted and paid twice a year.
Turnover tax is a good option for a small business that qualify
For a small business, staying on top of all the different tax obligations is overwhelming. Turnover tax offers a simple way to maintain your compliance. It is only available to a small business with annual turnover that does not exceed less than R1 million.
Turnover tax has much lower tax rates than the normal rates and replaces income tax, VAT, provisional tax and other forms of taxes. 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 keep record all income received as well as assets and liabilities over R10 000.
You will need to make two interim 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).
Small Business Corporations (SBCs) pay less taxes
Companies usually pay a flat rate of income tax at 28% of its taxable profit. An SBC, you pay less tax on profits up to R550 000 amongst other tax benefits. There are specific criteria for your business to qualify.
These include:
- 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
When is VAT Registration necessary
Should the value of your customer invoices/sales in any consecutive 12-month period exceed R1 million, you must register for VAT.
Registering for VAT means adding an additional 15% to the selling price of your goods or services. It also allows you to claim 15% back on certain expenses you incur. You must invest in a system to assist you keep your records in order should SARS require them from you at any time.
PAYE and UIF deductions for you and your employees
If you and/or your employees earn more than R91 250 per year (2023 tax year); R87 300 per year (2022 tax year), you must register your company for Pay As You Earn (PAYE) tax. Every month you must deduct PAYE from the relevant salaries and pay it over to SARS within seven days after month-end.
You will have to produce a reconciliation statement (EMP501) displaying the total amount of tax deducted or withheld. After that, You are must issue an IRP5 certificates to your employees at the end of the tax year to summarise their income and deductions.
If your total salaries are higher than R500 000 per month, you need to register for and pay over the Skills Development Levy (SDL) which is 1% of your total payroll.
Regardless of what amount you or your employees earn, you must deduct 1% of their salary and add another 1% from the company and pay it over to the Unemployment Insurance Fund (UIF). A monthly reconciliation is required to be submitted to the UIF and payment can be made directly to the UIF or SARS if you are registered for PAYE.
When is UIF registration necessary
As an employer, you must register your business with the Unemployment Insurance Fund (UIF). you need to register any employee who works for you for more than 24 hours per month with the UIF. You are then required to pay over the 2% (as explained above) 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 to avoid running into compliance issues in the future.
Your expenses cannot offset your tax liability
The only time you don’t pay income tax is when you make a loss. You will most likely have to pay income tax 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 is a qualifying deduction? Typically, a business expense incurred to be able to run your business.
Sticking your head in the sand, does not help!
There is a lot to understand and implement to ensure your business is tax compliant. To make it more complicated, the rules, thresholds, requirements and rates change regularly. As a business owner, you must make every effort to stay up to date with these changes. Saying you did not know will not help you with SARS nor potential customers and major suppliers. As a business owner, you are expected to keep yourself informed of the basic compliance requirements of your business.
Hire a registered Tax Practitioner
Even with the information and SARS guides you’ll find that tax can feel like a foreign language – you can hire an expert to help you make sense of it all. Your investment in hiring a tax practitioner will save you money in the long term as tax errors, late submissions and other issues can incur result in very high penalties and interest being charged and massive, yet unnecessary losses and cash flow problems for your business.
Does this seem a little overwhelming to you? Do you feel like you don’t even know where to start? Or, you don’t have the time to spend on ensuring your business is compliant?
You don’t have to feel that way.
At SBS we make your work a lot more lighter by taking care of the bookkeeping, accounting AND TAX for you. You are able to focus on running and growing your business with the time on your hands to pursue your passions and dreams.
Get in touch with us to get your business on track now.
