Starting your small business, and successfully getting it off the ground is no easy journey. Even after moving on from startup phase, there will still be numerous challenges that pop up, taxes being an area SMEs tend to neglect.
Handling your taxes can be one of the most daunting parts of running your own business. If not managed correctly, it could severely damage your business - putting all your dreams of being an entrepreneur at risk. In our small business tax guide, we aim to give SMEs the right tools and knowledge to succeed, understanding taxes being one more thing to tick off.
What is small business tax?
Small businesses are the backbone of the economy. They produce goods and services, create jobs, and contribute to economic growth. But, in order for them to grow and thrive, they need a business environment that is conducive to their needs. And this means that they need tax policies which are fair, competitive and promote economic growth. Small business tax falls under Corporate Income Tax (CIT), which according to SARS is a tax imposed on companies resident in the Republic of South Africa i.e. incorporated under the laws of, or which are effectively managed in, the Republic, and which derive income from within or outside the Republic. Non-resident companies which operate through a branch or which have a permanent establishment within the Republic are subject to tax on all income from a source within the Republic.
In other words, if you operate a business within South Africa, whether that is a South African business or not, you will need to pay tax on all income. All SMEs that are registered under the ordinary small business tax system will need to pay provisional tax, which means that your tax liability will be spread out over the assessment period (we will explain this a bit further down).
How do I register for tax as a small business owner?
The first step when starting a business in South Africa, is to register your company with the Company and Intellectual Property Commission (CIPC)
on www.cipc.org.za. Once you’ve done this, SARS will automatically generate a Company Income Tax (CIT) reference number for your business. As the business owner, you will then need to register this information on SARS eFiling, and update your company details.
Different types of small business tax
As a small business owner in SA, there are different types of tax you may be liable for, this depends on your business type, size and industry you operate in. There are varying types of small business tax (you may be liable for more than one), these are:
If your company makes a profit, you will be liable to pay annual income tax.
Essentially this is your income tax, however, your annual tax payment is broken up into two (or three) payments, The aim is to make sure the taxpayer does not pay a large tax debt on assessment, instead the payment mechanism With provisional tax, you’ll need to pay two amounts in advance, during the year of assessment, this will be based on estimated taxable income. A third payment is optional after the end of the tax year, but before the issuing of the assessment by SARS.
Capital gains tax
This type of tax is levied on the sale or disposal of company assets e.g. property, where the proceeds of the sale are greater than the asset’s base cost. Capital gains tax is a type of income tax.
If you have shareholders, and they receive dividends from your company, they will be taxed on these dividends.
If your company’s annual income is over R1 million, you’ll need to register for VAT. If you have a lower income, you can still register, but it’s optional. Value-added tax is a tax on the consumption of goods or services.
This is a simplified taxation system introduced by SARS, it’s aimed specifically at small businesses who have an annual turnover of less than R1 million. Turnover tax takes all the tax payments owed to SARS and combines them into a single payment. This is an optional tax payment mechanism, for lower earning small businesses.
How much tax do small businesses pay in South Africa?
In South Africa, generally small business tax range from 7% to 28%, in addition to a lump sum payable.
How do I calculate how much tax I owe as a SBC (small business corporations)?
*Year of assessment 2022
Understanding employee tax
If your company has grown to a size where you’ve decided to hire staff, you’ll need to register as an employer with SARS. After this, you will be expected to pay PAYE, UIF and SDL. In a few quick steps, you’ll be able to do this via e-filing makes this very easy to do with Should you decide to employ staff, SARS may require you to register as an employer in order to pay over PAYE, UIF and SDL. You can do this quickly and easily online via eFiling, by changing your profile from ‘Individual’ to ‘Organisation’, and continuing with the registration on the RAV01.
PAYE (Pay as you earn)
According to SARS, PAYE will be paid by an employer (on the employee’s behalf), if the employee earns more than R 91 250 for the 2023 tax year. Below is a breakdown for PAYE.
