Freelancing in Kenya offers the flexibility of being your own boss, but it also comes with unique responsibilities, especially when it comes to taxes. Unlike salaried employees whose taxes are deducted at source, freelancers are responsible for reporting and paying their taxes independently. Understanding how to file taxes as a freelancer can be daunting, but this guide will help you navigate the process with ease.
1. Register for a KRA PIN
The first step in filing taxes as a freelancer in Kenya is obtaining a Personal Identification Number (PIN) from the Kenya Revenue Authority (KRA). This is mandatory for anyone earning an income in Kenya, as it is used for tax transactions. You can register for a KRA PIN through the iTax portal by providing your personal details.
2. Determine Your Taxable Income
Freelancers are required to pay taxes based on their total earnings. Your taxable income includes all payments received for your services, whether from local or international clients. It is important to keep accurate records of all your income streams, including invoices, receipts, and bank statements.
For freelancers who receive payments from abroad, you are still required to report this income in your tax returns. These earnings are taxable in Kenya unless you have a legal exemption.
3. Understand the Types of Taxes You Need to Pay
Freelancers in Kenya are liable for several types of taxes, depending on their level of income and services provided:
- Income Tax: Freelancers must declare and pay income tax on their total annual earnings. Income tax is progressive, meaning you will be taxed at different rates depending on how much you earn. For example, if you earn above Ksh. 288,000 annually, your tax rate will be 30% for any income above that threshold. This is done through the annual self-assessment filing.
- Pay-As-You-Earn (PAYE): While freelancers are not employees and don’t have an employer to deduct PAYE, they must still file annual returns based on their earnings. If you have freelance contracts that involve long-term work, you may be asked to deduct PAYE for yourself.
- Turnover Tax (TOT): If your annual gross turnover is between Ksh. 1 million and Ksh. 50 million, you are eligible for turnover tax, which is charged at 1% of your gross income. TOT is reported and paid monthly.
- Value Added Tax (VAT): If you earn more than Ksh. 5 million annually, you are required to register for VAT. VAT is charged at 16% on taxable goods and services, and as a freelancer, you may need to add this to your invoices and remit it to KRA monthly.
4. File Your Tax Returns
As a freelancer, you must file annual tax returns through the iTax portal, which is KRA’s online system for managing taxes. The filing deadline is June 30th each year. Late filing can result in penalties, so it’s crucial to ensure you meet this deadline.
You can file your taxes by filling out the Income Tax – Resident Individual Form on iTax. Here, you’ll input details of your income, tax reliefs, deductions, and taxes paid. If your taxes for the year exceed what you’ve already paid through instalments, you’ll be required to pay the outstanding balance.
5. Keep Accurate Records for Tax Compliance
Freelancers need to maintain detailed financial records to ensure they can accurately report income and expenses. These records include:
- Invoices issued to clients.
- Receipts for any expenses related to your freelance work.
- Bank statements showing payments received.
Having clear records not only helps during tax filing but also protects you in case KRA audits your finances.
6. Tax Reliefs and Deductions for Freelancers
As a freelancer, you are entitled to some tax reliefs and deductions that can lower your tax liability. For instance:
- Personal Relief: All individual taxpayers are eligible for a personal relief of Ksh. 2,400 per month (Ksh. 28,800 annually).
- Insurance Relief: If you pay for health or life insurance, you may qualify for insurance relief, which is 15% of the premiums you pay (capped at Ksh. 60,000 annually).
- Expenses Deductions: You can also deduct business-related expenses from your taxable income. This includes internet bills, software subscriptions, office supplies, and travel expenses related to your work.
7. Paying Taxes on Installments
If you expect your tax liability to be more than Ksh. 40,000 annually, you are required to make quarterly tax payments to avoid a large lump sum payment at the end of the year. These installment payments are due on:
- April 20th
- June 20th
- September 20th
- December 20th
8. Penalties for Non-Compliance
Failure to file your taxes on time or incorrectly reporting your earnings can lead to significant penalties. The fine for late filing is Ksh. 2,000 or 5% of the tax due, whichever is higher. Additionally, if you fail to pay the taxes owed, a further penalty of 20% on the unpaid amount will be applied.
9. Consult a Tax Professional
The tax system can be confusing, especially for freelancers dealing with multiple income sources, international payments, and various tax obligations. To avoid making costly mistakes, consider consulting a tax professional who can help you navigate the process and ensure that you remain compliant.
Conclusion
Filing taxes as a freelancer in Kenya may seem overwhelming at first, but once you understand the basics and stay organized, the process becomes manageable. By registering for a KRA PIN, keeping accurate records, filing your returns on time, and understanding your tax obligations, you can fulfill your tax duties and avoid penalties. Take advantage of the tools and resources available, like the iTax portal, to simplify the process and stay compliant.
