Taxation of a sole trader in Nigeria: Facts you must know

  Taxation of a sole trader in Nigeria: Facts you must know

Taxation of a sole trader in Nigeria: Facts you must know – Taxation of a sole trader in Nigeria and elsewhere emphasises on good tax process understanding and Tax Planning. The applications deal with sole proprietorship income tax calculation which involves tax  allowable expenses deductions and non-allowable expenses  additions. Sole Proprietorship tax calculator and  tax  return forms. Here are facts you must know about sole trader tax processes in Nigeria. Please understand that what is called sole trader or sole proprietor in this post is what is commonly called in Nigeria ” Business Man”.

As a sole proprietor, while making your annual tax returns, you must report all business income or losses on your self-assessment personal income tax return. You have to understand that the business itself is not taxed separately. This is a “pass-through” taxation, because business profits pass through the business to be taxed on your personal tax return. That is to say, your trading business income and profit are yours. Unlike in a limited liability company, here there is no separation between you and your sole trading business.

Taxation of a sole trader in Nigeria: Facts you must know

Facts You Must Know:

To start with, it’s important you understand that Nigeria operates a self-assessment tax regime. It’s a tax regime that allows you to personally assess yourself to tax and make such returns to the tax office.
You also need to know that there are three tax authorities in Nigeria. The federal Inland Revenue Service (FIRS). the State Internal Revenue Service(SIRS) and the Local Government tax authority. The FIRS handles company taxes and other assigned tax obligations while  SIRS handles every tax matter that relates to individuals based on their residence. The Local government tax authority takes charge of the residual tax matters especially of the local community taxes.
Therefore, our discussion on Taxation of Sole Trader in Nigeria: Facts you must know are tax matters that fall within the purview of SIRS and the local authority tax offices.
Listed here are facts you must know about your trading business income/profit and your other personal income in relation to their tax implications on your personal income tax liability. These are to help you understand what should be in your tax self-assessment form while making your annual tax returns. They are a session of questions and answers for your good undertstanding of the sole trader  tax process in Nigeria.
Included here also, are our platform for comments and contacts in the case you need further explanations on these tax matters. And when you need to render your annual tax returns, our services cover all.

Taxation of a sole trader in Nigeria: Facts you must know

Who is a sole trader or sole proprietor?

In Nigeria, people are fond of saying ” I’m a business man”. With the exception of those operating Limited Liability companies, whether registered or not, this is the sole trader or sole proprietor, and he/she is our concern in this post. What we mean here, are  businesses that legally have no separate existence from their owners.  The sole proprietorship is the simplest form of business  under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts.

What is an example of a sole trader?

All those traders; market men and women traders in Ariaria Market Aba, Alaba Market Lagos, Otu Market in Onitsha, Sabon Geri Market Kano, Wuse Market Abuja etc., carpenters, masons etc. who work for themselves, take the entire profit or loss are examples of Sole Trader.
Their individual tax responsibilities are our concern in this post.

What does individual sole trader mean?

An individual  trader business structure is a person trading as the individual legally responsible for all aspects of the business. Individual sole trader is different from a group of sole traders who come together to do business. It may be a formal partnership or non-formal partnership, but the point here is that the risk and return associated with this business is not now an individual thing.
The tax implication of such sole trading structure is also covered in this post.

What tax law covers Sole Traders Taxation?

The income of individuals in any form –  employee, sole trader, artisan etc. – are covered in the Personal Income Tax  Act (PITA) as amended. This Act is our reference point in this post.

Does the Consolidated Tax Relief cover sole traders?

Yes. Every individual income tax calculation apply the Personal Income Tax  consolidated Tax Relief formula.

What is this Personal Income Tax Consolidated Tax Relief formula like?

The Consolidated Relief Allowance (CRA) is a relief granted to a tax payer to reduce the tax burden on the tax payer. Under the Personal Income Tax Act, the CRA  consists of:
  • The sum of N200,000 or 1% of the gross income whichever is higher, 
  • Plus 20% of the gross income. 
  • In the end, the sum of the CRA is deducted from the gross income or profit of the tax payer to arrive at the taxable income.

For example, if your income or profit is N600,000.00. Your CRA will be: 
N200,000 + 20% of N600,000; i.e. N200,000 + 120,000 to give N320,000 as the CRA. Therefore, your taxable income becomes, N600,000 – N32,000.00, which is N280,000.00.

What tax do sole traders pay annually?

All self-employed people – Sole traders and Partners in a partnerships – are taxed under  the 
self-assessment system each year. They  pay income tax and other business associated taxes.
As a sole proprietor you must report all business income or losses  and other personal income on your personal income tax return. Your business itself is not taxed separately. 

 Do I have to register as a Sole Proprietor?