*Year of assessment 2022
UIF (Unemployment Insurance Fund)
In addition to PAYE, employers in South Africa are required to pay UIF. If any of your employees are contracted to work more than 24 hours in a month, as the employer you’ll need to pay UIF to SARS every month. UIF is 2% of the employee’s salary – this is broken down into 1% from the employee, and 1% contributed by the employer.
SDL (Skills Development Levy)
The aim of the SDL, is to encourage education, upskilling and development in South Africa. SDL is a levy is imposed if your salaries per year are more than R500 000. These funds are used to develop the skills of your employees. It is 1% of the total amount paid in salaries to employees. E.g. if you pay R1 million in salaries, you’ll pay R10 000 towards SDL.
Once you’ve registered for your employee tax obligations you’ll need to submit the EMP201 via e-Filing.
How do I file my corporate income tax?
First, you’ll need to register as a taxpayer on SARS, as every business in South Africa is required to do so under the Tax Act, 1962. As a small business owner, it’s your responsibility to make sure the business details are up to date before you submit your ITR14. SARS give a simple overview of how to keep your business details up to date.
Next, you’ll be required to submit an annual tax return at end of the financial year. Returns can be submitted electronically via e-filing or manually at a SARS branch where you registered. In addition to this, you’ll need to submit a provisional tax return. This type of return is submitted every six months and must contain estimated figures of total revenue earned for that period and to pay over taxes in respect of the income estimated for that period.
Frequently asked questions about small business tax:
FAQs created in collaboration with TaxTim.
How do I register for provisional tax?
According to TaxTim, if your company has been issued with a tax number, you are automatically registered for provisional tax. However if you want to submit your provisional tax return via eFiling, then you will need to follow these steps:
Log into your eFiling profile, select the applicable "Portfolio" and "Taxpayer" click on "Organisations on the top menu, then select "Organisation", "TaxTypes" and "Manage Tax Types" on the left menu bar then select the “Provisional tax” tax type, scroll down and click on “Submit”, this will be sent to SARS for approval and they will activate the tax type within 48 hours.
If you’d like to find out more about provisional tax, read TaxTim’s full breakdown.
How can I pay my corporate income tax?
Once you’ve filed your corporate income tax, you’ll need to pay SARS. Here are a couple of ways
- Online Banking
- By cheque, limited to payments of R500 000 or less (all cheques to be made out to the “South African Revenue Service” and marked “not transferable”)
- Bank payment
- Swift payment method (applicable only to foreign payments).
When do I need to pay my provisional tax?
2022 tax year: First provisional tax payment was due 30 Aug 2021, 2nd payment was due 28 Feb 2022 and the final tax payment is due 30 Sep 2022.
2023 tax year: First provisional tax payment was due 30 Aug 2022, 2nd payment is due 28 Feb 2023 and the final tax payment is due 30 Sep 2023.
How do I file my personal income tax?
Much like your corporate income tax there are a number of steps you’ll need to follow. If you earn a salary from the business you own, you will need to file your personal income taxes. If you’d like to find out more on how to do this read more on Fincheck Academy.
What if I hire a freelance worker or contractor, do I have to pay tax?
In short, no. As the business owner, you are bound to make use of freelancers and independent contractors at some point in time. Because this is project-based work, you do not need to deal with PAYE & UIF. Independent contractors and freelancers will need to handle their own individual taxes. However, as the sole proprietor, you may choose to pay PAYE based on certain conditions.
Which business expenses are tax deductible?
Any expenses that assist your business operations are considered business expenses. In order to deduct these expenses from your taxes, your business will need to be operational.
A couple of common tax-deductible business expenses include: internet, printing and stationery, office equipment, office rent, security, entertainment (related to the business only) etc. SARS keeps a close eye on SMEs trying to claim their expenses are business-related when in fact they are for personal use. In order to deem something a business expense, your account will need a record of these expenses, so be sure to keep track of your invoices and receipts. Mainly because of COVID, work-from-home expenses in certain situations are also tax deductible. If you’d like a full breakdown of which home office expenses are tax deductible visit the SARS website.