Filing tax returns in Kenya by yourself is a daunting task for most people. It becomes more complex when you are running your own business. It is important to understand that managing taxes as a business owner comes with its own set of rules. Recently, the Kenya Revenue Authority announced the reintroduction of the three percent sales tax for those operating small businesses, revised penalty rates for late filing, among other changes. You have to be informed of such changes as they will affect your business in the long run.
What is the definition of a small business? In Kenya, a small business or microfinance entreprise is a business that has a turnover of below KES 5 million per annum.
For ease of filing tax returns successfully, always keep your books neat and updated. Consider hiring a qualified accountant to help you if possible. The following are some tips to improve your bookkeeping this tax season as a self-employed individual or small business owner:
- Use a simple spreadsheet for bookkeeping
Detailing and tracking your monthly expenses as well as income in a spreadsheet system will greatly reduce the stress you go through during the annual tax season. Common examples of spreadsheets are Google Sheets and Microsoft Excel. Proper record keeping will help you remain in compliance with proper tax filing.
- Never mix business expenses and personal expenses
Freelancers and small business owners make a common mistake of using the same account for business and personal banking. Separate your business account from your personal account once you have paid yourself. Never take money for personal expenses from your business as this will mess up your record keeping and wreck your business. Keep track of your receipts; personal and business receipts should remain separate.
- Comply with the timeline for tax submission
The tax season for small businesses and individuals usually starts from the January 1 – June 30. In those six months you can file your tax returns for the previous year. Do not wait for the last minute. The filing your taxes in a rush invites mistakes and you may fail to meet the deadline. This could cost your business a hefty fine in addition to takin a toll on you mentally. On-time submission allows for a healthy business culture.
- Stay on top of the various changes in tax obligations
Entrepreneurs should be aware of the different types of taxes they are obligated to pay in Kenya and any changes that could affect their tax liabilities. A perfect example is the Finance Act 2019 that was passed on November 7, 2019 and came into effect on January 1, 2020. It reintroduced the turnover tax for businesses whose annual sales are below KES 5 million. Not being aware of this new tax obligation could attract hefty penalties.
- Work with qualified experts
As a small business the cost of hiring an accountant to keep your books and file your taxes or even a law firm to advise you on what taxes as a business you should comply with is expensive. This doesn’t mean anyone who offers a low price is an alternative. Hiring unqualified people could end up costing you heavily in the long run. Qualified record keepers and accountants will ease make your tax season stress free.
- Avoid misclassification of employees
The classification of workers as employees or independent contractors determines whether an employer is responsible for withholding and paying employer taxes. The obligation to pay payroll taxes applies to employers with workers who are properly classified as employees as opposed to independent contractors. For a contractor, you don’t have to pay any employer taxes. If you get this wrong it messes up with the amount of deductions you can claim on business taxes.
- Rely on an income tally system that works
This is especially true for freelancers or self employed individuals who run small creative businesses. Usually you keep track of how much you owe in taxes by the 5 percent withholding tax, which is a deductible from your source of income or your client. The moment you are paid, 5 percent of total amount is withheld by KRA to track your earnings. Then a certificate is generated to let you know how much is due from you in taxes. It is up to you to track all of these certificates and remain tax compliant. If you underpay, again, interest and penalties can accrue.