Started freelancing, need business advice please

[seanyp00h]

Hi All,

I recently started doing quite a few freelance jobs for guys overseas.
It's becoming a bit more serious now and it seems like I might be getting a few "regular clients".

What I'd like to know is what type of business I should register? These guys pay me via paypal and this is then transferred into an FNB acccount. I don't want the tax man coming after me so I'm thinking that registering a business and opening up a business account would be best?

I'm sure I can figure out the finer details with regards to paying tax etc. Would this be a good idea? I'm not too keen on bringing in money and hiding it from our lovely government.

Thanks

 

[Greig Whitton]

What, exactly, is your motivation for registering a business? If it's to keep everything legal and avoid any trouble with SARS, then your easiest option is to continue trading as a freelancer and make sure that you declare all of your taxable income when submitting your personal tax returns.

By the way, have you looked at any alternatives to PayPal? I highly recommend Payoneer, although only if you are doing work for clients in the United States.

 

[seanyp00h]

Well it's to keep everything legal as well as claim back on expenses, (Internet, stationary, travel costs etc).
I think it might also be easier as by having the money go into my personal account I have no way of keeping the money aside I would need to pay when doing my returns.

I work with clients from all over. I'll give Payoneer a look though.

 

[MrGray]

Just out of interest AFAIK it is perfectly legal to have an offshore bank account (and even company) for these funds as long as you declare the income locally and pay the tax. Might be a good option given the downward trend of the Rand.

When it comes to deciding whether you should continue as a company or not, it is well worth getting a professional analysis because depending on the level and source of the income, there could be long term tax advantages/disadvantages. The biggest advantage of a company is that your legitimate expenses offset your taxable income. The biggest disadvantage is the cost and time of all the bookkeeping and red tape.

 

[seanyp00h]

Just out of interest AFAIK it is perfectly legal to have an offshore bank account (and even company) for these funds as long as you declare the income locally and pay the tax. Might be a good option given the downward trend of the Rand.

When it comes to deciding whether you should continue as a company or not, it is well worth getting a professional analysis because depending on the level and source of the income, there could be long term tax advantages/disadvantages. The biggest advantage of a company is that your legitimate expenses offset your taxable income. The biggest disadvantage is the cost and time of all the bookkeeping and red tape.

How does one go about setting this up?

Bookkeeping shouldn't be too much of an issue as my income is pretty straightforward.

 

[mh348]

Depending on what Your Turnover/Profit is I think registering as a business would be better. If you within a certain threshold your business could be classified as a 'small business corporation' and your tax rate would be lower than if you trading as a sole proprietor.

Read up more on small business corporations
http://www.sars.gov.za/ClientSegments/Businesses/SmallBusinesses/Pages/default.aspx

 

[bchip]

You can claim all deductions in your own personal name (all costs relating to the business).
If the business is making a loss at some point SARS will probably just ring fence it.

My 2c is simply -
I can understand the want to keep things clean and seperate,
but quite honestly a business comes with some admin (you need to submit docs to CIPRO and SARS annually,
need to keep seperate documentation, registering everything, etc) - its not a lot of admin.
If you see yourself going down this path for a longer period then it will be worth the effort,
if you are dealing with a "once-off" client and (eg) in 2 years they go their seperate ways and you dont pursue
more clients then it will be a waste going through the effort.

The tax benefit isnt that great IMO
I know in simple terms it seems 28% corporate vs 40% individual but you still pay tax
out of the business to get it back to you (eg 15% Dividends tax or 40% PAYE)

All Im trying to say is that - A lot of these things are only beneficial if this is a longer term pursuit,
if its a short term plan then its better to do everything in your own name.

Good luck

 

[Greig Whitton]

Well it's to keep everything legal as well as claim back on expenses, (Internet, stationary, travel costs etc).
I think it might also be easier as by having the money go into my personal account I have no way of keeping the money aside I would need to pay when doing my returns..

If it's just to keep everything legal and claim back on expenses, then stick to freelancing. You can claim income-generating expenses for taxation purposes regardless of whether you trade as a freelancer or register a company. Opening a separate bank account is a good idea but you don't need to register a new business to do that.

 

[seanyp00h]

Thanks for the feedback.
Freelance tax is 40%? That's heavy.

Looking at the link SARS small business it seems that If I earn under a certain threshold I'd pay little to no tax. I think it's worth the extra admin and effort if I'm not to pay 40% of what I'm making while freelancing.

 

[bchip]

Thanks for the feedback.
Freelance tax is 40%? That's heavy.

18% - 40% is individual tax - you pay the % dependant on your total income
http://www.sars.gov.za/TaxTypes/PAYE/Pages/PAYE-statutory-rates-and-tax-tables.aspx

Looking at the link SARS small business it seems that If I earn under a certain threshold I'd pay little to no tax. I think it's worth the extra admin and effort if I'm not to pay 40% of what I'm making while freelancing

Like I said its not as simple as which one pays less, if you go the small business route
then you said need to take that money out of the separate company, when you do that
you will still end up paying the 18-40% if you take it out as a salary.
You could take it out as a dividend but to do this you need the help of a tax professional,
which also costs money.

If I was you I would stick to just doing it through your name.

 

[seanyp00h]

18% - 40% is individual tax - you pay the % dependant on your total income
http://www.sars.gov.za/TaxTypes/PAYE/Pages/PAYE-statutory-rates-and-tax-tables.aspx



Like I said its not as simple as which one pays less, if you go the small business route
then you said need to take that money out of the separate company, when you do that
you will still end up paying the 18-40% if you take it out as a salary.
You could take it out as a dividend but to do this you need the help of a tax professional,
which also costs money.

If I was you I would stick to just doing it through your name.

