Freelancing and Tax Compliance in
Why it’s your company’s problem
Businesses must heed the importance of Freelancing and tax compliance. That’s because both have a shared interest in ensuring freelancers are fully compliant with SARS
For so many businesses, the murky waters of freelancing and tax compliance are almost unnavigable. And answers to questions are hard to find. For example, with whom does the tax liability lie? Is PAYE involved in the transactions? Who is responsible for ensuring an independent contractor pays their taxes?
We’re going to answer these questions in this article and demystify what is currently a very grey area. Whether you’re a freelancer / independent contractor or a business who uses the help of an independent workforce to grow, this is a must-read to ensure that both sides are remaining 100% compliant in the eyes of SARS.
Companies using freelancers
In our networked digital “gig economy”, sometimes having a small, successful and nimble business means outsourcing tasks to specialists in their fields. Scaling does not always mean hiring permanent staff and for many, this is never part of their growth plan, to begin with.
Maybe you need an animator who knows 3D rendering like the back of her hand. Or your permanent team is overworked (good news if it means you’re growing!) and you turn to your roster of trusted independent creatives or consultants.
From the perspective of freelancers, the freedom, flexibility and variety that comes with sharing your marketable skills from the comfort of your couch is hard to resist.
But don’t let the apparent informality of the relationship fool you: As far as the tax authorities are concerned, income is income and somewhere along the line, tax needs to be declared and paid.
Tax compliance and freelancers: Beware of this tax pitfall
Here’s the catch when it comes to tax compliance and your freelancers.
Although it’s the responsibility of freelancers to manage their own tax affairs, the business hiring the freelancer has a corresponding obligation to ensure that their freelancers are actually tax compliant.
To illustrate, if you hire a freelancer, SARS requires you to request proof that the contractor submits their tax returns and pays tax or deduct the 25% paye.
That’s not just some arcane administrative requirement. Ultimately, if SARS finds – through an audit or some other process – that your contractors have not met their tax obligations, your business can be held liable, and subject to potentially severe penalties.
Independent no more
While there is no hard and fast distinction between independent contractors and contractors subject to employment tax, SARS has provided a clear set of guidelines that can be applied to clarify the nature of the employment relationship.
Any employer who pays freelancers is strongly advised to peruse the guidelines – especially when you consider that the nature of the employment relationship can change over time.
Consider the following scenario: You contract out some work to a freelancer who operates remotely. She does small jobs for a number of clients. Over time, that freelancer becomes so useful to your operations that you put her on a retainer. She now dedicates most of her time to you and even comes into the office to brainstorm with your permanent team. Perhaps you give her a more powerful laptop to enable her to work more efficiently.
You’ve never hired her as a staff member, but will SARS really be satisfied with you treating her as an independent contractor instead of dutifully deducting PAYE?
Again, SARS is very clear: “It is the responsibility of the employer to determine … whether payments are subject to employees’ tax”.
In such a case, even if the contractor has dutifully managed her taxes, you could be liable for penalties for failing to deduct employee tax in accordance with SARS guidelines.
When in doubt about a contractor’s status, employers can avoid compliance issues by deducting employee tax. The good news is if any individual has been overtaxed, they can claim a rebate when filing their taxes through eFiling.
When it comes to tax, ignorance is not bliss
If you’re a business, you cannot afford to disregard ensuring tax compliance. Too often these pitfalls and penalties come around later when you’re a middle-weight company and decimate cash flow. When it comes to tax compliance, ignorance of the rules is no excuse.
I’m a freelancer, get me out of here
On the other side of the equation, if you offer your services as a freelancer, you have a strict non-negotiable legally-binding tax obligation. That’s even if you conduct your work from your bedroom in your Hello Kitty pyjamas sipping hot chocolate with marshmallows. You may not be anyone’s employee, but you earn taxable income – and SARS wants to know about it.
There has to be an easier way!
