Every small business operating in Nigeria is obligated to pay taxes.
Now, this obligation is often difficult for some small business owners to pay. Which is why they try to avoid it.
But the truth is that no small business that wants to succeed and grow would avoid paying taxes.
Tax payment is important for economic development, but also business growth.
The business that pays its taxes protects its business and growth from penalties and fees that could have been avoided.
Paying such default fees can cause cash flow problems that may be difficult to recover from. Additionally, it may affect the reputation and public trust and goodwill the business has worked hard to gain over time.
In the end, it is more costly to avoid paying taxes than it is to pay them as and when due.
Types of Taxes For Small Businesses In Nigeria
There are different types of taxes imposed by the federal and state governments in Nigeria that affect small businesses and entrepreneurs.
1. Income Tax
This is the payment individuals, small businesses and corporate bodies are obligated to pay on their income per year.
There are two types of income tax:
a. Personal Income Tax
b. Company Income Tax
a. Personal Income Tax – Small business owners and entrepreneurs are obligated to pay tax on their income (including their business).
Small businesses in Nigeria may not fall under the Company income tax scope, but they are charged indirectly through the owner or partner’s income.
So, small business owners pay a personal income tax between 7 – 24% depending on the chargeable income.
Employers are also required to deduct employee taxes before their salaries are disbursed. And remit such to the government as Pay-As-You-Earn (PAYE).
P.A.Y.E is charged on your employees’ annual income after deducting tax reliefs, pension and insurance etc.
The P.A.Y.E tax rate (employee income tax) is a 7 – 24 per cent deduction.
This tax is payable to the state revenue or tax body.
b. Company Income Tax – Although it is important to mention, this tax not applicable to most small businesses in Nigeria. The company Income Tax levy on the income of a business whose annual turnover is less than 25 million.
As most small businesses don’t fall under this category, they are not required to pay it.
The company income tax (CIT) is payable to the Federal inland Revenue Service (FIRS).
If your business makes between 25 million and 100 million Naira per annum, your company income tax rate is 20% and 30% if you make more than 100 million Naira per annum.
2. Value-added Tax
This is a tax charged by the federal government on the sale of value-added products or services.
It is collected from customers by businesses on behalf of the government.
The current rate of V.A.T in Nigeria is 7.5%.
Some goods and services are, however, exempt from VAT. They are medical and pharmaceutical products, books/educational materials, fertilizer, basic food items, baby products, medical services, exported services and tuition relating to the nursery to tertiary education etc.
If you want to learn more information about VAT, visit this link.
3. Withholding Tax
Withholding Tax is not a different tax per se, it is an advance payment of company income tax.
Businesses are obligated to deduct a withholding tax of 5 – 10% from other entities with whom they do business. Like suppliers and vendors etc.
Withholding tax can be charged on payments including rent, commissions, contract sum and fees payable to consultants, service providers etc.
4. Tertiary Education Tax (EDT)
The tertiary education tax is a 2% levy imposed on the assessable profits of businesses incorporated in Nigeria.
The goal of the education tax is to enable businesses to contribute to the development of Nigeria’s education sector.
A good understanding of the taxes that applies to your business category is important for your success.
Successful small businesses know to incorporate these taxes into their business costs early enough and calculate a clear path to profitability with them in mind.
If you need help understanding your taxes, and your small business finances, contact us to subscribe to our Accounting-As- A-Service today!!!
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