Tag: withholding tax

  • 3 Tax Loopholes Every Kenyan Freelancer Should Know in 2025

    3 Tax Loopholes Every Kenyan Freelancer Should Know in 2025

    Let’s be honest. As a freelancer, what’s the one thing that gives you more stress than a difficult client or a looming deadline? For most of us, it’s taxes.

    That dreaded email from the KRA, the confusion around what to pay, and the constant fear of penalties can be overwhelming. It’s especially tough when your income isn’t a fixed monthly salary. One month you’re crushing it, and the next is quiet. How are you supposed to manage your tax obligations with that kind of unpredictability?

    Well, what if I told you that you might be leaving money on the table? What if there were simple, 100% legal ways to not just pay your taxes, but to actually save money in the process?

    Stop stressing and start saving. Here are three powerful, yet simple, tax strategies every freelancer and small business owner in Kenya needs to know for 2025.

    1. Make Withholding Tax Work FOR You

    First up is a concept that many freelancers find confusing: Withholding Tax. You might have seen it on a client’s contract—a 5% deduction—but what is it, really?

    Think of it like this: Withholding Tax is a client pre-paying a small part of your annual tax bill on your behalf. It’s like a forced savings account specifically for your taxes!

    Here’s how it works in simple terms. Let’s say you’re a freelance consultant and you send an invoice for a project worth 100,000 shillings.

    When your client pays you, they are required by the KRA to “withhold” 5% of that service fee, which amounts to 5,000 shillings. You receive the remaining 95,000 shillings in your bank account.

    But that 5,000 shillings isn’t gone forever. The client remits it directly to the KRA under your KRA PIN. It now sits safely in your KRA account as a tax credit.

    So, how does this save you money?

    At the end of the year when you file your annual returns, imagine the KRA calculates that your total income tax for the year is 50,000 shillings. Instead of paying the full amount, you get to deduct all the withholding tax credits you’ve accumulated. If you completed ten projects just like the one above, you’d have 50,000 shillings (5,000 x 10) already sitting in your KRA account.

    Your tax bill just went from 50,000 down to ZERO.

    By operating as a registered business (even a simple Sole Proprietorship), you can turn this tax deduction into a powerful tool for managing your end-of-year tax bill.

    2. Turn Your Business Expenses into Tax Savings with VAT

    This next strategy is a game-changer, especially if you’re looking to grow your freelance work into a serious business. We’re talking about VAT (Value Added Tax).

    Don’t let the term intimidate you. Imagine you have two piggy banks:

    • Tax Bank #1 is for the VAT you collect from your clients.
    • Tax Bank #2 is for the VAT you pay on your business expenses.

    When you register for VAT, you must add 16% to your invoices. So, if you charge a client 100,000 shillings, you actually invoice them for 116,000 shillings. That extra 16,000 goes into Piggy Bank #1. It’s not your money—you’re just holding it for the KRA.

    Here’s the magic part.

    Whenever you buy something for your business—a new laptop, an internet subscription, software, or even office supplies—you also pay 16% VAT. That amount goes into Tax Bank #2.

    At the end of the month, the KRA asks for the money in Piggy Bank #1. But you get to say, “Hold on! I can subtract everything that’s in Tax Bank #2 first.”

    For example:

    • You collected 32,000 Ksh in VAT from your clients this month (Tax Bank #1).
    • However, you bought a new office chair and paid 5,000 Ksh in VAT. You also paid for software and paid 3,000 Ksh in VAT. In total, you paid 8,000 Ksh in VAT on your expenses (Tax Bank #2).

    So, the amount you actually remit to the KRA is 32,000 minus 8,000, which equals 24,000 shillings.

    You just saved 8,000 shillings! You’re essentially getting a discount on all your legitimate business purchases, which encourages you to reinvest in your own growth. Just remember to always get a proper ETR receipt with your business KRA PIN on it to make a claim.

    3. The Easiest Money You’ll Ever Save

    This last one isn’t a fancy loophole. It’s the most simple, most overlooked way to save money, and it costs you nothing but a bit of discipline: File your taxes on time.

    Seriously.

    The KRA charges fixed penalties for late filing that can add up quickly.

    • For an individual or a sole proprietorship, it’s Ksh. 2,000.
    • For a registered company, it’s Ksh. 10,000.

    That’s money you are literally throwing away for no reason. Think about it—saving Ksh. 2,000 is just as good as earning an extra Ksh. 2,000.

    Set a reminder on your phone. Put a big red circle on your calendar for June 30th. Do whatever it takes to file on time, even if you have zero income to declare for the year. Avoiding that penalty is the easiest profit you’ll make all year.

