Self-employment can be an exciting experience, allowing individuals to control their own time, pursue ambitious goals, and provide employment opportunities. However, accurately tracking and remitting taxes throughout the year can be challenging for self-employed individuals. In this article, we will discuss how self-employed individuals can estimate and remit their taxes throughout the year to avoid the risk of being hit with a large tax bill all at once.
Why Self-Employed Individuals Need to Make Estimated Tax Payments
While tax returns are filed once per year, individuals are required to pay taxes on their income throughout the year. Withholding taxes are usually taken care of by employers on behalf of employees, but self-employed individuals must estimate and remit their own tax payments. Failure to do so may result in a large tax bill that can be difficult to pay at once, leading to debt or bankruptcy.
How to Make Estimated Tax Payments
The first step in making estimated tax payments is to calculate what you owe. Self-employed individuals typically use their previous year’s income as a starting point and estimate their current rate of earnings, credits, and deductions to determine their estimated tax liability. The government provides resources and guidelines to walk individuals through the process, which can be found on the Federal Inland Revenue Service (FIRS) website.
Important Things to Note About Taxes on the FIRS Website
The Personal Income Tax Act Cap P8 LFN 2004 (as amended) guides personal income tax, which is imposed on the income of individuals, corporate sole or body of individuals, communities, families, and trustees or executors of any settlement. Individuals are entitled to a Consolidated Relief Allowance of N200,000 or 1% of gross income (whichever is higher) plus 20% of gross income. The rate of tax ranges from 7% to 24%, depending on the amount of chargeable income, and individuals are subject to a minimum tax of 1% of gross income if their income is less than N300,000 per annum.
Filing and Remittance of Taxes
The tax is administered by the FCT/States Internal Revenue Service (IRS) for residents and by the FIRS for non-residents, members of the Armed Forces, Police, and Officers of Nigerian Foreign Service. The due date for filing returns of the tax is March 31st of every year, while the due date for remittance of PAYE is the 10th day of every succeeding month. Employers must file returns of emoluments and tax deducted from employees not later than January 31st of every year. Failure to file a return may result in a fine of N5,000 and a further sum of N100 for every day during which the failure continues or imprisonment of six (6) months or both. Employers who fail to file a return may be liable on conviction to a penalty of N500,000 for body corporates and N50,000 in the case of individuals.
Calculating and Paying Taxes
Calculating and paying taxes is relatively straightforward if accurate records of income and expenses have been kept using accounting software. However, if records are disorganized, it may be necessary to hire an accountant or bookkeeper to accurately calculate income. It is essential to plan ahead and give adequate time to avoid missing deadlines. FIRS provides several methods for payment, which can be found on their website.
Conclusion
Self-employment is a rewarding experience that requires accurate tracking and remittance of taxes throughout the year. By estimating and remitting taxes throughout the year, self-employed individuals can avoid the risk of being hit with a large tax bill all at once. The FIRS website provides resources and guidelines to walk individuals through the process of estimating and remitting.
