Does the taxman need to know about your side-hustle?

Laura du Preez | 03 October 2022

Laura du Preez has been writing about personal finance topics for more than 20 years, including eight years as personal finance editor for two leading media houses. 

If you are making money from a side-hustle, you probably need to declare it on your tax return.

One in five city-dwelling South Africans have a side-hustle business in addition to their day job, this year’s Old Mutual Savings and Investment Monitor shows.

Whether you are making lunch for colleagues at work, making clothes, pet-sitting, tutoring or delivering Uber Eats, if your side-hustle and day-job income together amount to more than the tax threshold, you need to declare the income, Doné Howell, a tax director at BDO, says.

Your “hobby” becomes something that you must declare when your intention is to actively undertake it as a business with the purpose of making a profit, she says.

Last year Momentum and Unisa’s Household Index showed that the bulk of South Africans who are side-hustling are earning between R12 000 and R250 000 a month, putting them well beyond the tax threshold (about R7 600 a month or R91 250 a year if you are under the age of 65).

Declare the side-hustle income no matter how little it is, Yolandi Esterhuizen, director of product compliance at Sage Africa & Middle East, says.

How to declare it

Income earned from your side-hustle must be recorded in the Local Business section of your personal tax return (ITR12), Nicci Courtney-Clarke, the chief operating officer and head of tax at online tax practitioner TaxTim, says.

This  income will be added to your salary income and will be taxed according to the normal tax tables at your marginal tax rate. Read more: How do the income tax brackets work and what is my marginal tax rate?

Entities may notify SARS

If your side-hustle involves another entity, be aware that it may have to declare the income paid to you to SARS.

Esterhuizen says international platforms, like Uber and AirBnB, generally make tax compliance the responsibility of their users and hosts.

But Courtney-Clarke says SARS is focussing on collecting data from third parties and announced last tax season its collaboration with Airbnb, as well as various crypto exchanges.

If you freelance or contract with a South African company, it might add you to the payroll, deduct a withholding tax and provide an IRP5 at the end of the tax year to you and to SARS.

Don’t take the risk of keeping quiet

It’s advisable to declare additional income to remain tax-compliant.

You may think that no one will know about your side-hustle income, but SARS uses multiple data sources, including bank records, property deeds, motor vehicle registrations and more, to watch for taxpayers with unexplained income and wealth, Esterhuizen says.

SARS can cross-reference your tax returns with properties you own and listings on an accommodation platform, for example, she says.

SARS is also watching out for taxpayers who earn money through overseas businesses and fail to declare it on their local tax returns, Esterhuizen says.

Courtney-Clarke says there is always a chance of SARS identifying a risk and then auditing a tax return from a previous year – even if the previous year’s return was finalised.

If you fail to declare some of your income and SARS finds out, it could levy a penalty of up to 200% of the tax payable - plus interest, she says.

Howell says not declaring your income is not only a criminal offence but can be costly. SARS recently did lifestyle audits on 24 taxpayers and recovered R700 million from them.

Taking the risk of not declaring is not worth it for such a small amount of money, and you don’t want to be worrying if your business gets bigger, she says.

If you have failed to declare – use SARS’s voluntary disclosure programme to come clean and avoid criminal prosecution, she advises.

Beware of provisional tax

If your side-hustle is flying, be careful that you don’t become liable for provisional tax or tax paid in advance, Howell says.

You are obliged to register for and pay provisional tax when you earn more than R30 000 of income from which pay as you earn tax is not deducted. Read more: What is provisional tax? and Should I be registered for and paying provisional tax?

Esterhuizen says when your part-time business becomes profitable, ensure you set aside the money you need to pay provisional tax in August and February.

When your turnover exceeds R1 million you will also be obliged to register for VAT, Howell says.

Claiming expenses

If you declare your side-hustle income, you can also claim expenses directly related to generating that income as a deduction, the tax practitioners say. 

If your side-hustle is initially unprofitable, legitimate tax deductions for expenses can help you grow your business, Esterhuizen says.

Your side-hustle expenses can even reduce some of the tax you pay on the income you earn from your day job, although there are some caveats, she says.

SARS can ask you to show that your side business has the potential to generate taxable income within a reasonable period, she says. You can’t expect to run at a loss that reduces your tax burden forever. 

If your losses continue into a third tax year, SARS will not allow those losses to offset tax on the rest of your income. The loss may then be ringfenced and only offset against future profits from your side business, Esterhuizen says.

In order to deduct your side-hustle expenses against your employment income you must be able to prove your costs, Howell says.

You don’t need to register as a company to do this – you can trade as a sole proprietor, but you’ll need to prove you are running a business, she says.

You cannot, for example, buy a second property for your family, not charge a fair rental and claim the expenses, she says.

Tax tips for side hustlers

It is always best to have a separate bank account for your business but it doesn't have to be an expensive business bank account, Howell says.

You should also be issuing invoices, have records of card transactions on Speedpoint devices, or at the very least, cash receipts if you have a small cash business, she says.

Esterhuizen and Courtney-Clarke suggest keeping accurate records – including invoices and statements - of expenses such as Wi-Fi, inventory, contractors, electricity, water, staff and wear and tear on equipment such as computers or printers.

If you can’t prove your income or expenses, you are likely to be audited by SARS, Howell says.

SARS tends to flag provisional taxpayers’ expenses for verification, Esterhuizen says.

Courtney-Clarke says SARS checks entertainment expenses closely so claim for taking an important client out for dinner, but not for a “date night” with your partner.

She also suggests you keep a detailed logbook backing up any business mileage you do in your vehicle. 

Identify which portion of expenses such as petrol and cell phone costs are personal and which is business, using your logbook and cell phone records, she says.

If you want to claim home office expenses, you may have a dedicated space for this. The couch in your lounge is not good enough, she says. Read more: Can you claim a home office tax deduction?

Esterhuizen says using a registered tax practitioner can be helpful as they may be able to identify legitimate tax deductions that can help you to bring your tax bill down.