A question we are frequently asked is what an independent contractor can claim against income.
If you are a contractor who is classified as an employee for employees' tax purposes, but receive variable income such as commission, you may approach the South African Revenue Services for a directive which will tell your employer to deduct a reduced amount of employees' tax depending on what expenses you incur in order to earn your commission income.
If you are truly independent, the people to whom you provide services will not deduct employees' tax from your fees.
Either way there are probably certain expenses that you have to incur to earn your contracting income and it is important that you reflect these as deductions on your tax return to ensure that you pay only as much tax as you have to and no more.
These expenses would include:
* Travel costs. For a car you may deduct the full amount of your recurring car costs and depreciation but you will be taxed on your private travel at a rate of 1,8 percent of the determined value of the car (excluding VAT and finance charges) a month unless you can prove otherwise through keeping a log book. Travel between home and the office is not deductible. You may also claim any other business travel costs;
* The costs of maintaining an office. If your office is at home it must be exclusively used for business purposes, and you must not be working from an office provided by your employer. The cost should be determined by taking the proportion of any rent or bond, rates, insurance, electricity, water, repair, cleaning and maintenance that relate to the office;
* The costs of any furniture you use in the office such as a desk, chair or computer would qualify for deduction over their useful lives. This is six years for furniture and three years for a computer;
* Stationery, telephone and postage costs that you incur for business purposes;
* Entertainment costs (which include club memberships up to R2 500, entertaining at home or taking clients or suppliers to shows or restaurants);
* The cost of any employees you may have to assist you to earn the business income;
* Income protection insurance;
* Fees for membership of professional bodies related to your business; and
* Any other costs which you may incur which are directly related to your earning your income like advertising and the cost of goods for resale.
These deductions may seem obvious, but are sometimes forgotten!
It is important when you claim these costs that you retain the relevant documentation to support the claims because the tax authorities have every right to ask you to provide proof of the expenses you have claimed.
You have probably noticed that I have not included deductions for medical aid and provident fund contributions. These benefits may not be available to you as a contractor in the form that they are available to a business with employees and they are not deductible for tax purposes.
If you would like to be a member of a provident or medical aid fund, you may consider operating as a corporate entity (a company or CC) which may pay contributions to a non-contributory fund. The corporate entity will be able to deduct these contributions for tax purposes and they will not be taxable in your hands.
The company or CC would deduct all the costs set out above (it may have to pay rent to you for the use of the office and you would continue to deduct the costs against the rental) and would pay you a salary which could be structured as I discussed last week.
However, before you sell your business to a corporate entity it is important to ensure that you are aware of additional costs that might be involved, such as set-up, audit and statutory return costs, and that the benefits you will gain by doing so will exceed the costs. It would probably be advisable to seek professional advice if you are thinking of going this route.