[Part 1] Professionals working from home -Accounting and Taxation Compliance

27th Dec 2012
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Yesterday I was going through the career section of one of the leading newspapers and read about ever-increasing career opportunities in the freelance world; may it be the IT sector, journalism, literature and even in the architectural, interior decoration, finance and consultancy fields. The column discussed the growing string of freelance professionals be it full-timers or even part timers, students, educated housewives and hobbyists.

Being a tax advisor, the first thing that struck my mind was the accounting and taxation aspect of these professionals; Do they need to maintain their books of accounts, do they need to pay taxes, if yes, then what expenses can they claim, in order to minimize their tax liability and other similar questions propped in my mind and I thought of jotting them down, so as to enable my freelancer friends to tie-up the loose end.

It’s a general notion that things like accounting, taxation, maintenance of records, preserving supporting bills of expenses and others, conjure up only when one has a proper office setup and is working from his office; working from the comfort of ones home or say drawing room or working as a freelancer from ones laptop or an iPad do not call upon these compliances.

Going against these perceptions, to start with, every individual whose total income for the current financial year 2012-13, exceeds Rs. 2, 00, 000/-, among other things, is required to pay income tax and file his income tax return u/s 139 of the Income Tax Act. The limit is 2.5 lakhs for senior citizens having 60 years of age and 5.0 lakhs for super-senior-citizens having 80 years of age; irrespective of the fact whether he is a salaried individual, full time professional, businessman or a freelancer or person working from his home.

Next, every person who is into profession of law, medicine, architecture, engineering, accountancy, technical consultancy, interior designing, authorized representative, film artist, company secretary and information technology, needs to maintain proper books of accounts, as specified in section 44AA of the Income Tax Act, if their receipts from the above profession are likely to exceed Rs. 1.5 lakhs in the year the profession has been initiated or has exceeded Rs. 1.5 lakhs in any one of the preceding three financial years; The books of accounts include the cash book, journal, ledger, carbon copies of serially numbered bills, original bills of expenses incurred and payment vouchers for petty expenses incurred during the year.

These norms do not apply only to professionals working under a trade name from their offices, they equally apply to freelance professionals and professionals working from their home; However, journalists, freelance writers of different fields and consultants of domain other that specified above, small online traders working from their homes and commission agents, are not covered under the provision of this section; However, they get covered under the definition of other businesses and professionals, for whom the limit is Rs. 1.2 lakhs as net income from their business or profession during the financial year or Rs. 10 lakhs as gross receipts from their business or profession.

So, the freelancers and professionals working from their home, it's high time for you all to wake-up and start preserving the carbon copies of serial number of bills issued to your clients, keeping original bills and vouchers of expenses incurred in the process, and maintaining books of accounts in form of cash book, bank book, journals and ledgers; in order to avoid initiation of proceedings by the income tax department; certainly, only if your receipts or income are crossing or are likely to cross the limits discussed above.

In the next article we would address issues like nature of expenses that can be claimed as deduction by professionals working from home and freelancers and also their tax implications. Please feel free ask us any query: alokpatnia@taxmantra.com. Startups and other businesses feel free to visit Taxmantra.com for comprehensive accounting, legal, regulatory, taxation and other compliance related assistance.

[Image credit: Forbes]

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