In this post we will be looking at small business taxation in Nigeria and types, why small businesses are required to pay taxes and small business tax rate by business type.
INTRODUCTION
Business taxation is essentially the tax businesses pay to the government as part of their operations. It is important that every business pay taxes, whether it falls under sole proprietorship, partnership, limited liability or a corporation. Your business is responsible for abiding by the tax regulations provided by your country of operation. Taxes are essential to the government because they are the primary source of revenue to fund the activities of the government on the federal, state and local levels. As long as your business is registered in a country, you are expected to remit a certain percentage of profit to the government of that country.
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It is essential to understand the tax process and regulation, whether small business or not. This will help decide how to maximize tax advantages and ensure that you pay on time, so your company wouldn’t have problems with tax regulators. Even though paying taxes is one aspect of a small business that most business owners try to avoid. According to conducted research, over 70% of small businesses in Nigeria are not paying their regular taxes to the government. When you make money with your own small business you have to pay income taxes just as if you worked for another company. In some cases, you may also have to pay additional taxes that are specifically associated with small business operations.
SMALL BUSINESS TAXATION IN NIGERIA AND TYPES
Small businesses in Nigeria are liable for various tax obligations to various governments in Nigeria. It is important to know the taxes small businesses will be subjected to before commencing the operation. Upon the registration of a business, such business is required to start remitting a certain amount of the profit derived from the business to the government. It is important to state that small businesses are not completely exempted from paying taxes although such businesses are exempted from paying company income taxes depending on the turnover of the company.
Types of taxes for small business in Nigeria
Business taxes aren’t just about income taxes. Just like people in general, businesses must pay several different kinds of taxes. If you are just starting your business, you need to know what taxes you are subjected to paying.
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- Personal Income Tax: all small business owners are liable to pay their personal income tax which is governed by the Personal Income Tax Act (Cap P8 LFN 2004), for each year of assessment from their source of income for the year, which also includes the profit made in the small business. It is paid as a direct assessment which is applicable to sole proprietors (small business) owners. The tax is paid from the income earned in the preceding year without notice or demand from the relevant tax authority. The deadline for remittance is the 31st of January of the succeeding year. Although the collection of this form of tax is the federal responsibility, it is however collected by the State government through the State Inland Revenue Service (SIRS).
- Self-Employment Tax: Self-employment tax is a type of tax primarily for individuals who work for themselves. Self-employment taxes are paid by sole proprietors and partners based on the income of the business. Because business owners are not employees, there is no pay to withhold these taxes from, so self-employment tax is the alternative. LLC owners also must also pay self-employment tax. Owners of corporations who work as employees do not have to pay self-employment tax.
- Sales Tax: Sales tax also known as Value Added Tax (VAT) is required to be collected by merchants in most states and paid to the state department of revenue. Specific products and services are sales-tax eligible and money must be collected and paid, and reports must be completed on a regular basis. There are two main methods of calculating VAT: the invoice-based method and the subtraction or accounts-based method. Using the invoice-based method, sales transactions are taxed, with the customer informed of the VAT on the transaction, and businesses may receive a credit for VAT paid on input materials and services. The invoice-based method is the most widely employed method. The tax rate payable on the purchase of certain goods and services is 7.5%
- Company Income Tax: this form of tax is paid to the Federal government and it is imposed on the profits of companies incorporated in Nigeria. Although with the new Finance Act 2019, small businesses with an annual turnover of less than N25 Million are now completely exempted from paying company income tax. Hence, the company income tax rate for small businesses with a gross turnover of less than N25 Million Naira is 0%.
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- Withholding Tax: this is a tax paid from payments due to companies or individuals whether resident in Nigeria or not, that provides goods and services to individuals or companies in Nigeria. The period for filing withholding tax is on or before 21 days after the duty to deduct arose for deductions from companies. It is an advance payment of income tax. Withholding tax is charged at the rate of five percent (5%) or ten percent (10%) depending on the type of payment or nature of the transaction and also whether the beneficiary of the payment is an individual or a corporation.
- Business Premises Levies: this levy is a form of tax paid on property used for the production of income, office buildings, factories, etc. paid to the State government. The tax rate paid is usually N10, 000 (Ten Thousand Naira) for registration and N5, 000 (Five Thousand Naira) for subsequent renewals in respect of urban and N2, 000 (Two Thousand Naira) in rural areas. This form of tax is paid in Lagos State to the Lagos Internal Revenue Service.
Small business owners are also required to register and obtain a Tax Identification Number (TIN) from the State Inland Revenue Service for the purpose of paying their relevant taxes. The TIN is simply an identification number unique to a business owner which is used in the administration of tax and making tax returns to the relevant authority.
WHY SMALL BUSINESSES ARE REQUIRED TO PAY TAX.
Businesses need to pay taxes on time as it provides money to the government to pay the salaries of government employees, support and maintain common resources like police, army, and firefighters, and provide proper infrastructure and fund for public places like libraries and parks. Besides helping the government perform its duties properly, it also benefits the businesses to pay taxes promptly and on time. Businesses, at times, try to delay their tax filings because of cash flow concerns. This happens mostly with small businesses. The tax filing is also a resource-draining and burdensome endeavor for businesses that have limited manpower resources. But one must try to pay tax on time due to the following reasons:
- To Avoid Penalties
- Get Good Credit Ratings
- Increased Investor’s Confidence
- Gives Complete Peace of Mind
SMALL BUSINESS TAX RATE BY BUSINESS TYPE.
Small business taxes can be complicated, as there isn’t a single tax form or even a single tax rate that applies to all businesses. How you file your taxes and the rate you’ll pay on business profits will depend on your business entity structure. Businesses organized as corporations pay the corporate tax rate, which is 21%. Other business structures — including sole proprietorships, partnerships and corporations and their incomes are taxed at the owner’s personal tax rate, which is between 10% to 37%.
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Limited liability companies (LLCs) may either pay taxes as a corporation or as a pass-through entity. Resident companies or businesses are liable to corporate income tax (CIT) on their worldwide income while non-residents are subject to CIT on their Nigeria-source income. The CIT rate is 30% for large companies (i.e., companies or businesses with gross turnover greater than NGN 100 million), assessed on a preceding year basis (i.e., tax is charged on profits for the accounting year ending in the year preceding assessment). Investment income paid by a Nigerian resident to a non-resident is sourced in Nigeria and subject to WHT at source, which serves as the final tax.
In respect of business profits, a non-resident company (which is not tax resident in a treaty country) that has a fixed base or a PE in Nigeria is taxable on the profits attributable to that fixed base. Non-resident digital companies (which are not tax resident in a treaty country) that have a significant economic presence (SEP) will be subject to income tax in Nigeria on profit attributable to the taxable presence in Nigeria.
CONCLUSION
Tax payment is important for the growth of a small business and ensuring tax compliance helps to secure the business and avoid any form of default and sanctions. Paying tax as a small business is also advantageous to the business owner as its evidence that the business is a committed one and it helps to also boost the reputation of the business owner especially when dealing with investors.