The rise of the gig economy in South Africa has led to an increase in side hustles, with more than half of the population engaging in some form of secondary income stream. However, while this may seem like a lucrative way to earn extra money, it can also introduce a level of complexity that threatens financial stability. According to the South African Reserve Bank, household debt levels remain high, with many households having little room to absorb shocks or build long-term security.
A side hustle can be a necessity for some, covering fixed expenses and providing a sense of financial freedom. For others, it’s a strategic move towards financial independence, allowing them to tap into alternative and even global income opportunities. However, managing irregular cash flow requires a different psychological and structural approach to budgeting. When your income fluctuates, basing your lifestyle on your highest-earning month can be a recipe for disaster.
Understanding the Tax Implications
One of the most significant pitfalls for multi-income earners is underestimating the South African Revenue Service (Sars). Many South Africans assume that a small freelance project or a few dollars earned in a foreign currency won’t trigger a tax event. However, as a South African tax resident, your worldwide income is subject to tax locally, and must be declared to Sars. This can result in a tax ‘shock’ after assessment, where you end up owing Sars a large part of that income.
Provisional Tax and PAYE
If you are formally employed, your income will typically be subject to Pay As You Earn (PAYE), which is a tax collection method where your employer withholds the tax on your behalf and pays it to Sars. However, for those earning outside a traditional PAYE system, it will result in becoming a provisional taxpayer. Provisional tax is not a separate tax, but an alternative tax collection mechanism where you pay your tax in advance.
To navigate the complexities of side hustles, it’s essential to determine a financial baseline, the bare minimum needed to survive, and use the higher income months to build a buffer that carries them through lean periods. Here are some tips to consider:
- Determine your financial baseline and use it as a guide for budgeting
- Set aside a portion of your income each month for taxes and savings
- Consider seeking the advice of a financial advisor or tax professional
