How are you taxed on your 'side-hustle'?

In addition to working a full-time job, many South Africans work part-time as freelancers or contractors to make ends meet. Colloquially known as a ‘side hustle’, this kind of work is usually done in the evenings or over weekends.

But what impact does this have on their taxes? We contacted several specialists to find out how tax would be calculated and how to ensure you remain tax compliant.

Tip: Use our tax calculator to work out how much you owe SARS.

According to Christiaan Scheepers, who is a tax consultant for small businesses and part-time employees, all individuals in South Africa are taxed according to the same income tax tables.

The most recent figures are based on the 2022 tax year (1 March 2021 – 28 February 2022):

 “The difference between the tax of salaried individuals and freelancers lies in the way the total tax liability for the year is collected by the South African Revenue Service (SARS),” says Scheepers.

First things first: Employee’s Tax

Full-time employees receive a payslip at the end of each month, which indicates their gross salary and the amount of tax that was deducted to calculate their net salary.

“The employer pays the amount deducted for tax to SARS on a monthly basis, and at the end of the tax year, which runs from March to February, you will receive a summary of the tax paid over to SARS on your behalf from your employer, by way of a form called an IRP5,” says Scheepers.

He explains that the amount of tax that gets deducted from an employee’s monthly salary is calculated by taking their monthly salary and multiplying it by 12 to get to the yearly equivalent. The total is then compared to the tax tables mentioned above to determine the annual tax liability.

“This is then divided by 12 to calculate the monthly instalment you have to pay in order to have paid off your full annual tax liability at the end of the tax year. This monthly instalment gets deducted from your gross salary on a monthly basis and paid to SARS by your employer,” says Scheepers.

Additional Freelancer’s Tax

Freelancers do not receive consistent paycheques. They pick up work from different employers who pay them varying amounts. As a result, it's impossible to determine their total annual income, and therefore their applicable tax bracket, ahead of time.

“To work around this problem, SARS allows employers to deduct a flat tax rate of 25% from freelancers and pay this across to SARS. At the end of the tax year, you will get an IRP5 certificate from each of the employers who deducted this 25% tax from you, and you will use this to submit your income tax return,” says Scheepers.

He explains that the total income earned from these various freelancing jobs is then added together and the tax thereon is calculated according to the same tables as if you were employed full time. The tax you paid during the year – in the form of the collective 25% tax deductions – is then subtracted from the total tax you are supposed to pay.

“If there is a shortfall, you will have to pay the difference to SARS. If you paid more than you should have paid, SARS will refund you the difference,” adds Scheepers.

To add to this, Danielle Luwes, manager of Tax & Advisory at Hobbs Sinclair, explains that South African taxpayers are taxed on their combined worldwide incomes – irrespective of their sources.

“If you earn R500,000 per annum as a full-time employee and you do part-time work valued at R100,000 per annum, your total taxable income for that year is R600,000,” says Luwes.

How to be a provisional taxpayer

According to Scheepers, it’s important to note that employers will not deduct 25% if you have successfully applied to SARS for a tax directive to be provisionally taxed at a lower rate, and can provide the employer with paperwork confirming the lower percentage.

Luwes adds that, should you meet the SARS requirements to register as a provisional taxpayer, your additional tax would be settled during the tax year. If you are not required to become a provisional taxpayer, the amount would be settled once you have filed your income tax return.

“Non-provisional taxpayers who earn additional income are advised to ensure they have saved sufficient funds throughout the year to be able to pay any additional tax,” says Luwes.

According to Naomie Fourie, tax consultant at Mazars, provisional tax is payable as follows:

• The first provisional tax payment must be made within six months of the start of the year of assessment. For the year of assessment starting in March, this will be 31 August.
• The second payment must be made no later than the last working day of the year of assessment. This will be 28 or 29 February.
• The third payment is voluntary and may be made within seven months after the end of the year of assessment to avoid interest accruing. In other words, it should be made no later than 30 September and before the annual return is submitted and assessed.

Setting your own taxes aside

Scheepers points out that some clients might not be registered as employers with SARS, or they might prefer not to have anything to do with the tax of a freelancer, so they will ask you to send them an invoice for your time and pay you the full amount.  

“This does not mean that you don’t have to pay tax on these amounts. It is your responsibility to declare this income to SARS and pay the tax thereon when the SARS annual filing season opens in July each year,” says Scheepers.

He advises putting away 25% of each invoice in a separate bank account, since this is what would have been deducted from your pay in any case if the client was registered as an employer with SARS.

“Doing this prevents nasty surprises when you submit your tax return and can similarly end up being a pleasant mid-year bonus if all of the money you put away for tax ends up being more than your actual tax liability,” says Scheepers.

Tips and Tricks to stay tax compliant

Scheepers believes it's best to find someone who is trained in this field who can take care of this chore for you, while you do what you do best.

“A tax professional does not necessarily have to cost an arm and a leg, and it is money well spent if it gives you the peace of mind that all your tax affairs are in order,” says Scheepers.

“I usually tell my clients to find a system of record keeping that is simple and effortless. There are some slick products available on the market, but it can really be just a folder on your computer where you save all the invoices you send to clients, and a concertina file which you keep in your car for all expenses,” says Scheepers.

Fourie agrees that it's important to keep track of your funds. She suggests keeping documentary evidence of all expenses incurred in the production of your freelance/contracting income.

“Work with a registered tax practitioner to ensure you remain compliant with legislation, but at the same time, ensure that you claim all allowable expenditure,” says Fourie.