All You Need to Know About Working as an Independent Contractor in South Africa
Who is an independent contractor/freelancer?
To start off right, we should define who an independent contractor/freelancer is. This is someone who is self-employed and offers services to clients on a contractual basis. A freelancer, unlike an employee, does not receive benefits from a company and files tax returns independently. He or she is in control of his or her work method and schedule, and is not limited to one client.
Getting started as an independent contractor / freelancer in South Africa
If you are a freelancer in South Africa and earn taxable income which is above the tax threshold for the particular year of assessment, you need to register with the South African Revenue Service (SARS) to receive a tax number. The tax threshold for the 2022 year of assessment (ie, the year 1 March 2021 to 28 February 2022) is R87 300 if you are younger than 65 years.
Independent contractors commonly act by way of a sole proprietorship. A sole proprietorship is the simplest form of conducting a business that is owned and operated by an individual. The sole proprietorship is not a legal entity. The business has no existence separate from the owner, who is called the proprietor.
There is no need to register the business with SARS as the sole proprietorship itself is not separately taxed on its income. Instead, all of its income and expenses are added to your own personal annual income and filed in your personal tax return. Assuming you are already registered with SARS personally, then by default your sole proprietorship will also be registered.
If you are not yet registered with SARS, you can register at a physical SARS branch, or online through the SARS eFiling service. The following documents are vital:
- An ID
- Proof of banking details
- Proof of address
How to Resister through The eFiling Process
- Visit the SARS eFiling website linked here
- Click the “Register Now” option and go through the process
- As a plus, you can carry out the eFiling process on your phone. All you have to do is download the MobiApp, click on the register option, and follow the procedure.
Upon registration, SARS will verify the information captured during the registration process. The outcome of this will be communicated on your eFiling registration verification page or via email. If your registration is successful, a One Time Pin (OTP) will be sent to your preferred channel of communication, to allow you to complete your registration.
The statuses can either be:
· registration successful,
· registration rejected
· awaiting supporting documents.
If the status is not successful, you cannot use eFiling and must respond based on the correspondence received.
Please Note: The above information can be found on the official SARS website. To learn more, you can visit the SARS website here
Name Registration: As a sole proprietor, you are free to choose any name for your business without any obligations to register the name. You can trade under your own name or set up a fictitious name for trading purposes.
Taxes for independent contractors in South Africa
As independent contractors file tax returns independently (unlike an employee whose employer will withhold employees' tax on their behalf), it is imperative that you understand the tax consequences of being an independent contractor. We have described below some key information about the topic that relates to independent contractors.
- The provisional tax system does not differ from the income tax system. However, it is based on estimated taxable income and is a way in which tax is paid in advance during the tax year, so as to avoid owing SARS a large amount when the annual income tax return is submitted.
- The provisional tax system applies to those who receive income other than a salary. If you are already registered on eFiling, simply add provisional tax to your profile so that you can access and file your IRP6 return online. With the provisional tax system, you are required to submit two provisional tax returns (IRP6s) along with the respective payments, as well as the annual income tax return, which should be submitted after the tax year. The first provisional tax return and payment is due within the first six months of the tax year, and the next is required at the end of the tax year.
Individual tax payers also have the option of a third payment after the tax year is over, so they can make up for preceding payments if they were too little. PAYE (Pay As You Earn)
This is the tax the employee’s salary (remuneration) is subject to. The tax is withheld from an employee’s salary by his or her employer. For a typical employee, the amount of tax withheld is determined by the amount of income received.
It is important to note that, should you decide to incorporate a wholly-owned company to perform your freelancing business, and your freelancing business is your only income stream, any salary which you pay yourself will be subject to PAYE. In other words, provisional tax will not be applicable.
- If you are a sole proprietor, depending on the income you earn, you will be subject to a tax rate ranging from 18% to 45%.
- Furthermore, if the turnover from your freelancing business for 12 consecutive months is greater than R1 million, you must register as a VAT vendor. VAT must be levied at a rate of 15% on all taxable supplies.
Non-residents and Residents
The official SARS website (https://www.sars.gov.za/individuals/tax-during-all-life-stages-and-events/tax-and-non-residents/#:~:text=South Africa has a residence, from a South African source.) states that South Africa “operates a residence-based tax system”. As the website puts it, “residents are, subject to certain exclusions, taxed on their worldwide income, irrespective of where their income was earned. By contrast, non-residents are taxed on their income from a South African source.”
SARS explains further that you are a South African resident, for tax purposes, if you are either of the two below. If you are unable to meet either of the below categories, you are not a resident.
Ordinarily resident: SARS defines an ordinarily resident as one for who “South Africa is the country to which that individual will naturally and as a matter of course return after his or her wanderings.” In other words, you regard South Africa as your true home, regardless of the time spent in South Africa.
Resident according to the physical presence test: SARSexplains(https://www.sars.gov.za/individuals/tax-during-all-life-stages-and-events/tax-and-non-residents/#:~:text=South Africa has a residence,from a South African source.) that to qualify according to the test you must have stayed in South Africa for:
- 91 days in total during the year of assessment under consideration;
- 91 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
- 915 days in total during those five preceding years of assessment.
If any of these requirements are not satisfied, you are not a tax resident in terms of the physical presence test.
You can cease to be a resident under the physical presence test if you remain outside of South Africa for a continuous period of 330 days or more. If you regard yourself as your true home, however, you may still be resident under the ordinarily resident test. Please Note: The above information can be found on the SARS official website. To learn more, you can visit the SARS website [here](https://www.sars.gov.za/individuals/tax-during-all-life-stages-and-events/tax-and-non-residents/#:~:text=South Africa has a residence,from a South African source.)
Even if you meet either of the tests above, it is still possible to be deemed not to be a South Africa tax resident if you are tax resident of another jurisdiction with which South Africa has a double taxation agreement (DTA) and the DTA in question deems you to be a tax resident exclusively of the other jurisdiction. You can search for DTAs here
We’ve talked about registering through the eFiling service. If you took this path, you can perform a number of tax related duties through the online portal, such as submit tax returns and payments.
How to open a bank account in South Africa
Firstly, non-residents can open bank accounts. We have already discussed who qualifies as a resident and non-resident. Resident vs non-resident for banking (i.e., exchange control) purposes now follows a person's tax residence, i.e., if you are tax resident, you will open a resident bank account.
Opening A Resident Bank Account
The essential documents may vary from bank to bank, but generally, you must submit:
- Proof of residence
- Proof of identity such as a passport or ID card
Opening A Non-resident Account
The documentation listed below should be submitted
- Passport copy
- Bank statement for the last three months
- Address of present residence
- Minimum opening deposit
- Proof of income
- Certificate of introduction from your home country’s bank, with the signature and contact number of a bank official.
If your freelancing business is a sole proprietorship, then you can start out from your personal account. However, the personal account is limited in its advantages.
Also Remember: You must be above 18 years of age to open a bank account, regardless of what account it is.
Opening a Bank Account from Abroad
In some cases, you will be able to set up an account while outside South Africa. You should note that the bank may ask for the application form to be signed by a solicitor or lawyer, among other requirements.
Over to You
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