As with most countries in the world, Kenyan residents are required by law to declare their income tax returns to the Kenya Revenue Authority (KRA). However, this is not always a smooth and easy process. Tax management may be overwhelming and troublesome for many.
There are different tax obligations varying according to individual or type of business. There are various legal ramifications to anyone who fails to meet their tax obligations including penalties and PIN deregistration. Hence a freelancer needs to consider the tax implications of registering as a sole trader, company or partnership.
As a freelancer, your tax obligations may differ from employed individuals since you have no single employer. Employed individuals’ income is usually subjected to PAYE tax which is usually deducted at source. PAYE is a form of Withholding Tax requiring employers to deduct it from gross pay and remit to it KRA.
Your tax liabilities as a freelancer will be based on different tax regimes as a freelancer.
Value Added Tax (VAT)
VAT is the tax charged on the supply and importation of goods and services made in Kenya. Currently, the VAT tax rate is 16% for goods and services.
It is important to note that as a freelancer you should NOT register for VAT if your annual sales do not exceed KSh.5 million. You can also voluntarily register for VAT if needed. However, this will add to the overwhelming nature of tax management as you will be expected to file nil VAT returns monthly. Failure to do so will attract a penalty.
VAT on many freelancing platforms such as Upwork is collected and remitted to KRA by the platform.
PAYE
This is only applicable if your business has employees. You will have to file statutory deductions like HELB, NHIF, and NSSF monthly if you activate PAYE.
Withholding Tax (WHT)
Businesses will deduct 5% WHT for professional and management fees for services offered by freelancers and consultants. This tax is applicable for services exceeding KSh. 24,000 per month. It is important to note that WHT applies only to services offered and not goods sold.
The deducted amount will be remitted to KRA as a prepayment of your annual income tax.
Determining Income Tax Due
The 5% WHT is not a final tax and freelancers will be expected to account for their full annual income tax. Unlike employed individuals, freelancers are taxed based on their net income and not gross income.
Business expenses incurred directly while running your business such as rent, wages, and electricity are tax deductible. These expenses are deducted from the gross pay to determine the net profit. The tax rate applicable on the net profit will vary according to the different brackets ranging from 10%, 15% and 30%. This gives the tax payable.
Once you have determined the tax payable, deduct the WHT paid by your clients to find the tax amount due to KRA.
