Paying tax for small businesses in South Africa may seem like a daunting task, but once you are equipped with the knowledge, you will think otherwise. Once your small business exceeds certain tax thresholds, SARS treats your business tax as one and the same as everyone else, there are no exceptions. It is better to know your tax standing beforehand.
Tax Responsibilities of Businesses
All businesses are required by law to pay taxes and maintain a record for cases of tax returns. It is their obligation to register, pay their taxes on time and file accurate tax returns. It helps to have a dedicated accountant who understands the laws surrounding taxes and can handle the responsibility thus having your taxes submitted accurately and on time.
The responsibilities of a sole proprietorship are different from that of a Partnership or a Private company. The tax for small businesses does vary.
Proprietorships are defined as small-scale and owned by self-employed persons.
Partnerships have a minimum of two shareholders, each taxed individually.
Co-operative, public or private companies are required to register with the Company and Intellectual Property Commission (CPIC). While they may have a founder, they are usually comprised of a group of people with common interests and the company is taxed separately. Generally, they contribute the most to tax.
We’ll look further into some relevant South African tax information for small businesses in this blog.
What are tax returns?
Having the correct knowledge of tax for small businesses means knowing the ins and outs of tax returns. Above all else, tax returns are prepared documents of income and expenses. They hold your financial information, and dates of scheduled payments and allow you to collect refunds for overpayments of tax.
If your business doesn’t have a dedicated bookkeeper or accountant to do the job, consider outsourcing to a reliable firm. Their bookkeepers help manage invoices and all financial statements while keeping you compliant. With their accumulated knowledge, outsourced accountants can help you decide whether a refund or rollover suits your financial situation. This is done via eFiling.
Know your taxes
There are many different types of tax, however, not all apply to business. Taxes such as personal income tax (PIT) is paid by the individual and remains their sole responsibility. Regardless of their role in a partnership or other entity, their business tax needs to be declared on their PIT form. Then there is PAYE which is tax paid on behalf of the company before paying the employee’s salary.
Let’s discuss some more relevant taxes concerning businesses.
Corporate income tax (CIT)
CIT tax applies to the profits at a flat rate of 28%. The rate of tax for small businesses could potentially be lower if you meet SARS criteria for an SBC. Overall, business expenditures usually lower the rate and companies are allowed a 6-month extension when filing their tax returns, upon accepted requests. CIT is paid every year while small businesses have a leeway of 12 months after the tax year.
Put simply, it is an estimated down payment of yearly taxable income CIT. It is paid twice annually: around the six-month mark and again come year-end. You can get a refund if you are in excess of your paid estimations.
Pay As You Earn (PAYE) tax
PAYE is tax that is taken from your employee’s salary and paid within seven days of the deduction. This tax is paid every month before the 7th. Along with PAYE, there are a few other tax registrations a company may have to submit. Such an example is the tax for small businesses & corporations.
Dividends, or select portions of a company’s profits, are distributed among shareholders. The company withholds a flat rate of 20 percent to be paid as tax.
Small business corporations (SBC) tax
If the turnover for small corporations doesn’t exceed R20 million, they may qualify to pay tax at a reduced rate. There may be no need to go looking for a reduced rate of tax for small businesses, as this rate may be applied automatically upon meeting registration requirements.
The more volatile tax in comparison to the rest. In simple terms, it can be viewed as a user fee. An example would be the long-term negative effects of sugary products which could lead to hospitalisation. The “extra fee” would contribute to government hospitals.
VAT (Value Added Tax)
VAT is a standard tax indirectly applied to goods and services, paid monthly or bi-monthly before the 25th, within an economy. Upon registration, you will know your VAT period. In South Africa, the rate of tax for small businesses is 15% as of 2023.
Turnover tax (TOT)
TOT simplifies the burden of tax for small businesses with a turnover of under R33,500. It reduces administration and makes compliance easier. This tax replaces a few of the above-mentioned taxes, and it is best practice to check with a chartered accountant for turnover tax information regarding small businesses.
If a company doesn’t exceed the VAT threshold, when paying TOT, they have the option to register for VAT.
When it comes to Value Added Tax (VAT), there are two main categories: compulsory and voluntary. With laws regarding electronic invoices and submitting tax for small businesses online, it is wise to consult accountants who have access to the latest accounting software and understand the implications within the process.
If turnover exceeds or expects to exceed the local threshold of R1 million within twelve months, you are eligible to register.
However, when your business’s turnover exceeds or expects to exceed R50k in a twelve-month period, then you have a choice to register for VAT within 21 days of exceeding the threshold.
For more info on how to register for VAT, visit the SARS page on VAT registration.
Tax exemptions and deductions
Taxes for small business corporations (SBC) and micro businesses differ. The turnover threshold amount on income tax for small businesses is R70 700, which means you won’t pay tax on profits below this amount. Small businesses are exempt from tax if they are below certain thresholds.
Deductions in South Africa can be any number of small business expenses, such as educational or training expenses and maintenance expenses all the way from costs on email domains to office repairs and asset depreciation. There are a whole host of expenses that a qualified accountant can help you identify.
Lastly, you may be asking yourself; “When and how do I pay taxes?”. With the laws being updated, they make it possible to pay your tax online with SARS eFiling. Visit the SARS website for more information although an outsourced accountant can handle this responsibility. Most taxes are paid annually. If you have a certified chartered accountant on your payroll, they will know the deadlines and ensure your taxes are paid on time.