Self-employment tax and tax planning for seasonal workers

As much as self-employment gives you full control over your time and your professional life, it is also essential for you to take full control of your accounting and taxation aspects to avoid problems in the future.

Mar 03, 2019 04:03 IST India Infoline News Service

Quoting data from the Centre for Monitoring Indian Economy (CMIE), a recent Business Standard report said that close to 11mn jobs were lost in India during the year 2018.

The CMIE data also reported that unemployment levels had touched 7.4% as of December 2018. Various reasons were cited for this, including automation and partly due to the reduction in the number of jobs required by MSMEs.

So what happened to these people who were displaced? Obviously, there are not enough jobs to absorb such a huge supply. A lot of them would be forced to seek self-employment, more out of default than by design.

If you are a self-employed individual but your income levels are less, then you don’t have to worry about the taxation aspects. However, if you are a professional engineer, doctor, CA, CS, or even if you are running a small business or consultancy work, then tax planning and maintenance tax records become critical.

As much as self-employment gives you full control over your time and your professional life, it is also essential for you to take full control of your accounting and taxation aspects to avoid problems in the future.

How are self-employed professionals taxed?
Ideally, self-employed professionals are required to maintain elaborate books of accounts that show their income statement, balance sheet, cash register, etc. A tax audit is mandatory if your revenues exceed Rs50 lakh during a given financial year. At the time of filing the ITR-4, which self-employed persons use to file their tax returns, you are allowed to claim all legitimate business expenses and you only have to pay the applicable rate of tax on the net profits for the year.

Remember, that while smaller expenses can be paid by cash, all large items of expenditure above Rs10,000 must be paid through banking channels only. All admissible expenses like rent, salaries, wages, office expenses, travel costs, audit costs, interest on loan, etc., must be backed by evidence of payment in the prescribed format.

Self-employed have the choice of paying presumptive tax
All self-employed professionals need to know about the concept of presumptive taxation. This is specifically meant for smaller outfits and businesses where it is difficult to maintain elaborate records of expenses. Professionals earning less than Rs50 lakh per annum can opt for the presumptive taxation mode. Here, you are allowed to claim 50% of your total income as a presumptive expense and the balance will be treated as profit on which you would need to pay tax. The choice of a presumptive tax model predicates on whether your actual monthly expenses are less than 50% of your income or more than that.

Presumptive tax is the ideal option if your total expenses are less than 50% of your total income as it saves you the hassle of maintaining detailed accounting and tax records. However, the choice of the mode of taxation does not impact your tax deducted at source (TDS) in any way. TDS will still be debited on all your receipts and you are allowed to claim a refund later on, if required.

Deductions above the presumptive tax
If you are filing returns under Form ITR-4, you are eligible to claim your regular deductions under Section 80C, Section 80CCC, and Section 80D after claiming the 50% benefit for the sake of presumptive tax. This can be instrumental in substantially reducing your tax liability.

What happens in the case of seasonal employment?
In the previous Union Budget, the Finance Minister allowed all sectors to hire temporary workers to take care of seasonal demand. In the past, only the apparel industry was allowed to hire temporary workers while others used to rely on contractual labor. Seasonal employment is quite common in other countries where employers can have short-term contracts. As far as the recipients of this kind of seasonal income are concerned, the earnings are treated as salary income since the employee-employer relationship comes into existence during the tenure of the agreement.

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