Navigating tax as a sole proprietor

Running your own business as a sole proprietor in South Africa is one of the quickest and simplest ways to become your own boss. No complex registrations, no corporate red tape - just you, your business and full control over decision-making and profits. But with that control comes responsibility, particularly when it comes to tax.

Unlike registered companies, sole proprietors are personally liable for all tax obligations. That means your business income is taxed as part of your personal income, and you’ll need to submit the right forms, keep clear financial records and fully understand which expenses you can, and can’t, deduct to reduce your tax burden.

Wandile Mnguni, Head of Transactional Banking Products and Payments at FNB Commercial, emphasises the importance of structuring your finances correctly from the start to make tax compliance easier. "A well-managed financial system is critical for the growth and success of any small business," Mnguni says. He offers a number of vital ways to ensure your growing sole proprietorship stays on the right side of the tax man:

1. Register for tax and submit the right forms

Every sole proprietor must be registered with SARS for income tax, and you need to also register as a provisional taxpayer. This means you must submit two IRP6 returns during the tax year (to estimate and pay tax in advance). At the end of the tax year, you’ll submit an ITR12 (your annual income tax return) to declare all earnings and expenses in your personal and business capacities.

Where your business has made taxable (Vatable) supplies exceeding R1 million in any consecutive 12-month period or where you reasonably expect to exceed this threshold in the next 12 months., VAT registration is mandatory.

If your taxable (Vatable) supplies is above R50 000, you can choose to voluntarily register for VAT. Being registered for VAT allows you to claim VAT on business expenses. Just remember this adds a significant administrative burden to your operations because you need to work out your VAT every month or two months, depending on the VAT category.

2. Understand what you can and can’t deduct - To minimise your tax liability, Mnguni says you should take advantage of allowable business deductions. While it’s important to know the finer details of what can and can’t be deducted, generally as a sole proprietor, you can deduct the following provided you have adequate supporting documentation:

Business-related rent, office supplies, advertising and salaries
Travel and vehicle costs (but only for business-related travel, with a proper logbook) Home office expenses if you use a dedicated space for business
Internet and phone bills, but only the portion used for business

3. If you have employees, you must deduct their tax

As a sole proprietor registered with SARS, you can take on employees as your business grows. If you hire employees, your monthly tax obligations increase. You’ll need to register for Pay-As-You-Earn (PAYE) and deduct tax from salaries every month to pay over to SARS via an EMP201 return. You will also have to contribute to the Unemployment Insurance Fund (UIF) on behalf of each employee and register for the Skills Development Levy (SDL) if your payroll exceeds R500 000 per year. Ignoring these obligations can result in serious penalties from SARS, so ensure you’re compliant from day one.

4. Be smart to reduce your tax bill legally

In addition to the amounts you can deduct from your taxable income for ongoing operational expenses, there are also other allowable ways to reduce taxable income and pay less tax:

Contribute to a retirement annuity – this allows you to deduct up to 27.5% of your total taxable income reducing your annual liability.
Donate to qualifying public benefit organisations- SARS allows deductions for donations to registered public benefit organisations (with a Section 18A certificate).

5. Keep good records

SARS requires businesses to keep records of all income and expenses for at least five years. Store invoices, receipts and tax documents securely to ensure compliance and simplify audits. Proper record-keeping also helps when claiming deductions or defending yourself in the event of a SARS audit.

6. Consult a professional

While running a sole proprietorship is simpler than managing a company, tax compliance can still be complex due to the onerous record keeping requirements. Mnguni recommends seeking professional tax advice from a registered tax practitioner to optimise deductions and ensure full compliance with SARS regulations. "Having an expert in your corner ensures your business remains tax-efficient while avoiding unnecessary penalties," he explains.

Navigating taxes as a sole proprietor may feel overwhelming, but Mnguni points out that it’s simply a matter of discipline and planning. The businesses that thrive aren’t the ones that ignore tax obligations and scramble at the last minute - they’re the ones that take financial management seriously. “Get your records in order, pay your taxes on time, and take advantage of every legal tax-saving opportunity,” he says. “In the long run, a well-run business isn’t just about making money; it’s about keeping it.”