Did You Know That There Are Tax Laws Applicable To Freelancers?

Most individuals have moved online platforms to offer their services since the onset of covid 19 which paved way for digitization.  As a freelancer, are you obligated to pay any taxes, and which type will that be, and at what rates?

To begin with, a freelancer is a person who operates on a contract basis for multiple companies, rather than working as an employee for a single company.

Freelancing certainly has its benefits, but it can result in a few complications come tax time. The Internal Revenue Service considers freelancers to be self-employed, so if you earn income as a freelancer, you must file your taxes as a business owner.

Common freelancing professions stem from creative fields but are not limited to these. They include writers, editors, trainers, graphic designers, IT specialists, doctors and nurses on locum and self-employed marketers, etc.

These are non-traditional professions, so most people think they are not subject to tax, but that’s not the case.

In Kenya, an individual can earn taxable incomes from business, rent, agriculture, interest, and employment income. These are called specified sources of income, and as such, are taxed separately. The general effective tax rate for these incomes is 30 percent.

While you can take additional deductions if you are self-employed, you’ll also face additional taxes in the form of self-employment tax.

If you have withholding tax certificates for the year, then you are considered a freelancer because withholding tax at 5 percent generally applies to management and professional fees of over 24,000 shillings per month.

Administrative set-up a freelancer should have in place

There are three key areas all freelancers should look at:  tax registration, how to invoice, and what to expect from their clients regarding invoicing and payments.

The main factor to remember, however, is not to register for VAT as a default if you have not attained annual sales of 5 million shillings. You can voluntarily register for VAT if your business circumstances require it.

A common mistake freelancers make is registering for VAT and then failing to file a monthly return, thus accruing penalties. You should expect withholding tax to be deducted from your pay if it exceeds 24,000 shillings per month.

This withholding tax of 5 percent is not final as you will still require to account for your full tax at the end of the year

How A freelancer should go about billing

1. Always negotiate for milestone payments and a deposit before work begins. Never accept to work for free because the KRA only accepts the legal currency.
2. When invoicing for work done, you should negotiate for favorable terms such as a deposit at commencement, milestone payments, and payment at completion. You should also inquire what details your clients want to see in your invoice to be compatible with their ERP system.
3. Confirm with your client whether they expect to be billed inclusive or exclusive of VAT to avoid back and forth during the crucial payment time.
4. Be informed if the client is going to withhold tax (5 percent) in advance and check for the withholding certificate on iTax once they do. The certificate is important since it confirms the tax was properly withheld.
5. If you are registered for VAT, make sure you get paid quickly, because once you issue the tax invoice, tax is due the next month.
6. keep a detailed account of all your income (cash, M-Pesa, and bank) and expenses so that at the end of the year, you can calculate your net profit. Only your business expenses incurred directly in generating your business income are tax-deductible, such as rent, salaries, licenses, buying stock, electricity, and courier expenses.

The tax rate applicable is effectively 30 percent, although other rates apply depending on your income tax band – ranging between 10 percent and 25 percent. Once you have computed the tax payable, then you deduct the withholding tax paid by your client and only pay the difference to the KRA as your tax balance.

A consultant/freelancer only needs to have one  PIN certificate, and if you have registered a company, the company needs to have a PIN too.