Freelancers are often production, client services, sales and administration in a single person. In addition to all the great work they get directly paid for, they’re burdened with an additional layer of admin to make sure everything runs smoothly and on time.
The last thing freelancers need is to have to set up an amateur finance department.
Therefore, an elegant solution that works for most freelancers is simply to arrange for their clients to deduct PAYE at a rate of 25%.
This system benefits everyone. Freelancers don’t have to take on the complex, massively time-consuming burden of managing provisional tax.
From the freelancer’s perspective, the process is seamless and completely painless. The client deducts 25% and furnishes the freelancer with a Payslip as proof of the deduction as well as an IRP5 at the end of the year.
Now, Freelancers don’t need an advanced diploma in financial maths to work out their provisional tax burden. Instead, they can sit back and wait for a juicy rebate when they do routine eFiling through the SARS website at the end of the year.
Peace of mind for clients, too
For the client, the deduction is the simplest way to guarantee that compliance is met. After all, if a freelancer fails to manage their tax obligation correctly, for whatever reason, liability could sit with the client. That’s important. When it comes to Freelancing and tax compliance, your business is not free from responsibility.
At it’s best, the client-freelancer relationship is about each party playing to their strengths, to the mutual benefit of everyone. Managing the tax burden should be no different. By deducting 25% in payroll tax from the freelancer fee, the administrative burden is shifted onto the business. The business has the capacity to manage payroll efficiently and at scale. Furthermore, it can provide the freelancer with a clear paper trail of all deductions.
In return, businesses can rest assured they will not be held liable by SARS in the (let’s be honest, quite likely) case of contractors failing to manage their tax obligation correctly.
How to prove you’re tax compliant as a Freelancer
So you’re a freelancer and your clients have asked for proof that you’re tax compliant. Or the fright of non-compliance could happen at any moment, leaving you in a bureaucratic no man’s land. What do you do?
First, you need to register with SARS, if you haven’t yet done so. That doesn’t sound like much fun, and, frankly, it isn’t. You’ll have to visit a SARS office and file the necessary paperwork. Be sure to check what documentation you need and don’t leave any behind. You only want to do this once!
Once registered, you can breathe easy. Now you can do your taxes online, through SARS eFiling or outsourced platforms like Taxtim. By requesting an IRP5 from all the clients you did work for, you can declare and do your tax returns online, from your home office/shared workspace/bedroom.
The downside, of course, is that you have to pay the tax. But here’s why that’s actually a good thing. SARS is working hard to restore its capacity and improve its ability to collect revenue. And that means there’s a much greater chance you’ll get caught or run into problems as your independent business grows.
Ultimately, if your clients insist on proof of tax compliance, it could be the best thing to happen to you. It’s not just the right thing to do. You can now sleep easy, free of the anxiety of calamitous penalties and potential legal trouble.
Flexyforce, freelancing and tax compliance
When building Flexyforce, we were very aware of the compliance problems that both Freelancers and small companies have. That’s why we built our tax compliance feature that would help businesses avoid any pitfalls and penalties. Because these are such murky waters, sometimes, it just helps to have a platform that can guide you. A place to make it easy for businesses who work with freelancers to deduct the 25%, without having a degree in tax legislation.
For more information from Flexyforce on how to build a sustainable Freelancer network, read this.
Symbiosis not exploitation
At its best, the client-freelancer relationship is symbiotic and mutually beneficial. It’s a more pleasant way to do business, but it also makes strategic sense. As a freelancer, if your client flourishes, more work will naturally flow to you. Nurture and train your freelancers. Give them the resources they need and they’ll produce the consistent high-quality work you need.
In addition, when hiring a freelancer, make it clear what their tax obligations are. Explain to them why you need proof of their tax status, or you will deduct the 25%. In the long run, they’ll thank you.
For any further information or sharing your thoughts, please do not hesitate to get in touch on firstname.lastname@example.org. We are here to learn from and support businesses working with freelancers all over Africa
The Flexyforce Team