Everything You Need To Know about Withholding Tax in Nigeria

As a small business owner in Nigeria, navigating the maze of taxes can be daunting, yet it’s crucial for the legal and financial health of your enterprise. There are so many different kinds of taxes and keeping track of them can be dizzying, especially considering that you are also trying to run a business. However, if you take some time to understand how they work, you’ll realise it’s not so hard. 

One of the more common kinds of taxes that businesses in Nigeria have to pay is a Withholding tax. In this article, we look at withholding tax in Nigeria, what it is, and how business owners can navigate it. If you’re a reader from Ghana, you can read our guide to navigating withholding tax in Ghana. 

What is Withholding Tax?

Withholding tax is a type of tax that is deducted from the source of income. Think about this: you’ve made a pot of food for yourself and your family, but before dishing the food, you keep apart some of it for the oldest member of your household. That’s kind of how withholding tax works. It is a tax that is deducted from your earnings before you get them. 

A similar example to withholding tax is personal income tax which is usually deducted by the employer (income payer) before the employee gets it. Just like in personal income tax, the income payer is usually the responsible party for paying withholding tax. 

In Nigeria, withholding tax is common in transactions like contracts, consultancy, professional services, commissions, and more. It’s a way for the government to combat tax evasion and ensure tax compliance from businesses and individuals.

How much is Withholding tax in Nigeria?

Withholding tax in Nigeria typically varies between 5% and 10%. However, there may be varying rates depending on whether you are paying tax as a company or as a business. Some of the important categories to look out for as a small business owner include:

Transaction Type	Tax rate for companies (%)	Tax rate for individuals (%)
Hire of equipment	10	10
Commission, Consultancy, technical and service fees.	10	5
Management fees	10	5
Contracts other than sales in the ordinary course of business	5	5

How to navigate withholding tax as a client and a contractor

Since withholding tax is usually paid by the income provider, you will be responsible for paying it if you are the client i.e. the one receiving a service or good. To properly manage your withholding tax requirements, you should make sure to deduct it before making payments to your contractors.

If you are the contractor, on the other hand, you have no direct obligation to pay your withholding tax, but you must create documentation that acknowledges that your client will be paying it for you. This documentation is usually done using an invoice. When sending an invoice to your client, include the gross amount they are to pay you, then add a line outlining the withholding tax, and another showing the actual net payment that you will be receiving. Make sure to keep a copy of the invoice as it will be important for navigating any potential issue with the inland revenue service. You will also need to include your business’s tax identification number (TIN) on the invoice for proper documentation and reconciliation.

How can I pay withholding tax in Nigeria?

Withholding tax is typically paid directly to the Federal Inland Revenue Service (FIRS) on or before the 21st of the next month after the income was received. 

Is there a penalty for not paying withholding tax?

Yes, businesses are penalised for not paying withholding tax in Nigeria. The penalty for failure to deduct or remit your withholding tax is 10% of the amount that was not deducted. This may mean that you end up paying more than you originally would have been required to if you had paid your taxes. 

Conclusion

Understanding and managing withholding tax effectively is a critical skill for small business owners in Nigeria. It not only keeps you compliant with tax laws but also equips you with better financial management skills. Always stay updated with the latest tax information and consider consulting a tax professional for tailored advice. With this knowledge, you can ensure that your business not only survives but thrives in Nigeria’s dynamic economic landscape.