Tax laws

Did you know that there are tax laws applicable to freelancers?

Did you know that there are tax laws applicable to freelancers?

By Lynnet Okumu / Posted on February 28, 2022 | 1:55 p.m.

KEY POINTS

A freelancer is someone who works on a contract basis for multiple companies, rather than working as an employee for a single company.

KEY POINTS TO REMEMBER

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

Most individuals have moved online platforms to offer their services since the onset of covid 19 which paved the way for digitalization. As a freelancer, do you have to pay taxes, and what kind will they be and at what rates?

For starters, a freelancer is someone who works on a contract basis for multiple companies, rather than working as an employee for a single company.

Freelancing certainly has its perks, but it can lead to some complications at 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 freelance occupations come from the creative fields but are not limited to them. They include writers, editors, trainers, graphic designers, computer scientists, locum doctors and nurses, and freelance marketers, and more.

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

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

While you may qualify for additional deductions if you are self-employed, you will also face additional taxes in the form of self-employment tax.

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

Administrative organization that a freelancer must have in place

There are three key areas that all freelancers should consider: 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 by default if you have not reached annual sales of 5 million shillings. You can voluntarily register for VAT if your professional situation requires it.

A common mistake that freelancers make is registering for VAT and not filing a monthly return, which leads to penalties. You should expect tax withheld at source to be deducted from your salary if it exceeds 24,000 shillings per month.

This 5% withholding tax is not final, as you will still have to declare all of your tax at the end of the year.

How a freelancer should proceed with invoicing

  1. Always negotiate milestone payments and a down payment before work begins. Never agree to work for free as the KRA only accepts legal tender.
  2. When invoicing for work performed, you should negotiate favorable terms such as a down payment at the start, milestone payments, and payment on completion. You should also find out what details your customers want to see on your invoice so that it is compatible with their ERP system.
  3. Confirm with your customer whether they expect to be billed inclusive or exclusive of VAT to avoid back and forth during the crucial payment period.
  4. Know if the customer is going to withhold tax (5%) in advance and check the withholding certificate on iTax once they have. The certificate is important because it confirms that the tax was correctly withheld.
  5. If you are subject to VAT, make sure you get paid promptly, because once you issue the tax invoice, the tax is due the following 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 to generate your business income are tax deductible, such as rent, salaries, licenses, stock purchases, electricity, and courier costs.

The applicable tax rate is effectively 30%, although other rates apply depending on your income tax bracket, ranging from 10% to 25%. Once you have calculated the tax payable, you deduct the withholding tax paid by your client and pay only the difference to the KRA as the tax balance.

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

More articles by this author