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Confused about home office deductions for commission earners? Here's how it works

by , 15 May 2014
Picture this: You employ Thabo as a sales agent and he signs an employment contract that says he'll earn a certain amount of commission income, an annual salary and a travel allowance. You also make it clear in his contract you won't give him an office to work out from.

As a result, Thabo sets up an office at home. Months later, he asks you to explain how home office deductions for commission earners work.

If you don't know what to tell him, this example will help you and your employee stay out of trouble with SARS.

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This practical example explains how home office deductions for commission earners work
 

The Practical Tax Loose Leaf Service gives you an example of how home office deductions for commission earners work:
Thabo is an employee at your company.

He earns commission income of R50 000 annually, an annual salary of R2 000 and a travel allowance of R3 000, which allows him to make sales visits.

Since you (employer) don't give him an office to work out of, Thabo sets up a small home office, from the study in his home. He uses this home office every day to carry out his duties.

Of the total 200m² of his home, the office constitutes 20m². This means the office is about 10% of the total area of the house. Thabo pays interest of R25 000 a year on his bond. And his rates and taxes cost him R2 500 per year too.

When he set up his home office, Thabo bought a PC for R12 000, a desk for R2 000 and a chair for R800. His commission-work office expenses (for his cellphone and stationary, etc) amounts to R9 000. And Thabo contributes R5 000 each year to a pension fund.


Thabo must use all this information when he calculates his home office deductions.

Here's how he'll be taxed…

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Commission earners who work from home are taxed as follows

 

Since more than 50% of Thabo's income is commission, the limitations imposed by Section 23(m) of the Income Tax Act won't apply to Thabo. And since he uses his home office regularly and exclusively for the purposes of earning income, he meets the home office deduction requirements.

This means Thabo is allowed to deduct:
 

  • His pension fund contributions;
  • The cellphone and stationary expenses;
  • Wear and tear allowance, for the computer, desk and chair in his office;
  • Travel deduction;
  • 10% of the interest on the bond (since his office is 10% of the area of the house); and
  • Rates and taxes of R250 (this is calculated based on the office being 10% of the area of the house).

Now that you know how home office deductions for commission earners work, help your employee out so he can avoid SARS penalties. Doing this should also make him more productive and loyal when he knows he has an employer who cares.



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