Tax and multiple incomes

As economic times become more challenging and salaries are insufficient to keep up with the rising cost of living, an increasing number of South Africans are relying on multiple streams of income.

They are entrepreneurs with multiple businesses such as township entrepreneur Mpho and full-time employees who have a side hustle such as Sanet’s franchise business, or they may be earning an income as a contractor or freelancer such as lecturer Zinzy.

If you are earning multiple incomes, the first thing you need to be aware of is the possible impact this has on your taxable income. This is something that caught Zinzy unawares and resulted in a large tax bill from the SA Revenue Service (Sars).

Zinzy worked as a contractor for various universities prior to the Covid-19 lockdown in 2020. She earned an income from each employer who in turn deducted pay-as-you-earn (PAYE) tax.

Zinzy assumed that the PAYE the employers deducted was her full tax liability. When Sars sent her a notice that she owed R80 000 in tax, Zinzy thought it was an error by the revenue collector. What Zinzy did not understand was how the progressive tax system works.

As you earn more, the percentage of tax that you pay increases. This means higher income earners pay a larger percentage of their salary in tax than lower income earners.

For example, if you earn R250 000 a year, your marginal tax rate would be 26%. Based on this year’s tax tables, your employer would calculate your tax using R250 000 as your taxable income and deduct about R46 920* in tax per annum (R3 910 per month).

If, in addition, you worked for another employer, earning another R250 000, that employer would assume that this was your only income and apply the tax tables based on R250 000 taxable income. They would also deduct R46 920* in tax annually. The total amount of tax one would have paid between both employers would have been R93 840*.

However, when it comes to your annual tax return, your total taxable income is in fact R500 000 (R250 000 from employer one plus R250 000 from employer two). This means your marginal tax rate would in fact be 36%. Based on current tax tables, your tax liability would be R137 830* (R11 485 per month). As your employers had only paid R93 840 in total, this would result in an unpaid tax liability of R43 990 – a nasty shock when you submit your tax return.

(*To simplify the examples, the above tax calculations do not take into account the primary rebate of R16 425 or any other deductions. The calculation should be used for illustrative purposes only).

A freelancer or multiple income earner should calculate their total tax liability and make provision for this. If you earn multiple incomes, you need to check the tax tables available on the Sars website to understand how much additional tax you need to be putting aside. In the above example, if you are aware that you will face a shortfall of R43 990 for the year, you calculate what that would be per month (R3 665).

Every month you are paid, immediately put that money aside in a separate savings account. In this way you will have the funds available to meet your tax liability.