Ah I see now. I think I'll take your advice then and do it in my personal capacity.
I'll open up a seperate account to keep things seperate and easier to manage.

 

[Greig Whitton]

For the sake of completeness, it's worth mentioning that you have a third possible option: registering for turnover tax. However, even if you were eligible for turnover tax, there is a good chance that you will still end up better off doing all of this in your personal taxpayer capacity. Here's a nutshell summary of your three options:

1. Freelance and pay income tax in your personal taxpayer capacity. Tax rate will vary from 18% - 40% (you might even pay zero tax if you earn less than the personal income threshold). Pros: simple; easy; convenient. Cons: being self-employed is not the same thing as growing a business (but this won't matter unless you have other good reasons for starting and running an actual business).

2. Register a company (or buy a shelf company or close corporation) and register for Small Business Corporation tax (SBC). Company tax rate will vary from 0% - 28% and will work out to less than the flat 28% tax rate for companies that don't qualify as SBCs, but you will still pay personal income tax and/or dividends tax on the salary and/or dividends that your business pays you. Pros: you will be growing your own business, not working a job (but this won't matter unless you have other good reasons for starting and running an actual business). Cons: will probably end up paying more tax in total; much more administration and red tape; you may not qualify for SBC.

3. Register a company (or continue trading as a sole proprietor) and register for Turnover Tax (TT). Your tax rate will vary from 0% - 6%, but is levied on turnover (unlike income tax and SBC tax which is levied on taxable income). Pros: less administration and red tape than option 2; may end up paying less tax than option 1 or 2 (but very unlikely). Cons: will probably end up paying more tax than option 1 or 2; you may not qualify for TT.

 

[seanyp00h]

For the sake of completeness, it's worth mentioning that you have a third possible option: registering for turnover tax. However, even if you were eligible for turnover tax, there is a good chance that you will still end up better off doing all of this in your personal taxpayer capacity. Here's a nutshell summary of your three options:

1. Freelance and pay income tax in your personal taxpayer capacity. Tax rate will vary from 18% - 40% (you might even pay zero tax if you earn less than the personal income threshold). Pros: simple; easy; convenient. Cons: being self-employed is not the same thing as growing a business (but this won't matter unless you have other good reasons for starting and running an actual business).

2. Register a company (or buy a shelf company or close corporation) and register for Small Business Corporation tax (SBC). Company tax rate will vary from 0% - 28% and will work out to less than the flat 28% tax rate for companies that don't qualify as SBCs, but you will still pay personal income tax and/or dividends tax on the salary and/or dividends that your business pays you. Pros: you will be growing your own business, not working a job (but this won't matter unless you have other good reasons for starting and running an actual business). Cons: will probably end up paying more tax in total; much more administration and red tape; you may not qualify for SBC.

3. Register a company (or continue trading as a sole proprietor) and register for Turnover Tax (TT). Your tax rate will vary from 0% - 6%, but is levied on turnover (unlike income tax and SBC tax which is levied on taxable income). Pros: less administration and red tape than option 2; may end up paying less tax than option 1 or 2 (but very unlikely). Cons: will probably end up paying more tax than option 1 or 2; you may not qualify for TT.

Thanks so much for the info Greig

 

[noob_saibot]

For the sake of completeness, it's worth mentioning that you have a third possible option: registering for turnover tax. However, even if you were eligible for turnover tax, there is a good chance that you will still end up better off doing all of this in your personal taxpayer capacity. Here's a nutshell summary of your three options:

1. Freelance and pay income tax in your personal taxpayer capacity. Tax rate will vary from 18% - 40% (you might even pay zero tax if you earn less than the personal income threshold). Pros: simple; easy; convenient. Cons: being self-employed is not the same thing as growing a business (but this won't matter unless you have other good reasons for starting and running an actual business). Most important con: unlimited personal liability. Whereas the company can shield your personal assets in options 2 and 3(to a certain extent), when using option 1, any and all personal assets can be attached when in a legal situation.

2. Register a company (or buy a shelf company or close corporation) and register for Small Business Corporation tax (SBC). Company tax rate will vary from 0% - 28% and will work out to less than the flat 28% tax rate for companies that don't qualify as SBCs, but you will still pay personal income tax and/or dividends tax on the salary and/or dividends that your business pays you. Pros: you will be growing your own business, not working a job (but this won't matter unless you have other good reasons for starting and running an actual business). Cons: will probably end up paying more tax in total; much more administration and red tape; you may not qualify for SBC.

3. Register a company (or continue trading as a sole proprietor) and register for Turnover Tax (TT). Your tax rate will vary from 0% - 6%, but is levied on turnover (unlike income tax and SBC tax which is levied on taxable income). Pros: less administration and red tape than option 2; may end up paying less tax than option 1 or 2 (but very unlikely). Cons: will probably end up paying more tax than option 1 or 2; you may not qualify for TT.

1. Most important con: unlimited personal liability. Whereas the company can shield your personal assets in options 2 and 3(to a certain extent), when using option 1, any and all personal assets can be attached when in a legal situation.

 

[seanyp00h]

1. Most important con: unlimited personal liability. Whereas the company can shield your personal assets in options 2 and 3(to a certain extent), when using option 1, any and all personal assets can be attached when in a legal situation.

I don't have much to lose

With regards to threshold taxation - Is my total income calculated (So regular salary + freelance income) or are they taxed seperately?

 

[Greig Whitton]

With regards to threshold taxation - Is my total income calculated (So regular salary + freelance income) or are they taxed seperately?

You will be taxed on your total taxable income, not each taxable income stream separately.

 

[seanyp00h]

You will be taxed on your total taxable income, not each taxable income stream separately.

Ah dammit. This would push me into a higher tax bracket.