PIcture: ISTOCK
PIcture: ISTOCK

Many people consider giving up a regular salary as they believe that by working as freelancers, independent contractors or professional service providers they will be free of a difficult boss, improve their earnings or achieve more flexibility in the hours they work. However, it is never that simple.

In addition to the uncertainty of not having a regular monthly income, you are now also solely responsible for saving towards your retirement, making provision for tax, paying your medical scheme contributions and making sure you have enough life and disability cover.

Also, as an employee, your company provides the tools and materials you need to do your job. In self-employment, you need to purchase these yourself - from your computer, telephone and internet connectivity, to stationery, your office furniture and any materials, equipment or components and even transport that you need to deliver a product or service, cautions Yolandi Esterhuizen, compliance manager at Sage.

The move generally means shifting from receiving a regular salary or wage to getting paid only after you invoice a client or deliver a product or service.

How do you prepare?

Before you decide to resign from your job, you have to make sure you have the financial means to support yourself and your family until you can make enough money from freelance work, advises Kobus Engelbrecht, a certified financial planner and head of marketing for Sanlam's Business Market.

Esterhuizen says you should price your services at a level at which you can compensate for the loss of paid leave, for the cashflow implications of waiting for payment, and for the time you spend on sales, administration and skills development.

You should make sure you have enough in the bank to see you thought the lean months
Yolandi Esterhuizen

In addition, you should make sure you have enough cash in your bank account to see you through the leaner months or through periods when your clients are slow to pay. A rule of thumb is to have three to six months' income on hand.

You should also set aside enough money each month to ensure you can afford your provisional tax payments to the South African Revenue Service (Sars).

What are the tax implications?

If you are earning an income as a freelancer or as an independent contractor and you are not running your business as a company, you will operate as a sole proprietor and you will need to register as a provisional taxpayer.

Karin van Wyk, senior lecturer at the online learning platform The Tax Faculty, says the onus is on the taxpayer to request an IRP6 (a provisional tax return) and to submit it on time.

When you file the final return during the tax season, Sars will reimburse you if you have overpaid income tax for the tax year or seek payment for the outstanding amount if you've underestimated the tax due in your provisional returns. You may face a penalty of up 20% of the underestimated amount if:

• The total of your first and second provisional payments is less than 90% of your assessed income tax as a person earning less or equal to R1m, or;

• The total of your first and second provisional payments is less than 80% of your assessed income tax as a person earning more than R1m.

Meticulous record-keeping is critical. Sars can ask you to show the receipts for the expenses you claim and justify as a business expense, Esterhuizen says.

Van Wyk adds that all records need to be kept for five years (or until finalisation of a tax audit). It is therefore crucial you not only obtain the correct documentation, but retain it as required by the Tax Administration Act.

If you are running a small business, you may want to take tax advice on the merits of using the tax incentives for micro businesses (turnover less than R1m). And if you are providing your services as a sole proprietor at a business and are under their supervision (among other factors), you may be considered an employee and be subject to normal employees tax, Daniel Baines, tax consultant at Mazars, says.

Domestic vs business expenses

As a freelancer, you may work from home, which means the lines between your personal and business expenses may blur. You can claim only the part of the expense relating to your business use as a tax deduction.

It is important to keep accurate records such as a logbook of vehicle use or details for business versus personal use of your mobile phone, advises Esterhuizen.

Van Wyk says if you claim expenses related to a home office, you need to apportion the floor area used for private or domestic purposes and the floor area used for business purposes. You would then apportion all the relevant costs and claim a portion of the costs as tax deductions. However, this will affect you when you sell your home. Usually, the sale of your home will qualify for a R2m capital gain exclusion. But if you have used the residence partially for business purposes and claimed tax deductions, a portion of the profit you make on the sale of your home will be taxed outright and will not qualify for the R2m relief, she cautions.


Tips for the self-employed

• "Self-employment is not for the fainthearted," says Susan Erasmus, a former teacher and medical journalist. "I have been freelancing for almost five years, and while it's wonderful to have so much more freedom to structure my own time, it does come at a price: there is no predictable salary at the end of the month. Income could vary from feast to famine."

To stop yourself from lying awake at night, she gives the following tips:

• Make sure you have at least enough capital to cover your expenses for three months.

• Cut your fixed costs to the bone, as this lowers the monthly financial pressure. When you have a bumper month, pay extra into accounts such as municipal ones. You will be relieved later when your finances are tight.

• Be disciplined about claiming expenses from the taxman - it's worth paying an accountant to maximise these for you.

• Make sure you at least have a decent hospital plan, gap cover, disability insurance and home and car insurance.

• It costs money to have a salaried job - commuting and work clothes. Work out how much you can save with these expenses reduced, and put it aside for a rainy day.

• Work your contacts, as that is how a steady flow of work is achieved in the long run.

• Remember that people in permanent jobs also face job insecurity as they could be retrenched if the company goes through a bad time.