Debunking Tax Myths for Entrepreneurs

There’s a lot of room for tax education for entrepreneurs. In order to be compliant as a business, you must educate yourself on tax, even if you’re a one-man show.

Tax can be complicated when you are uneducated about the topic, and it’s important not to find yourself taking false information and applying it to your business.

Compliance requires tax knowledge, even for sole proprietorships. Tax complexities arise from a lack of education, and misinformation should be avoided. This article addresses seven common tax myths entrepreneurs encounter.

Myth 1: If I Earn Less than R1 Million, I don’t Have to Worry about SARS

The R1 million threshold applies only to mandatory VAT registration, not income tax. Even if your business earns R50 000 a year, SARS still expects you to declare your income.

If you’re a sole proprietor, freelancer, or micro-business, you’re taxed on your net profit and must file an ITR12 (personal income tax return). If you’ve registered a company (Pty Ltd), you must file an ITR14 (corporate return) regardless of revenue size.

What most executives miss is that SARS doesn’t care about how “small” you think your side hustle is. It only cares about undeclared income.

Myth 2: VAT Registration Will Make My Business Lose Money

Understanding VAT as an SME can seem daunting. It shouldn’t be, because VAT can be used as a tool that can benefit businesses in the long run. You’ll need to charge 15% on your taxable supplies, but you can also claim input VAT on business expenses like stock, equipment, rent, and even advertising.

The legal threshold for mandatory VAT registration remains at R1 million in turnover over 12 months, as per SARS’ official VAT guidelines. But even if you earn below that, voluntary VAT registration can benefit businesses selling to other VAT-registered companies.

Being VAT-registered adds to your business’s legitimacy, which can increase your chances of gaining access to supply chains and corporate contracts.

Myth 3: Freelancers Don’t Need to Register for Tax

If you’re earning money, whether from freelance design work, content creation, or consulting, you’re technically a sole proprietor in the eyes of SARS. You are required to declare your income, even if it comes from foreign clients or online platforms.

This income is subject to personal income tax, and if it exceeds R95 750 a year for individuals under 65, you owe SARS. It’s crucial that freelancers keep up with updated compliance regulations and view themselves as a formal entity, instead of an informal individual who doesn’t need to pay tax.

Myth 4: Provisional Tax is Only for Big Companies

Provisional tax is for any taxpayer who earns income outside of formal employment. If you don’t have a fixed salary with pay-as-you-earn (PAYE) tax deducted, you’re expected to pay your tax in advance through provisional tax.

This applies to:

• Freelancers
• Consultants
• Sole proprietors
• Directors/shareholders who earn dividends

You’ll be expected to make two payments a year, one in August and another in February, to reduce the final tax liability in your annual return. Missing these can lead to penalties, interest, or both.

Myth 5: Turnover Tax is a Loophole for Low Taxes

Turnover Tax offers reduced tax rates for micro-businesses with turnover below R1 million, but it’s not a free pass. You can’t claim any expenses or deductions. There are also certain professional services that are excluded from turnover tax. Some of these professions include legal, accounting, architecture, etc.

Myth 6: I Only Need to Worry About Tax Once SARS Contacts Me

Waiting for SARS to notice you is like waiting for a fire alarm to tell you the house is burning. By the time you’re contacted, it’s usually because a red flag has been triggered, unusual banking activity, undeclared income, mismatched VAT declarations, or a late return.

Rather than being reactive, entrepreneurs must be proactive by doing the following:

• Submit annual returns
• Register for provisional tax if applicable
• Keep digital records of income and expenses for at least five years
• Use compliant accounting software that links to eFiling

Myth 7: My Side Hustle is Not a Real Business, So Tax Doesn’t Apply

If it generates income, it’s considered a business by SARS, regardless of its formality. Whether it’s labelled a “side hustle” or a “hobby” is irrelevant. If profit is the aim and earnings consistently exceed the minimum PAYE tax threshold monthly, tax registration is mandatory.

Informal entrepreneurs are increasingly on SARS’s radar. The integration of data from payment providers, banks, and logistics companies means your transactions are traceable, and the last thing you want is SARS coming for you.