A lot of business men/women do their business without registration.  Even though this is practicable, it’s not the best. If you register your business, and so have Corporate Affairs  Commission (CAC)  business name registration certificate, you will have a better legal standing to do business. Most government offices and parastatals, NGOs and other high profile organisations, wouldn’t do business with you if you are not registered. Contact us today to register your business name with CAC.

Taxation of a sole trader in Nigeria: Facts you must know

How much does it cost to register a sole proprietorship business with CAC?

It doesn’t cost much. Together with our professional fees you will only pay N30,000.00. Your certificate will be ready in 3 days.

When should I register my sole trading business?

I would say, TODAY. Just call us and it will be done in less than a week.

What Is The Difference Between Self-Employment and Employment Tax?

The tax compliance for these two set of tax payers fall under the Personal Income Tax Act. The employment tax is called PAYE – Pay As You Earn – and is deducted at source and remitted to the tax authority on monthly basis, while those of the self-employed (business man/woman) is paid annually on preceding year basis.
If you are on employment and also earn other income like Rent or Royalties, you have to include all of these at the annual summary of your tax returns to the tax authority.

What percentage does a small business pay in taxes?

As explained above, there is no difference between your person and your sole trading business. The rate of your tax payment is the same as in the Personal Income Tax Act. The tax rate is divided into the following income slabs.
  1. The minimum PIT rate is 1% if your annual income is less than ₦300,000. 
  2. If then you earn more than N300,000.00, then you have to  apply the following tax rates for your  tax calculations:
  • The first ₦300,000 of your income are taxed at 7%; 
  • The next ₦300,000 are taxed at 11%; 
  • The next ₦500,000 are taxed at 15%;
  •  The next ₦500,000 are taxed at 19%; 
  • The next ₦1,600,000 are taxed at 21%;
  •  If you have anything more than  ₦3,200,000 as in the calculation above, the tax rate is 24%. This is the last tax rate, so no matter what other income you earn after N3,200,000.00 24% tax rate will apply.

 Now all you have to do is to apply the formula above to your income after deducting the consolidated tax relief. 
Where the calculation becomes messy, please, don’t hesitate to call on us. With little fee the problem will be out of your shoulder.

Taxation of a sole trader in Nigeria: Facts you must know

What can a sole trader  claim on his/her tax return?

  • You have to claim or adjust your business income with every allowable business expenses and depreciation to arrive at your Assessable Income. 
  • Then work out and deduct Capital allowances,  after which;
  •  You calculate and deduct your consolidated personal income relief. 
  • Then work out your tax liability and now;
  • Deduct Withholding taxes already suffered to arrive at your net tax payable.

But don’t worry about all of these technicalities. We will help you out if you contact us.

Can a sole trader  pay himself a wage?

Whether you call  it wages or drawings from your business, as a Sole Trader, you’re taxed on the profits that your business makes. Essentially, your profit is the income that your business receives, minus the allowable business expenses that have been incurred. 
The implication of this is that you will pay tax on what you call salary or drawings to yourself. That means, every taxable income is taxed and then you can use your money as you like.

What are the advantages and disadvantages of a sole trader in relation to tax liability?

One major disadvantage of sole trading is that you have unlimited liability for debts as there’s no legal distinction between  your private life and your  business life. Consequently, your business tax liability is your personal tax liability.
An inherent advantage here is that once your personal tax liability is taken care of, your business tax liability is also ok.

Are sole proprietors taxed twice?

No! That is not proper. 
There are policies that take care of double taxation and even multiple taxation systems in a tax regime.     
The truth is that  sole proprietorships are not considered tax entities separate from their owners, so owners do not face double taxation.

What taxes do you pay if you are self-employed?

You will pay your personal income tax and other business associated taxes.

Taxation of a sole trader in Nigeria: Facts you must know

How much can a retired person earn without paying taxes?

If you are a retiree in business, you will pay tax subject to your business income, as have been explained at various points above. The fact is that tax is paid on earnings and not on whether it’s earned by a retiree or not.

Do I pay tax on drawings as a sole trader?

As explained above, a sole trader’s wages is called ‘drawings’. This is any money you have taken out of the business for personal reasons. Lunch paid for with the business card is drawings, cash taken out to pay your house rent is drawings.  You really have to know that, as a sole trader, your drawings are not tax deductible expenses.

I’m a sole trader, how do I pay my  tax? 

If you want to pay your tax, and don’t know how to go about it, call us on +234 8034347851 or email us via cfmclimited@gmail.com. We will help you fix all your tax challenges.

Can a sole trader be VAT registered?

Yes. That’s what qualifies you to also collect VAT (output VAT) on behalf of the tax authority.

Taxation of a sole trader in Nigeria: Facts you must know

Do sole traders pay VAT?

