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Legal and Tax Advice

Withholding Tax for Freelancers: A Nigerian Perspective

Last Updated on July 21, 2023

Introduction

As a freelancer in Nigeria, it’s important to understand the concept of withholding tax.

Withholding tax is deducted at the source by employers or clients from payments made for goods or services provided by individuals or companies.

The tax is usually a percentage of the cost of the goods or services.

It is important to understand withholding tax for freelancers because it affects their income and tax obligations.

Freelancers who do not understand the concept may have trouble preparing their tax returns and may end up paying more than they owe or even face penalties for non-compliance.

Furthermore, freelancers who are unaware of withholding tax may also be at risk of not receiving full payment for their services.

Clients may overlook withholding tax or not willing to pay the full amount due to a lack of understanding of the tax system.

Therefore, freelancers who understand withholding tax can negotiate terms and conditions of their contracts effectively.

In summary, the concept of withholding tax is crucial for freelancers in Nigeria, and it’s important to familiarize oneself with the guidelines and regulations governing the tax system.

Comprehending the tax system empowers freelancers to make informed decisions on tax obligations, preventing potential financial loss in business dealings.

Read: Guide to Freelance Taxes: Navigating Nigerian Tax Law

What is Withholding Tax?

Withholding Tax is a tax system where a portion of a freelancer’s payment is deducted by their client or employer.

Definition

  • Withholding Tax is an advance payment of income tax.

  • It is applicable to professionals, self-employed individuals, and freelancers.

  • It is deducted from the gross income earned by a freelancer, based on the tax rate.

Explanation of how it works

  • The client or employer calculates the tax due based on the gross income earned by the freelancer.

  • The tax is then deducted at the source before payment is made to the freelancer.

  • The withheld amount is then remitted to the tax authorities on behalf of the freelancer.

  • The freelancer is then given a credit for the amount withheld against their tax liability in the year.

Importance of Withholding Tax

  • It helps to ensure tax compliance and increase revenue generation for the government.

  • It helps to reduce tax evasion and fraud.

  • It helps to promote transparency and accountability in the tax system.

  • It enables freelancers to meet their tax obligations easily.

Legal provisions guiding Withholding Tax in Nigeria

  • The Nigerian Tax Laws stipulate that every contract or service rendered shall be subject to a tax charge.

  • The Companies Income Tax Act requires companies to deduct withholding tax from the payments made to freelancers.

  • The Personal Income Tax Act also provides for the deduction of withholding tax from fees, commissions, and other income paid to individuals.

  • Section 81 of the Personal Income Tax Act allows a tax credit for the amount of tax withheld at source.

Conclusively, withholding tax is an important aspect of the Nigerian tax system that has helped to increase revenue generation and promote tax compliance among freelancers.

It is important for freelancers to understand their tax obligations and ensure compliance to avoid penalties and other legal implications.

Read: Understanding VAT in Nigeria as a Freelancer

Withholding Tax for Freelancers in Nigeria

Freelancing has become a popular way for Nigerians to earn income, and like any source of income, it is important to understand the tax implications.

Freelancers are not exempt from paying taxes, and one type of tax they may need to pay is withholding tax.

Who is a freelancer?

A freelancer is a self-employed person who offers their services to clients. They typically do not have an employer and work on a project-by-project basis.

Freelancers can be writers, designers, developers, consultants, and more.

Freelancing income and tax in Nigeria?

Indeed, freelancers in Nigeria are obligated to pay taxes on their income, following the relevant tax regulations and fulfilling their tax obligations. This includes income earned from freelancing.

Under Nigerian tax law, individuals must declare all taxable income, regardless of its source. Freelancers are responsible for declaring their income and paying the appropriate taxes.

Types of Withholding Tax Freelancers can pay

Withholding tax is a form of tax deducted at the source by the individual or organization making the payment on income earned within Nigeria.

