- Understandably, majority of income earned from “side hustles” in Nigeria escape taxation.
- Recently the government announced its intention to enforce the Personal Income Act which makes it mandatory for all earned income to be taxed.
- This article breaks down the taxation to be expected on alternative income sources and how it will be calculated
The Nigerian government currently boasts a paltry tax-to-GDP ratio of 10% – one of the lowest in the world. A tax-to-GDP ratio is the total amount of taxes collected per total value of goods produced in the country. A pertinent reason for this is the low rate of tax collection in the informal market, which is largely made up of sole entrepreneurs, freelancers and those with alternative sources of income.
Lately, the government has been very vocal about its plans to focus on this segment of the economy as part of its tax revenue drive. Just recently, the Minister for Finance, Kemi Adeosun revealed plans to go after “side hustles”, a term for alternative sources of income for employed Nigerians who engage in other personal businesses to augment their primary income.
This has resulted in a backlash as most Nigerians see side hustling as an honest and legitimate way of getting around harsh economic conditions. Nevertheless, we have decided to prepare this tax guide for the possible tax you may pay for the income earned from a side hustle. This is based on the Personal Income Tax Act (Amended 2012).
Common side hustles in Nigeria include running a taxi service (e.g. UBER), owning a thriving blog, running a barbershop, hairdressing salon or fashion boutique, being a make-up artiste, part-time musician or consultant, or engaging in trade of any kind.
If your side hustle falls into any of these categories of business, then you are expected to pay tax on the income earned.
Nigeria does not operate a flat tax rate, rather taxes are progressive. This means that the higher you are up the ladder, the more your taxes. Here is what it looks like:
- You pay a flat rate of 7% of your first N300k annual income or less
- You pay another 11% of your next N300k annual income or less
- You pay another 15% of your next N500k or less
- You pay another 19% of the next N500k you earn or less
- You pay another flat rate of 21% for your next N1,600,000
- You pay a final flat rate of 24% for any amount left off your income after deducting all of the above.
The following are likely taxes you are expected to pay based on your average income (after deducting all allowable expenses).
My Side Hustle makes;
An average income of N50k monthly
Maximum tax payable – N1,633 monthly
Taxation rate – 3.3%
Example of hustle – blogger, makeup artiste, trader, washer man, graphic artist, web administrator, social media strategist, lesson teacher, etc.
An average income of N100k monthly
Maximum tax payable – N 5,966.67 monthly
Taxation rate – 6%
Example of hustle – DJ, UBER driver, blogger, makeup artiste, trader, handyman, graphic artist, web administrator, social media handler, etc.
An average income of about N150k monthly
Maximum tax payable – N12,966.67 monthly
Taxation rate – 8.6%
Example of hustle – photographer, UBER partner, dry-cleaning service, editor, blogger, makeup artiste, trading, web administrator, graphic artist, social media influencer, etc.
An average income of N200k monthly
Maximum tax payable – N20,766.67 monthly
Taxation rate – 10.4%
Example of hustle – consultant, freelance writer, MC, photographer, UBER partner, dry-cleaning service, blogger, makeup artiste, trader, estate agent, personal trainer, etc.
An average income of N300k monthly
Maximum tax payable – N37,566.67 monthly
Taxation rate – 12.5%
Example of hustle – consultant, contractor, freelance writer, MC, photographer, UBER Partner, dry-cleaning service, blogging, makeup artiste, trading, personal trainer, etc.
An average income of N500k monthly
Maximum tax payable – N74,666.67 monthly
Taxation rate – 14.9%
Example of hustle – consultant, contractor, freelance writer, MC, photographer, UBER Partner, dry-cleaning service, blogger, makeup artiste, trader, caterer, etc.
In our opinion, any side hustle that earns you more than N500k per month is no longer a side hustle. You are better off giving that business more attention.
Allowable tax deductions
Just like a regular business, every side hustle incurs expenses, which are typically deducted from the income you make to determine what your taxable income (profit) is. However, not all expenses are allowed to be deducted before you arrive at your taxable income. The list of expenses that are tax-deductible and those that are not is provided at the end of this article.
Once you are done deducting and arrive at your gross income, you apply for a tax relief. A tax relief is the portion of your income from the side hustle that the government is not going to tax. Currently, the consolidated tax relief is derived by multiplying your annual income by 20% and adding N200,000 to the total.
For example, if your annual income from side hustle is N1 million, then your tax relief is 20% of N1m, which is N200k plus an additional N200k, giving you N400k.
The N1m income less the N400k tax relief becomes N600k, which is your taxable income. In other words, you will be paying tax on just N600k, while you keep N400k as tax-free pay.
For you to enjoy that tax relief, your annual income must be higher than N250k. This means you must earn at least, more than N20k monthly from your side hustle.
Being taxed on income from a side hustle might seem like a hassle however like any other form of taxation, it is a necessary evil. Nigerians must however learn to hold the government accountable for the expected dividends of any tax collected. As both parties better understand this contractual relationship, the society will further realize the benefits of taxation.
- Any interest on loan on your side hustle
- Rent paid, assuming you rent an office for your side hustle
- Rent you pay to your staff
- Legal Expenses that excludes cost of acquiring a lease, tax appeal or traffic offence
- Any other expense that is wholly, reasonably, exclusively and necessarily incurred for the sole purpose of running the business
- Any bad debt that you provide for or write-off
Expenses that are not allowable;
- Fines and Penalties
- Withdrawal of capital
- Any donations that you make
- Legal expenses for acquiring or renewing leases, defending tax or traffic offenses
- Any private or personal expenses
- Capital expenditure and depreciation.
If you earn N1,000,000 in income from side hustle and spend N200k on expenses that are allowable and another N200k on expenses that are not allowable, you will pay tax on N800k.
That is; N1,000,000 less N200,000.
Who you pay tax to? The State Inland Revenue Service of where you reside.