Even though paying taxes is one aspect that a small business that most business owners try to avoid. According to a conducted research, over 70% of small businesses in Nigeria are not paying their regular taxes to the government.
When you become a small business owner, you acquire a responsibility for making tax payments that you didn’t have as an employee.
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.
In this post, we talked about why small business owners have to pay tax, the various types of taxes that a small business owner needs to be aware of and how to get started and prepared for taxes when the time comes.
Why does my business have to pay tax?
In Nigeria, all persons in employment, individuals in business, non-residents who derive income from Nigeria as well as companies that operate in Nigeria are liable to pay tax.
Some taxes are payable to the Federal Government (and administered by Federal Inland Revenue Service), some are payable to the State Governments and some to Local Governments.
For a complete listing of which tax is payable to which level (or tier) of Government, please see Taxes and Levies (Approved list for collection) Act. No 21 of 1998.
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.
A. Income Tax
All businesses must pay tax on their income. This means that a business must pay tax on the profit of the business. How that tax is paid depends on the form of the business.
Small businesses (sole proprietors and single-member LLCs) owners pay taxes on their personal income tax returns. Company Income Tax (CIT) is payable only to the federal government.
State governments collect income taxes of individuals and unincorporated entities, while local governments are only allowed to collect levies and rates but not income tax.
B. 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.
C. 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.
In Nigeria, the average sales tax rate charged on the purchase price of certain goods and services is 5%.
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.
D. Employment Taxes
When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file.
Does this tax stuff have you totally confused? Most people are mystified by their own personal tax returns, let alone the more complex returns required of businesses. If you’re not confident in your ability to understand the requirements and correctly prepare returns and calculate payments, it’s worth the expense and the trouble to hire an accountant.
The time this will save you in dealing with tax issues will free you up to focus on your business. An accountant’s expertise will also help you avoid tax penalties, so the expense of hiring this professional can end up paying for itself.
If you don’t want to be dependent on an accountant or have to pay their bills forever, you can transition to doing your own taxes by taking some tax preparation classes, consider hiring a Financial Expert/CFO or using the FIRS Tax Calculator.