Freelancers may be subject to withholding tax on certain types of income. The types of withholding tax freelancers can pay include:

  • Commission

  • Rent

  • Royalties

  • Consultancy/Professional Services

Return filing frequency

Freelancers who have paid withholding tax are required to file a tax return. The frequency of filing tax returns depends on the individual’s status.

Self-employed individuals are required to file a tax return once a year, while limited liability companies and other organizations are required to file their returns monthly.

Penalties for non-compliance

Failure to comply with the Nigerian tax laws can result in penalties. Freelancers who do not declare their income or fail to pay withholding tax may be subject to penalties and interest charges.

It is important for freelancers to understand their tax responsibilities and ensure they comply with the law.


In fact, freelancers in Nigeria are not exempt from paying taxes. Withholding tax is one type of tax that they may need to pay on certain types of income.

Freelancers should ensure they understand their tax responsibilities and comply with the law to avoid penalties.

Read: Client Pitch: Making It Count in Nigeria’s Freelance Scene

Withholding Tax for Freelancers A Nigerian Perspective

How to Calculate Withholding Tax for Freelancers

Calculating withholding tax for freelancers in Nigeria is an essential process for avoiding tax evasion.

Withholding tax is the tax deducted at the source of income before it gets to the freelancer. This article will show you how to calculate withholding tax, step-by-step.

Determining taxable income is the first step. The following list shows how to calculate taxable income for freelancers:

  • Revenue: This refers to the amount of money earned by freelancers from their clients. Freelancers should keep track of their total revenue.

  • Business expenses: These are expenses incurred in running the freelance business. Examples include internet bills, electricity bills, transport, and other office expenses.

    Freelancers can deduct these expenses from their revenue to arrive at their taxable income.

Tax calculation equation

When you subtract business expenses from revenue, you get your taxable income. To calculate withholding tax, you need to apply the following equation:

Tax calculation equation: This equation involves the following steps:

  • Rate of withholding tax: The Federal Inland Revenue Service (FIRS) sets the rate of withholding tax, which is currently 10% for individuals and sole proprietors.

  • Calculation of taxable income: This is the taxable income calculated using the step above.

  • Multiplication of the tax rate with the taxable income: When you multiply the tax rate with the taxable income, you get the withholding tax.

For instance, if a freelancer earned ₦300,000 ($770) in a month and their business expenses were ₦80,000 ($206), their taxable income will be ₦220,000 ($564). To calculate their withholding tax, they will apply the following equation:

Rate of withholding tax x Taxable income = Withholding tax

10/100 x ₦220,000 ($564) = ₦22,000 ($57)

Therefore, the withholding tax for this freelancer is ₦22,000 ($57).

Ultimately, calculating withholding tax for freelancers in Nigeria is an easy process, provided the freelancer follows the steps above.

By calculating and paying their withholding tax, freelancers can avoid tax evasion and enjoy the benefits of being compliant with tax laws.

Read: Pitching for Success: Freelancing Tips from Nigerian Pros

Conclusion

After examining the topic of withholding tax for freelancers, it is clear that this is an important issue that affects many Nigerian freelancers.

To recap some of the main points:

  • Withholding tax is a tax deducted at source from payments made to freelancers

  • Freelancers in Nigeria are required by law to pay withholding tax

  • Failure to pay withholding tax can result in penalties and fines

  • Freelancers can reduce their tax burden by keeping accurate records of their income and expenses

  • It is important to pay taxes for sustainable economic growth

Given these points, it is recommended that Nigerian freelancers take steps to ensure compliance with withholding tax regulations.

This includes keeping accurate records of income, seeking guidance from tax professionals, and regularly filing tax returns.

In addition, it is important to recognize the importance of paying taxes for a sustainable economy.

By contributing to the tax base, freelancers and other citizens can play a role in funding important social programs and infrastructure projects that benefit all members of society.

Nigerian freelancers should embrace the responsibility of paying taxes and work towards building a more prosperous and equitable society.

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