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Legal and Tax Advice

Freelancing in Nigeria: Top Tax Mistakes to Avoid

Last Updated on August 6, 2023

Introduction

Brief Explanation of Freelancing in Nigeria

Freelancing has become a popular way of earning income in Nigeria. It involves offering services to clients on a temporary or short-term basis without being tied to any particular employer.

Freelancing is becoming increasingly popular in Nigeria due to the growing number of self-employed individuals and small business owners.

Importance of Avoiding Tax Mistakes

However, despite the benefits of freelancing, it is important to avoid tax mistakes.

The Nigerian tax system is complex, and many freelancers can easily fall into the trap of making mistakes that could lead to significant financial implications.

Avoiding tax mistakes is crucial for maintaining a sustainable freelancing career in Nigeria.

It is therefore important for freelancers in Nigeria to understand the tax system and the common mistakes that can be made when filing tax returns.

This blog post will highlight some of the top tax mistakes that Nigerian freelancers should avoid to ensure they are compliant with the tax laws and regulations in Nigeria.

Failure to Register for Tax Identification Number (TIN)

Explanation of TIN

One of the biggest mistakes that freelancers in Nigeria make is failing to register for a Tax Identification Number (TIN).

This is a unique number issued by the Federal Inland Revenue Service (FIRS) to taxpayers for the purpose of identification and tracking of tax payments.

Penalties for not Having a TIN

As a freelancer in Nigeria, having a TIN is essential as it helps to showcase your compliance with tax regulations.

It also helps to avoid penalties that come with not having one, such as being excluded from government contracts, being barred from opening a corporate bank account and in more extreme cases, being arrested and prosecuted for tax evasion.

How to Obtain a TIN

The process of obtaining a TIN is simple and straightforward. All you need to do is visit any FIRS office or log on to their website and fill out the required registration form.

You will be asked to provide personal information such as your full name, address, phone number, email address, and occupation, among others.

Upon submission, your TIN number will be generated and sent to your email address within 48 hours.

It is important to note that failure to register for a TIN is not advisable for any freelancer in Nigeria.

Doing so can only lead to more trouble than good. Instead, take the time to register and ensure that you stay compliant with tax regulations. It is always better to be safe than sorry.

Read: How to Register for Taxes as a Freelancer in Nigeria

Not Keeping Track of Income and Expenses

As a freelancer, it’s easy to get caught up in the excitement of landing new clients, completing projects and receiving payment.

However, it’s important to remember that you’re now running a business and keeping track of your finances is crucial.

The Importance of Tracking Income and Expenses

  • By keeping track of your income and expenses, you’ll have a clear understanding of your financial standing as a freelancer.


  • Tracking your income can help you determine areas where you need to increase rates, while tracking expenses can help you identify areas where you’re overspending.


  • Additionally, keeping records will make it easier when filing your tax returns and calculations.

Consequences of Not Keeping Records

  • Not keeping accurate records may lead to underreporting of income, which can lead to fines and penalties by the Nigerian tax authorities.


  • You may also end up paying a lot in taxes, as you won’t have evidence to back up your deductions and expenses.


  • Furthermore, when audits are conducted, not having proper records can make it harder to prove compliance leading to heavy penalties.

Tips on How to Organize Records

  • Separate business and personal expenses: Open a bank account specifically for your freelancing business to avoid mixing personal and business transactions.


  • Keep track of all income: Whether you receive payments through bank transfers, online payments or cash, ensure you keep records of all transactions and keep them in a separate file.


  • Track all expenses: From rent to internet bills, electricity bills, software expenses, office supplies, etc. Have all the receipts in your file.


  • Digitalize your records: Take advantage of technology, and use financial software to help you keep track of your expenses.


  • Maintain a spreadsheet: You can also maintain a spreadsheet to keep track of your transactions, make calculations, and also as a backup.


  • Consistency: Endeavor to track your income and expenses daily, weekly, or monthly to avoid pilling up task.

It’s essential to maintain proper records of your finances as a freelancer. Remember, as your business grows, so does the importance of records keeping.

Therefore, invest in tracking software, set up an efficient system, and make it a priority to keep your records organized.

Read: Tax Compliance in Nigeria: A Freelancer’s Guide

Freelancing in Nigeria: Top Tax Mistakes to Avoid

Failure to Pay Taxes on Time

Paying taxes is a legal requirement that comes with operating a successful freelance business.

In Nigeria, this is no different, as the law demands that every freelance business owner must pay taxes.

