The freelancer’s quick guide to tax obligations

Any income earned from formal or informal employment is taxable under Kenya’s laws. As a consultant, you need to keep an eye on your iTax account to ensure that your name and business don’t find themselves on the chopping block for non-compliance.

As the deadline for filing your taxes approaches, Christine Odeph speaks to Susan Keter, a senior consultant at Ushuru Masterclass Kenya Ltd (ushuru.co.ke), to understand the types of taxes and levies that private consultants or freelancers must remit to the Kenya Revenue Authority (KRA). Ms Keter specialises in tax compliance and bookkeeping.

How do we define freelancing?

Broadly speaking, a freelancer is a person who operates on a contract basis for multiple companies, rather than working as an employee for a single company.
Freelancers are considered self-employed and have the freedom to choose the projects and companies they would like to be associated with. They can be paid cash in a lump sum, hourly, monthly or even quarterly, depending on the contract.

What types of occupations does the taxman consider freelance?

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 an self-employed marketers.

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From a KRA perspective, as long as you earn any business income, you are a freelancer, even if it’s a side hustle while you are still employed, and therefore, bloggers, consultants, musicians, artists, athletes, DJs, vloggers, and social media influencers fall under here. 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.

This is why we have different columns on the tax return form for other specified sources of income - but one only needs to file a single annual tax return before June 30 of the following year.

If a person is formally employed but also has a consultancy/side hustle, the consultancy business will be taxed separately from the employment income, as would any rental or agricultural income earned by the same person. If you have withholding tax certificates for the year, then you are considered a freelancer because withholding tax at 5 per cent generally applies to management and professional fees of over Sh24,000 per month.

Tell us about the administrative set-up a freelancer should have in place.

There are three key areas all consultants should look at: tax registration, how to invoice and what to expect from their clients regarding invoicing and payments. The main factor to remember is not to register for VAT as a default if you have not attained annual sales of Sh5 million. One can, however, 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. Consultants should expect withholding tax to be deducted from their pay if it exceeds Sh24,000 per month.

This withholding tax of 5 percent is not final as the freelancer is still required to account for their full tax at the year’s end. A freelancer should also consider what the legal implications are of registering a company, being a sole proprietor or a partnership. These business entities have varying legal and tax implications.

How should a freelancer go about billing?
First, always negotiate for milestone payments and a deposit before work begins. Never accept to work for free because the KRA only accepts legal currency.

Many companies require you to issue your invoice in a specific way, for instance, company details, description of services and PINs. When invoicing for work done, a freelancer should negotiate for favourable terms such as a deposit at commencement, milestone payments and payment at completion. One should also inquire what details your clients want to see in your invoice to be compatible with their ERP system.

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.

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.

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, by the 20th, even if you have not been paid. This is why milestone payments and deposits are critical for running a cash business.

Another important reason for doing all this is the Tax Compliance Certificate (TCC). Conducting any business services with corporate clients and government entities may at times require a TCC, which you can only get once you have filed all your tax returns and paid all your taxes.

As in the example above, you can see that freelancers are taxed on their net income and not gross income - this means your expenses are as important as your income. If your income is not subject to withholding tax, the illustration would still apply, without deducting withholding tax.

The first thing to remember is that as a consultant, withholding tax of 5 percent is not a final tax, this is a common misconception. Secondly, not all freelance income is subject to withholding tax, which only applies to consultancy income.

For instance, if you sell mobile phones, laptops, shoes and clothes, then withholding tax does not apply to you.

You need to 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, licences, 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.

Isn't VAT registration automatic in business registration?

It’s not. You only need to register for VAT if your annual sales exceed Sh5 million per year, although you can still voluntarily register even if your turnover is less than this. Withholding tax applies to management and professional fees, generally known as a consultancy, where the client sends you a withholding tax certificate for the value of the tax. This is automatically done via the iTax portal.

A consultant only needs to have 1 PIN certificate, and if you have registered a company, the company needs to have a PIN too.

A PIN certificate is required when opening a bank account, getting a water or electricity meter or for purchasing insurance.

About the experts
Ushuru.co.ke is an online tax filing site designed to make the tax filing process in Kenya efficient, so that employees, freelancers and business concentrate on their core business. The site provides end-to-end assistance with tax filing, iTax tasks, bookkeeping, auditing and management advisory.