Starting a side hustle business can be a great way to supplement your income, but it can also come with additional tax obligations.
Failing to comply with these laws could result in hefty fines, legal penalties, and other financial consequences.
Here are some tax tips to help you navigate the process and ensure your side hustle complies with South African tax laws.
Register your business with SARS
Yes, even side hustles need to be registered with the South African Revenue Service (SARS)–even if you don’t make a profit from it (yet) and especially if the combined income from your day job and side hustle takes you above the tax threshold.
The registration process is relatively simple and can be done online via the Company and Intellectual Property Commission (CIPC) website.
Once you have registered, you will be given a Company Income Tax (CIT) reference number, which you will need for all tax-related dealings with SARS. You will also use this number to register for eFiling.
You can also trade as a sole proprietor, but you’ll have to demonstrate that you’re running a business.
Understand your tax obligations
As a side hustle business owner, you must pay income tax on your profits.
You may be liable for provisional tax. Provisional tax is an estimate of your tax liability and must be paid in two instalments during the tax year.
Provisional tax tips:
- Set aside a portion of your income to pay provisional tax in August and February.
- Save this money in an interest-bearing savings or investment account and start to build wealth.
- Increase this amount when you start charging VAT (which you’ll add to your invoices).
- There is a 3rd voluntary payment, within six months of the end of the year of assessment (or 30 September if you have a February year-end), topping up the two payments if they are insufficient.
If your side hustle earns more than R1 million a year (taxable supplies), you must register as a value-added tax (VAT) vendor. If your business makes less than R1 million taxable supplies, but more than R 50 000, you can register for VAT voluntarily.
Familiarise yourself with these tax obligations, and ensure that you are paying the correct amount of tax at the right time.
Keep accurate records
Keeping accurate and complete records of your income and expenses is essential for completing your tax returns. This will also make it easier to calculate your taxable income and ensure you only pay tax on what you actually earn.
Keep a detailed logbook of business trips and phone calls. Write down the odometer reading before and after your journey, the total kilometres travelled, and the reason for the trip (e.g., client dinner). Do the same with your cellphone account. Separate business and private calls and Internet usage or have different numbers for business and personal use.
Knowing how much money is coming into and leaving your business is critical for cash flow forecasting. Sage links directly and securely with your banking account and automatically pulls transactions into your accounting system, giving you an instant overview of your financial position. You can also scan and store cash receipts in Sage, so everything is in one place.
Maximise deductions and claim expenses
There are several deductions and allowances available to you that will reduce your tax bill. This can include travel, home office expenses, and other business-related expenses, like equipment and supplies.
If your side hustle isn’t profitable in the early stages, you can still claim allowable tax deductions for expenses related to your business to help recover some of your losses. These deductions can help you grow your side hustle and even reduce some of the tax you pay on your primary income.
Losses may be carried forward indefinitely, but for the financial years ending on or after 31 March 2023, the assessed loss utilised is limited to the higher of R1 million or 80% of the taxable income for that year.
Have separate bank accounts for your business and personal expenses. Pay yourself a salary, and don’t use your business account to cover personal costs. SARS scrutinises entertainment expenses, so you can claim for taking a client out for dinner but not for date night with your partner.
Make sure you keep receipts and invoices for all expenses so that you can claim them when you file your tax returns.
How to declare your side hustle income
You need to record any income earned from your side hustle in the Local Business section of your personal income tax return (ITR12).
This income will be added to your employment income and taxed at your marginal tax rate, according to the standard tax tables.
Remember that adding your side hustle income might push you into a higher tax bracket, which means you’ll also pay more tax on your salary. But paying more tax is a good thing—it proves that your business is growing.
Don’t try to hide it
Some people try to hide their extra income from SARS, but this is never a good idea.
SARS uses various sources such as bank records, property deeds, motor vehicle registrations, lifestyle audits, and even cross-referencing with Airbnb listings to identify taxpayers who fail to declare their income and wealth, both locally and overseas.
If you do freelance work for a South African company, that company will have to declare any money paid to you and any Pay-As-You-Earn (PAYE) tax deducted. It will also issue you and SARS with an IRP5, so SARS will have a record of your additional income even if you don’t report it.
If SARS suspects any irregularities, it may examine the current year’s earnings and previous years’ earnings, even if they have already been finalised. If concealed income is discovered, you could be fined up to 200% of the tax owed, plus interest.
It’s not worth taking the risk and neglecting your tax obligations, as it can negatively impact the growth of your business.
Forgot to declare?
SARS offers a voluntary disclosure programme that lets you disclose your tax defaults without penalties or prosecution.
Speak to an accountant
If you are unsure about the tax laws and regulations that apply to your side hustle business, it may be a good idea to speak to an accountant who can help you understand your tax obligations and can ensure that you are complying with all the relevant laws and regulations.
Starting a side hustle business in South Africa can be a great way to supplement your income, but it’s essential to understand your tax obligations and take steps to comply with the tax laws. By following these tips, you can ensure that your side hustle stays on the right side of the law and avoid any financial penalties or legal consequences.
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