Merchant Capital

Tax For Small Businesses: What You Need To Know

Tax can be baffling, but if you own a small business it is an essential part of running and maintaining smooth and legal operations. So where do you start? We have rounded up the main aspects that you need to know in order to ensure you are on top of your small business tax.

How do start-ups comply with tax requirements?

First, you need to arm yourself with knowledge. If you can’t afford external advice, you could also begin on the SARS website which is quite helpful. Small and medium-sized business may have very different tax requirements so the best place to start is by identifying what you need to register for, by understanding what your sales are on an annual basis and whether you have employees. For companies with high sales you will need to register for Vat (value-added-tax) and if you employ anyone you need to be registered for PAYE (pay-as-you-earn). Once this is in place, it governs what you owe to SARS, and you will have various tax responsibilities on an annual or semi-annual basis.

What is tax registration?

As soon as you start your business, you are obligated to register your business with your local SARS office and get an official income tax reference number (within 60 days after commencing business). It is done by completing an IT77 form from the SARS website or your local SARS office). This may be a CC or private company which needs to be registered with the Registrar of Companies and Close Corporations to get a business reference number. Now your business is automatically registered as a taxpayer. You also now need to have a clear picture of factors like payroll amounts, turnover, and if imports and exports apply, in order to understand if you are liable for other levies, duties and contributions in any given financial year.

How does my small business register for Turnover Tax?

Turnover Tax is directed at a specific part of the small business community. It is a simplified tax system for small businesses with a turnover of up to R1 million per annum. It is a tax based on the turnover of a business and is available to partnerships, close corporations, companies, sole proprietors (individuals), and co-operatives. This is a substitute for Provisional Tax, Income Tax, VAT and Provisional Gains. Here you can pay a single tax which is elective if you qualify. It is a very attractive tax and relatively easy to register for on the SARS website or at your nearest branch.

How does Turnover Tax work?

This is calculated on a sliding tax rate to the Taxable Turnover of your business. Your Taxable Turnover is comprised of the annual turnover of the business with a few specific inclusions and exclusions.

  • R0 – R100 000: 0%
  • R100 001 – R300 000: 1% of each R1 above R100 000
  • R300 001 – R500 000: R2 000 + 3% of the amount above R300 000
  • R500 001 – R750 000: R8 000 + 5% of the amount above R500 000
  • R750 001 and above: R20 500 + 7% of the amount above R750 000

So once registered, what tax do I need to pay?

1. Provisional tax

This occurs by the payment of two instalments in respect of income received or accrued during that tax year. As well as an optional third payment after the end of the tax year.

2. Employees’ tax

Employees’ tax is a system where an employer deducts employees’ tax (PAYE) from the earnings of employees and pays it over to SARS on a monthly basis. This tax functions as a tax credit which is then set off against the final income tax liability by that employee. This happens on an annual basis.

3. Director’s remuneration

Director’s remuneration is subject to employees’ tax. Their salaries are often only finally determined late in the tax year or in the following year. Here Directors need to finance all their living expenditure from their loan accounts until their remuneration is determined.

The importance of good record keeping

The best way to ensure a smooth and simple tax return is to keep accurate records of all income and expenditure. This empowers you to prepare accurate tax returns for your business. This includes everything from accounts paid to cancelled cheques to other source documents that support your records. One way to make all of this easier is by opening a separate business bank account so that you don’t mix your private and business expenses.

The bottom line

Tax is not something you can turn a blind eye to. So, if you need help, make sure to hire a reputable tax specialist to formulate an appropriate tax strategy for your business. Once you understand the basics it really just comes down to being diligent with your admin, records and timing. As well as making sure you have cash on hand to pay your tax as and when the taxman calls.

Now your tax is done and you can get down to doing what you do best - running your business.

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