Yes! But you have to be VAT-registered at the nearest tax office. We can help you do this also.
Every VATable person that deals on VATable goods and services will incur input VAT and receive output VAT.  The difference between input VAT and output VAT is what you are going to pay as VAT.
However, as the common practice is with many sole traders in Nigeria without VAT transaction records, the tax office will simply collect 5% of your total turnover as VAT. For more explanations, please contact us today.

Can you be a sole trader while employed?

Yes. Many civil servants and company works have private businesses in Nigeria. In fact, it’s advisable for those nearing retirement.

How is partnership income taxed?

Every partner is taxed based on his earning in that business in addition to his other private earning. 

What can be written off as business expenses?

You have to write off every business related expenses that are reasonable, wholly,  necessary, relevant, exclusive to the business.

How do I set up a sole proprietorship?

Get business ideas by visiting our Business-Tips platform and then call on us to do your business plan with which you can look for capital/investors and then start off.

Can a minor start a sole proprietorship?

A minor is one below the age of 18. In Nigeria a minor doesn’t have business capacity in the eye of the law.

Taxation of a sole trader in Nigeria: Facts you must know

What are the main advantages of a partnership in relation to that matters?

Partners pool their recourses together for business and share returns and risks including those of the business tax. In tax matters, every partner is a ‘stand alone’.

How do I reduce my self employment tax?

You can reduce your tax liabilities by doing any or some of the following:
  1. Contribution to the National Pension Fund (NPF, at least 8% of income);
  2. Contribution to the National Health Insurance Scheme (NHIS, 5%); 
  3. Contribution to the National Housing fund (NHF, 2,5%); 
  4. Then get 

  • Life Assurance policy; 
  • Dividends and interests from quoted companies (franked investment); and

     5. Make claims for:
  • Capital allowances
  • Rent and business expenses; 
  • Bad debt recovered; 
  • Consolidated relief allowance (1% of Gross income or ₦200,000 + 20% of earned income). 

Taxation of a sole trader in Nigeria: Facts you must know

Taxation of a sole trader in Nigeria: Facts you must know

What are net income?

Your net income for tax purpose  is your gross income less all the non-taxable income and allowances stated above.

Do you have to pay income tax even at  age 70?  Do senior citizens pay taxes in Nigeria?

Remember, as stated above, it’s not age that pays the tax but the business you do.
So, it’s income, not age that determines when you can stop paying federal income taxes. Basically, you have to file a tax return as of publication if you want to make your tax returns.

What is a tax exempt income?

These are incomes that are not subject to federal, state, and/or local taxes. 
Incomes associated with following, are not taxable.
  • National Pension Fund (NPF);
  • National Health Insurance Scheme (NHIS); 
  • National Housing fund (NHF); 
  • National Social Insurance Trust Fund (NSITF)
  • Life Assurance premium;

Others are:
  •  Profits on sale of fixed assets and investments which are under another tax Act. 
  • And then any reversal of an already disallowed expense like some depreciation provisions and general provision for doubtful debts.

Can sole traders have employees?

Yes. You can employ staff to help out in the business. Although sole traders ‘trade’ or operate the business on their own, this doesn’t mean they have to work on their own. However, like any business owner regardless of structure, you have to ensure you meet all your legal obligations when employing people. Their PAYE, Pension etc. contributions will also be met.

What taxes do you pay if you are self employed?

Personal Income Tax. Much has been said about this above.

Taxation of a sole trader in Nigeria: Facts you must know

Taxation of a sole trader in Nigeria: Facts you must know

Be Tax compliance, check out the following:

How do I work out my taxable income in Nigeria?
How companies get their TCC
How Start-ups Get TIN
Business Initial TCC
How to Apply for Company Annual Tax Return Riling
How to Obtain Individual Tax Clearance Certificates
Individual Annual Tax Returns & TCC
Track Your With-holding Tax Credits

Is self-employment tax different from income tax?

May be Yes, becaus employment tax comes under PAYE and are remitted monthly, while those of individual personal income tax are paid yearly on preceding year basis. But they all  come under PITA – Personal Income Tax Act.

How can I lower my self employment tax?

You can do this by ensuring that you claim all due allowances, reliefs and all tax excempt income.

In Summary:

In this post,Taxation of a sole trader in Nigeria: Facts you must know, we have tried to answer series of questions that relate to sole traders tax challenges in Nigeria. I know you enjoyed it. I want to state here, finally, that Complete Full Marks Consultants Limited, who are chartered Accountants, Auditors, Taxation and Business Consultants can help you take care of your tax and other business challenges, if you let us know.
You can contact by email through cfmclimited@gmail.com or call +234 8034347851

Taxation of a sole trader in Nigeria: Facts you must know

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