Freelancing - Tax related

[CT_Biker]

I would like to know what are the tax related issues with free lancing while being employed full-time.

Is a second salary taxable even though it may be infrequent? Would it be better to register a small business and try and keep my total earnings below R79k as those business are not taxed. I do know that any income higher than that is taxed at 7%.

Are there any other tax/earning related issues or challenges I should expect? Should I go an consult an account regarding this?

 

[JayM]

Declare the additional income on your tax return and pay the tax. If you go the small business route with SBC tax rates, you will still have to pay tax when you pay yourself from that business. If you pay it out entirely as dividends you will only incur 20% tax, but SARS will start asking questions as to whether it really is a business and not just a tax dodging scheme.

 

[CT_Biker]

Declare the additional income on your tax return and pay the tax. If you go the small business route with SBC tax rates, you will still have to pay tax when you pay yourself from that business. If you pay it out entirely as dividends you will only incur 20% tax, but SARS will start asking questions as to whether it really is a business and not just a tax dodging scheme.

I hear you. I did want to try and avoid additional taxation, but rather safe than sorry.

Are there any documents I would need apart from my usual IRP5 to prove how my additional income was earned?

 

[JayM]

I hear you. I did want to try and avoid additional taxation, but rather safe than sorry.

Are there any documents I would need apart from my usual IRP5 to prove how my additional income was earned?

Nope, just keep track of how much you've been billing and add that amount as additional income in the correct section of your tax return. After your first year or two, SARS may decide that you're a provisional taxpayer, and that's when things get complicated, especially if you earn an unpredictable amount on the side.

 

[konfab]

Declare the additional income on your tax return and pay the tax. If you go the small business route with SBC tax rates, you will still have to pay tax when you pay yourself from that business. If you pay it out entirely as dividends you will only incur 20% tax, but SARS will start asking questions as to whether it really is a business and not just a tax dodging scheme.

The advantage with small business route is that you get the lovely concept of business expenses. So if you want a new computer, or want to repair your car, you can do it through the business and pay zero tax.
The other advantage is that you can get other people to carry your tax burden. If your partner earns less than you, you can simply register them as an employee and pay their salary along with the income tax with that. Since they earn less than you, you will pay less tax overall. Bonus points is when your partner is a stay-at-home-mother-to-be and isn't working. Then you can get all that extra work you are doing at their tax rate, which will be quite low.

@CT_Biker
If you are getting a second income already, I would suggest opening a business to do it with and getting an accountant to help you. They will tell you whether it is worth it or not.

 

[JayM]

The advantage with small business route is that you get the lovely concept of business expenses. So if you want a new computer, or want to repair your car, you can do it through the business and pay zero tax.

Assuming it's 100% justifiable, then yes it can be put through the business. I've done the whole side-hustle-into-self-employed thing, and SARS is definitely looking at things more closely now. I always did things 100% by the book and they still queried stuff.

 

[konfab]

Assuming it's 100% justifiable, then yes it can be put through the business. I've done the whole side-hustle-into-self-employed thing, and SARS is definitely looking at things more closely now. I always did things 100% by the book and they still queried stuff.

Do agree, you do have to be careful.
Your accountant will know what generally gets scrutinised and what doesn't. For example, claiming fuel use through the business raises red flags immediately. Buying a new computer doesn't.

 

[CT_Biker]

@CT_Biker
If you are getting a second income already, I would suggest opening a business to do it with and getting an accountant to help you. They will tell you whether it is worth it or not.

I will definitely look into this as I do know of an account I can consult with for free.

 

[konfab]

I will definitely look into this as I do know of an account I can consult with for free.

They can do the calculation very easily, so for an initial consult it should be fine.
However, if it becomes ongoing, getting them on board just to help you out with what is worth your while to charge for a business expense and what isn't is well worth the money.

Then again, my accountant is probably the most expensive one in the world as I had to hand over half the value of all my assets to her for her continued advice .

 

[Thor]

Bonus points is when your partner is a stay-at-home-mother-to-be and isn't working. Then you can get all that extra work you are doing at their tax rate, which will be quite low.

I'm pretty sure that is fraud

 

[ArmatageShanks]

Just shh and all till be alright.

 

[CT_Biker]

I'm pretty sure that is fraud

I ignored that. Gay, no plans of getting marred by circumstance(married) or shacking up with a partner, unless said partner is exceptional and doesn't mind me keeping 99% of financials a secret until i die.

 

[CT_Biker]

Just shh and all till be alright.

Ethically if I do not mind accepting cash-in-hand, but with a lot of freelance work that I can tender my skills for I will be paid electronically. Unfortunate, I know.

I wanted to look into avoiding tax, but I think income compounding and good investing will be the easiest viable solution, although the pay-day will come years from now.

 

[Thor]

I wanted to look into avoiding tax

Death and Taxes.

 

[konfab]

I'm pretty sure that is fraud

Just shh and all till be alright.

It isn't.

If you do your work through the business, have a business bank account and send people an invoice, you can choose exactly how much you can pay yourself. You can pay yourself nothing if you want to. You can also choose to pay whomever you want to as tax paying salaried employee for whatever work you want them to do. I even have the benefit that my company's accountant is my wife, so she is actually doing legitimate work for me anyway.

So yes, theoretically, you could get some random homeless person off the street, register them as a salaried employee for R8000 a month, give them R2000 a month and keep the rest for yourself. SARS would have no problem with that. All they are concerned with is that the taxes you pay for a person is what you are declaring as their income.

However, if said hobo gets smart, they would realise that they are legally entitled to the full R8000 a month you are declaring as their income. Which means that they would be able to take you to the labour court for not paying their salary into and you would be screwed as you wouldn't have the records to show that you paid them all the money they are legally due, which means that you would have to pay them the difference of all the money you haven't paid them. This is why SARS requires employees to be sent an IRP5 to show them how much tax they are liable for.

This also balances out at a point as there is only so much you can declare like this until your employees are paying as much tax as you would have anyway by paying the corporation and dividend tax.