Over the last two weeks, we have been focusing on the steps that newly self-employed persons should take to start out on the right footing in business. It is definitely a challenge to figure out which taxes are applicable and when they are due to be paid. Let’s take a look at the charges that sole proprietors are required to pay:
Income Tax
Income tax should be calculated on all sources of earnings including business profit, rent, and subcontracts. This tax is charged on the net profit after allowable deductions such as salaries, business rent, bank loan interest, transportation and all other expenses incurred in the production of the business income. The tax rate is 25 per cent of income, but persons are currently allowed to keep J$196,872 of their earnings tax-free.
Even though you are newly self-employed, you are still required to file an estimated income tax return. This outlines how much tax you’ll be liable to pay for the year, based on your expected taxable earnings. It’s best to be conservative when stating how much income you think you will earn when you’re just starting out.
Estimated income tax payments must be paid quarterly on the 15th of March, June, September and December each year, regardless of when you actually started operating. So if you commenced business in August, you will still need to pay up the quarterly amounts for March and June when you are filing for the September quarter.
An annual return outlining your actual income and tax liability is due by March 15th each year. If you earned less than J$1m in gross income you can just fill out an accompanying schedule that outlines your income and expenses. If your income is above this amount, you will need to submit more detailed documents like a profit and loss statement.
Note that losses from a business can be set off against all other income earned in that year. If a loss cannot be fully offset, the balance may be carried forward to the following year’s returns. If your tax liability is nil, it means that your estimated quarterly payments for the next year will also be nil, as they are calculated on the taxable income of the previous year.
The annual return form can be a little challenging for the average person, so it is advisable to get an accountant to calculate your final statement. Ensure that you keep proper records of all your expenses, as these can help to give you tax savings. You also need to keep your records for at least six years, as the tax department can request an audit on your books.
National Insurance Scheme (NIS)
All employed persons are obligated to make payments to the NIS, which was designed to provide retirement and other welfare benefits for its contributors. The law says that persons should contribute five percent of their gross income to the NIS, up to an earnings ceiling of J$500,000 per year. So the maximum that anyone would pay for NIS is J$25,000 per year.
To start the payment process, visit the nearest NIS office with your NIS card and you’ll be given a blue stamp book to record your weekly contributions. You have to buy J$20 stamps from the post office, which are to be affixed to each of the 53 spots on the blue book. Save time by buying all the stamps at once (J$1,060 for the year). If you’re newly self-employed, the NIS agent will tell you when your weekly obligations should start.
To complete the NIS payments for the year, take a copy of your annual income tax returns to the NIS to calculate the balance owed, if any. The NIS office will issue a demand notice which must be paid at the Inland Revenue Office. Then, take that receipt to the NIS office where they will record your payment and issue a new blue card for the current year.
National Housing Trust (NHT)
The law states that all persons between the ages of 18 and 65 years must contribute to the NHT once they are working and earning at least the minimum wage. The NHT classifies self-employed as persons who are working for themselves or earning an additional income to their regular pay cheque, contract workers and company directors, all of whom should pay three per cent of their income; while domestic workers, and Jamaican citizens working in embassies and consulates in Jamaica or overseas pay two per cent.
To register as a self employed contributor, you need to complete a declaration of income form which should be signed and stamped by a Justice of the Peace. This document outlines what you estimate you will earn for the year. Then, call the NHT office for an appointment with a compliance officer to determine your contribution amount. You will need your NIS card, TRN, valid identification, one passport sized picture, and some form of evidence of your estimated income.
NHT payments for the previous month’s contributions are due by the 14th of the current month. You can pay cash at any commercial bank and by debit or credit card at NHT offices island-wide. Note that late payments attract a 20 per cent interest penalty. Currently the NHT has an amnesty for outstanding contributions, so take advantage of this if you need to.
Next week we’ll conclude our series on self-employed start-up steps by looking at some other tax requirements.