    Taxes don’t have to be a source of stress. When you understand the system, you can make it work for you.

    For more expert tips on freelance, media, tech, and business, make sure to follow me on all social media platforms @cheptionymutai. Let’s level up together!

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  • Watch Out For These 2 Tax Filing Blunders That Could Cost You Big

    In Kenya, individuals and business owners typically file two main types of tax returns: Income Tax and VAT (Value Added Tax). Income Tax returns are filed annually and are mandatory for all taxpayers. VAT, on the other hand, is declared monthly and is only compulsory for businesses with an annual turnover exceeding KES 5 million; otherwise, registration is voluntary.

    In this article, I’ll explain two expensive mistakes every taxpayer should avoid when filing their returns.

    Counter Check The Type of Withholding Tax Client Has Withheld

    When a company engages your services, they are often required to withhold tax from your payment. This typically includes both VAT and income tax, depending on the invoice you’ve issued. It’s crucial to pay close attention to these withholdings.

    Be careful: some clients might mistakenly withhold 2% VAT even if you haven’t charged them VAT on your invoice. You’ll receive an email notification each time they declare this withholding. It’s crucial to cross-check these notifications immediately. If they’ve withheld 2% VAT but should have instead withheld 5% income tax, KRA will assume you did charge VAT. This could lead to KRA expecting you to pay the 14% difference between the actual VAT rate and the incorrect 2% withheld.

    Failure to declare this monthly incurs a penalty of KES 10,000. Neglecting this obligation can lead to prolonged resolution efforts and prevent you from obtaining a Tax Compliance Certificate.

    A crucial point to remember is that if a client withholds VAT from you when you aren’t registered for VAT obligations, it can lead to significant issues. The Kenya Revenue Authority (KRA) will likely forcefully add the VAT obligation to your account, compelling you to declare the return regardless

    It’s crucial to consistently verify the accuracy of any withholding tax declared by clients on transactions you’ve completed. This proactive step helps ensure everything is correctly accounted for.

    Expense Data in The Profit Loss Page

    For income tax filers, particularly consultants, freelancers, and sole proprietors, the profit and loss account section on the second page of the income tax return excel sheet requires meticulous attention. Errors in data entry here can lead to significant issues.

    When classifying expenses for individuals paid daily or per job, who are not permanent employees, the most accurate categorization is often Direct Wages or Contract Labor/Freelance Fees.

    While “salaries and wages” typically refers to permanent employees, and “direct expenses” is a broader term, “direct wages” specifically applies when these payments are directly tied to the production of goods or services.

    If they are providing services that aren’t directly part of your core product/service creation (e.g., a one-off IT fix), “contract labor” or “freelance fees” might be more appropriate.

    It’s crucial to distinguish these from regular salaries and wages for tax and accounting purposes.

    If you employ permanent staff in Kenya, you are required to register for P.A.Y.E (Pay As You Earn). This system mandates that you deduct income tax directly from your employees’ earnings and remit these amounts to the Kenya Revenue Authority (KRA).

    It’s important to note that the PAYE rates starts from 10% for every KES 24,000 and only applies to the first KES 24,000 of monthly taxable income (or KES 288,000 annually). KRA utilizes a graduated tax scale, meaning different portions of an employee’s income are taxed at varying rates, ranging from 10% to 35%. Additionally, a monthly personal tax relief of KES 2,400 is also applied.

    For accurate calculations, you’ll need to refer to the latest KRA PAYE tax bands and rates, which are subject to changes based on the Finance Act.

    It’s therefore crucial to correctly categorize expenses, especially when it comes to salaries and wages. If your company doesn’t have employees, avoid listing expenses under “salaries and wages.”

    Instead, these should be recorded under direct expenses (direct wages). This accurate classification will prevent issues and ensure a smoother process if the Kenya Revenue Authority (KRA) audits your tax return.

    Get A Professional With Accounting Background to Assist

    For those new to income tax filing, don’t hesitate to visit your local KRA office where you can get direct assistance with your return.

    If you have numerous transactions, it’s highly advisable to consult a professional accountant to assist with your tax filings. While there’s a fee involved, their expertise can save you a significant amount of time and eliminate potential headaches.

    Conclusion

    We all learn from our mistakes, and when it comes to tax returns, some lessons can be quite expensive. I’ve identified two common and costly errors that taxpayers frequently make. Failing to avoid these can lead to the denial of a Tax Compliance Certificate, a document often required by businesses and organizations before considering you for work.

    And that is it from me here. Are there any other costly mistakes that people should watch out for? let me know in the comments section below.

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    Up until next time, bye and take care.

    Follow me on social media @cheptionymutai.