Tax options for freelancers
During periods of weaker economic growth, companies are more open to using freelancers or contractors to reduce their cost-to-company spend. It also creates employment in an economic environment where employers are less likely to hire fulltime staff as it allows them to be more flexible in terms of employing the skills they need when they need them. Freelancers, in turn, have the flexibility to adapt their work hours to suit their lifestyles.
Whether you are a freelancer by choice or necessity, understanding your tax obligations is important. Far too many freelancers land up in financial difficulty as they have not made provision for their tax.
Lesedi Seforo, Project Manager: Tax at the South African Institute for Chartered Accountants (SAICA) offers some advice as to the best tax practices for freelancers.
From a tax perspective however, it may not make sense for a one-person consultancy to register as a company unless the company has at least three employees. Seforo says the main consideration as far as income tax is concerned has to do with the rate of tax levied on a company versus a sole trader.
Most freelancers use the fees they charge as their income and do not necessarily reinvest in the business, as the nature of their business does not require capital. In this case, Seforo says the tax effect is neutral as no income tax will be paid in the company on this amount as the full salary would be a tax deduction.
The scenario is different if the individual wishes to reinvest some money back into the business. For example, a consultant registered as a sole proprietor earning R1 500 000 profit that he or she wants to reinvest in the business, will pay about R520 000 in income tax. If the owner-manager formed a company and kept the money in the company, the company would pay a lower company tax rate of 28% – so about R420 000 income tax is payable.