As someone who frequently interacts with self-employed individuals and those earning extra income, I’ve compiled a list of their most common questions. However, it’s important to note that this list isn’t exhaustive and seeking the help of a professional is always recommended if you’re unsure. Here’s the list I’ve put together.
Can you explain what a Sole Proprietorship is?
A Sole Proprietorship refers to a business that is solely owned and operated by an individual. It is considered the most straightforward form of a business entity, and it is not regarded as a legal entity. The business does not have a separate existence from the owner, who is known as the Proprietor. The Sole Proprietor is required to report the profit generated by the business on their income tax return and is responsible for paying the taxes due. Only the Sole Proprietor has the authority to make decisions concerning the business, and they also carry the risk of the business. The Sole Proprietor is legally responsible for all the debts of the business and signs contracts in their name since the business has no distinct identity under the law.
Should the business be registered with CIPC?
No, you can start trading right away. As a Sole Proprietor, you have the option to operate under your own name or choose a fictitious name for your business. However, it’s important to note that the fictitious name is just a trade name and doesn’t create a separate legal entity for the business.
Should I open a separate bank account for my business?
It is recommended to create a distinct bank account for your business. Doing so will simplify the process of distinguishing between personal and business expenditures.
“In this world, nothing is certain except death and taxes”
Ben Franklin, 1789
The Sole Proprietor and Taxes
If you have already registered for income tax, there is no need to register your business separately. This is because its income will be added to your personal income tax return, along with any other income you earned throughout the year.
If an employer is responsible for paying remuneration or a lump sum to a person who is subject to normal tax, they are required to register with SARS as an employer for PAYE purposes.
- PAYE is payable when an employee earns more than the tax threshold for that particular year.
- UIF is payable if the employee works more than 24 hours a month. The amount payable is 2% of the salary (1% deducted from the employee and 1% contributed by the employer).
- Skills Development Levies are determined by the total salary account for the year. Therefore it is only applicable if the total salaries are expected to be more than R500 000. The amount payable is 1% of the remuneration paid to the employee.
If you anticipate that the value of taxable goods or services will surpass R1 million within a 12-month period, it is necessary to register for VAT.
Expenses that are allowed
For income tax purposes, expenses and losses can be deducted by reading section 11(a) in conjunction with section 23(g) of the Income Tax Act. These deductions must meet the following criteria:
- they must be actually incurred,
- related to income production,
- not of a capital nature, and
- expended for the purposes of trade.
Typical expenses may include:
- Accounting or bookkeeping costs,
- delivery and freight,
- depreciation on business assets,
- electricity and water associated with your business premises,
- entertainment,
- insurance costs,
- licences that apply to the business,
- maintenance and repairs on business equipment or the office,
- motor vehicle expenses such as repairs and maintenance, motor vehicle licences, subject to a proper logbook kept,
- security costs,
- postage, printing and stationery,
- rent, rates and taxes on leased equipment and business premises,
- subcontractors,
- telecommunication like cell phones, landlines and internet.
Home office expenses
To qualify for tax deductions, home office expenses must meet specific criteria as outlined in Section 23(b) of the Income Tax Act. The room must be regularly and exclusively used for business purposes and be equipped specifically for that purpose.
Typical home office expenses may include:
- rent,
- repairs,
- electricity,
- rates and taxes,
- cleaning costs
To calculate home office expenses, we use apportionment based on the floor area of the premises. This involves comparing the square meters of the home office to the total square meters of the residence. If you’re eligible for a deduction, you’ll need to calculate the amount using the following formula: A/B x total costs.
- A is the area in m² of the qualifying home office
- B is the total area in m² of the residence (including any outbuildings and the home office)
- Total costs are the costs linked to the premises, excluding expenses of a capital nature.
If you are eligible for and plan to use the deduction, it is important to be aware of the potential Capital Gains Tax consequences that may occur if you sell your home.
Here are some important things to keep in mind when managing your business finances:
- It’s crucial to maintain accurate records of both your income and expenses.
- Be sure to distinguish between personal and business expenses.
- Consider opening a separate bank account specifically for your business transactions.
As a Sole Proprietor, you face many challenges and I am ready to provide you with exceptional guidance, advice, and support to help you achieve success. Please feel free to reach out to me for any assistance you may need.
