minty203
Active Member
This is a repost of the question asked here and my reply. Hope it helps other aspirant entrepreneurs. Check out the post for other highly informative user's replies.
http://mybroadband.co.za/vb/showthread.php/552109-Contracting-consulting-self-employed
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.
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.
http://mybroadband.co.za/vb/showthread.php/552109-Contracting-consulting-self-employed
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.
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.
