Contracting/consulting self employed

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InvisibleJim

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Joined
Mar 9, 2011
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I am not working at the moment since my employer went bust last month. I have got some potential contracting/consulting work but the guy is talking about engaging me on self employed basis so I can claim on expenses (presumably so that it costs him less to pay me a given take home salary and so that he has a bit more flexibility to terminate the arrangment if it doesn't work out for any reason.)

I've looked on SARS and Google about what is involved in working on a self employed basis but I'm not finding the basics on how it works (is it provisonal tax you have to register for?)

Please can someone give me the TL: DR version or point me in the direction of a link that will give me an idea of what I would be letting myself in for from a tax point of view. I would probably use a tax practioner to help with the actual returns but I want to be prepared to evaluate his offer correctly so I don't accept something that is shooting myself in the foot or with SARS.

Thanks in advance for any help
 
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hsmnel

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Jul 13, 2005
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Nothing to it. If you are paid on an invoice basis, then register as provincial taxpayer and send in a provisional return in August. If the guy is going to deduct tax, then don't register as provisional. I think you have to work for more than one source to be exempt from having tax deducted by the guy and you have to provide an affidavit to prove you have more than one source and one source does not exceed 80%. Don't need a tax person as you keep records of all expenses and claim that when using e-filing. There is enough tips in this forum to help you claim and maximize your returns. In my opinion e-filing and Google have made tax adviser sort of obsolete.
 
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Biscuit1018

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InvisibleJim said:
I am not working at the moment since my employer went bust last month. I have got some potential contracting/consulting work but the guy is talking about engaging me on self employed basis so I can claim on expenses (presumably so that it costs him less to pay me a given take home salary and so that he has a bit more flexibility to terminate the arrangment if it doesn't work out for any reason.)

I've looked on SARS and Google about what is involved in working on a self employed basis but I'm not finding the basics on how it works (is it provisonal tax you have to register for?)

Please can someone give me the TL: DR version or point me in the direction of a link that will give me an idea of what I would be letting myself in for from a tax point of view. I would probably use a tax practioner to help with the actual returns but I want to be prepared to evaluate his offer correctly so I don't accept something that is shooting myself in the foot or with SARS.

Thanks in advance for any help
Click to expand...


I own a small company and have previously run a mid size tech company (about 200 techies)

Yes you need to be careful not to shoot yourself in the foot here.
There is no 100% fixed SARS rule on this.
However if SARS disagree with your behaviour after the fact they can go after your employer and yourself.
You wont get a Tax Directive out of SARS

You are actually debating the difference between being an employee (be it fixed term or permanent) and an independent contractor

So what defines what one is
Some (not all) of the questions you need to ask yourself. No one question decides it but if in doubt you are an employee
- Will you be working on a defined organisational structure (reporting to a manager etc)? Obviously being independent means exactly that)
- Do you work on a time basis or a deliverable basis? per hour or for a task? If time based you are most likely an employee
- Do you get more than 80% of your income from one source? If more than 80% then most likely an employee
- Are you free to deliver your tasks using your own resources (even other people)?
- How long is your fixed term contract for? If its short (few months or so) then you are probably OK. If it is a series of 6 month renewals then you are most likely an employee

Now people get away with being essentially an employee but claiming expenses and paying provisional tax.

To be straight the bigger risk is on your employer. If SARS disagree with your tax treatment after the fact they will get their money. They will go after your employer and/or yourself.

If you dont push the envelope you may be fine.
However if I was consulting to your potential employer I would advise them against treating you as independent unless you were providing a specific defined service.
I wont do it unless it is truly an arms length relationship.

A Tax Consultant will help you setup and it wont cost a lot.
Google in this case is *not* your friend

EDIT : Look at Page 17/18/19 from the SARS link below
http://www.sars.gov.za/AllDocs/Lega...7 - Employees Tax Independent Contractors.pdf
 
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Beachless

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Oct 6, 2010
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6,003
One way of getting around what Biscuit has said is to team up with other contractors and start a company.
The new company then holds the contracts with the clients and you put all your expenses(car,phone,internet,golf membership etc) through that before drawing a salary.
I know some people who do that and they pay as low as 15% tax.
 
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minty203

Active Member
Joined
Jun 25, 2013
Messages
87
I am all for self-employment. Warren Buffet said something to this effect recently that I couldnt agree more with. "if you come across an opportunity, and you scared to do the deal because of how much tax on the returns you would have to pay, send that opoortunity my way"

Anyways.

Because of tougher labour legislation, companies are scared to hire people on a permanent basis. So they will hire you now, and if business goes down again, he can let you go without the red tape.

This is how tax basically works. The tax year is from March of one year to February of the next. So for this period, all your expenses are deducted from all your incomes and the difference (net profit) is what you pay tax on. The rate of tax you pay is determined by how much net profit you make, as well as the entity type (sole proprietor, company, etc).

No matter your entity type, if you are a non-salaried employee, you pay provisional tax. Provisional tax is this. There are three times you submit a provisional tax return. Six months into financial year (end Aug), at end of financial year(end Feb), and six months after financial year(end Aug again).

So at 6 months you make an estimation of your income for the whole year and you pay part tax upto there. So say your profit at 6 months was R100 000(assumption that your next 6 months income will be R100k as well) and you're taxed at 10%, you pay R10000. At Feb, you do your estimations and assume your 12 month income is now R300 000, and you still taxed at 10%, then you pay R20 000 to SARS.

In the 12-18 month period after year end, you do final calculations and see your income is actually now R270 000, then at end aug(18 months Aug here), then at this provisional tax period you pay zero Rands.

At 24 months is when your INCOME TAX RETURN is due, and your income is now a final R270 000, and your tax rate is still 10%, your total tax bill is now at R27 000. But you have already paid a total of R30 000? So now SARS will refund you the R3000.

It is a lot to absorb, and looking back at what I've just wrote, it looks like it could be confusing. Draw a time line and understand it. It is important to know.

Now, about the issue whether to go solo or with partners. I say go solo. You have got the work already, why invite the complications of partners if you dont need to?

About the entity type. Trade as a sole proprietor initially. In your personal name. No PTY Ltd, no CC. Assume your business makes a loss, and you have to start working for a salary again, the losses you made as a sole proprietorship can be offset against the income you earn from being a salaried employee for the next two years at least.

If your business makes a loss and you decide to carry on none the less and the following years, you start making a profit, then the incomes of those following years are written off against the loss making years as well. So its win win in any scenario.

About the tax. Many people dont know this, but if your business is classified as a small medium enterprise(and most first time entrepreneurs in SA are), your net profit up to a maximum of R350 000 per year is taxed at 5.8%. A salaried employee on the same income pays an effective rate of 20% tax

I highlighted, bolded, italliced because this is by far the most important point.:D Do the sums.

And get an accountant. These type of things we deal with on a daily basis. Dont be the guy who was losing diamonds while he was picking up stones.
 
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