Importance of Paying Taxes on Time

Paying taxes on time has several benefits, including:

  • Avoiding penalties and fines: Late payment attracts a penalty of up to 10% of the tax owed.


  • Building a good reputation: Paying taxes on time helps build a good reputation with tax authorities, which can come in handy during tax audits.


  • Qualification for government contracts: Freelancers who pay taxes on time and can provide proof of payment can qualify for government contracts and benefit from government projects.

Consequences of Late Payment

The consequences of late payment of taxes cannot be overemphasized.

They include:

  • Interest and penalties: Frequent late payment of taxes attracts high-interest rates and penalties, which can affect the financial stability of the business.


  • Blacklisting: Non-payment of taxes can result in blacklisting, whereby the business can no longer provide services to some clients or secure contracts.


  • Legal action: In extreme cases, failure to pay taxes can result in legal action, which can lead to the seizure of assets or even imprisonment.

How to Avoid Late Payment

Here are some tips that can help freelance business owners avoid late payment:

  • Keep accurate records: Accurate financial records help in determining the amount of tax owed and the deadline for payment.


  • Seek assistance from tax experts: Tax experts can help freelance business owners understand the tax laws and deadlines, reducing the chances of late payment.


  • Prioritize tax payment: Treat tax payment as a priority and budget funds for it, instead of using the finances for personal expenses.


  • Set payment reminders: Set up reminders to ensure that tax payments are made on time.

In essence, paying taxes on time is a crucial factor in operating a successful freelance business in Nigeria.

Failure to pay taxes on time can result in severe consequences, including interest rates, legal action, and blacklisting.

Therefore, freelance business owners must prioritize tax payment, seek assistance from tax experts and keep accurate financial records to avoid late payment.

Read: Legal Implications of Freelancing in Nigeria: A Brief

Non-Disclosure of all Income Earned

As a freelancer in Nigeria, it is important to disclose all income earned to the appropriate authorities. Failure to do so can lead to severe penalties.

In this section, we will discuss the importance of disclosing all income, the penalties for non-disclosure, and how to disclose all income.

Importance of Disclosing all Income

Disclosing all income earned is important because it enables the government to determine the appropriate tax liability to impose on you.

If you fail to disclose all income earned, you may end up paying less tax than you should, which is unlawful.

Disclosing all income earned also shows your level of honesty and integrity, which is important in building trust with your clients, partners, and collaborators.

It can also help you when applying for loans or other financial opportunities that require proof of income.

Penalties for Non-Disclosure

Non-disclosure of all income earned is considered tax evasion, which is a criminal offense punishable by the law.

The penalty for tax evasion in Nigeria is a fine of up to 300% of the tax due and a prison sentence of up to 5 years.

The Nigerian tax authorities are becoming increasingly sophisticated in detecting tax evasion.

They have access to information from various sources, such as banks, landlords, and employers, which they use to verify the accuracy of tax returns and identify cases of non-disclosure.

How to Disclose all Income

To avoid the penalties of non-disclosure, it is important to disclose all income earned.

Here are some tips on how to do it:

  • Maintain accurate records of all income earned from your freelancing activities, including cash transactions, online transactions, and payments in kind.


  • Ensure that you declare all income earned on your tax returns, including income received from clients outside Nigeria.


  • Use the appropriate tax forms and fill them correctly. If you are unsure about how to fill the forms, seek the assistance of a tax professional.


  • Respond promptly to any requests for information or clarification from the tax authorities.


  • Seek the advice of a tax professional on how to reduce your tax liability legally, such as claiming allowable expenses and deductions.

Basically, disclosing all income earned is important for any freelancer in Nigeria.

It demonstrates your honesty and integrity, helps you build trust with your clients and collaborators, and avoids the penalties of tax evasion.

By maintaining accurate records of all income earned and using the appropriate tax forms, you can ensure that you comply with the law and pay the right amount of tax due.

Read: Paying Your Freelance Taxes: A How-To for Nigerians

Conclusion

Being a freelancer in Nigeria requires careful consideration of tax requirements to avoid getting into trouble with the law.

In summary, the top tax mistakes to avoid as a freelancer in Nigeria are:

  • Not registering with the relevant tax authority


  • Not keeping accurate records of income and expenses


  • Not filing tax returns on time

It is essential for freelancers to seek professional advice from tax experts to navigate the tax landscape in Nigeria. Failure to do so can lead to severe legal consequences.

As the freelancing industry in Nigeria grows, freelancers must be aware of their tax obligations to avoid legal issues.

Nigerian freelancers can thrive in their chosen professions and avoid legal issues with proper attention and expert guidance.

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