How To Calculate Withholding Tax In Nigeria: Step By Step Guide
Withholding Tax (WHT) is one of the most confusing taxes in Nigeria, especially for small business owners, freelancers, contractors, and even employees who see deductions but don’t fully understand them.
If you have ever asked questions like “Why was withholding tax deducted from my payment?”, “How do I calculate withholding tax in Nigeria?”, or “Can I get my withholding tax back?”, this guide is for you. This article explains withholding tax in Nigeria.
What Is Withholding Tax?
Withholding tax is a tax that is deducted at source from a payment before the recipient receives the money.
In simple words, instead of you paying tax later, the person paying you deducts part of the money and sends it to the government on your behalf.
Example:
- If someone is supposed to pay you ₦100,000 and the withholding tax rate is 10%, they will pay you ₦90,000 and send ₦10,000 to the tax authority.
What Is Another Name For Withholding Tax?
Withholding tax is also known as:
- Tax deducted at source
- Advance tax
- Prepaid tax
This is because it is not a final tax in most cases—it is an advance payment of income tax.
Who Should Pay Withholding Tax In Nigeria?
Withholding tax applies to both individuals and businesses involved in certain transactions.
People and entities required to deduct withholding tax include:
- Companies
- Government ministries, departments, and agencies (MDAs)
- Registered business owners
- Organizations making qualifying payments
People affected by withholding tax include:
- Contractors
- Consultants
- Freelancers
- Suppliers
- Landlords
- Professionals (lawyers, accountants, engineers, etc.)
What Are Examples Of Withholding Tax In Nigeria?
Withholding tax applies to many types of payments, such as:
- Contract payments
- Consultancy fees
- Professional services
- Rent
- Interest
- Dividends
- Royalties
- Commissions
Each of these transactions has specific withholding tax rates.
What Is The Purpose Of Withholding Tax?
The main purposes of withholding tax are:
- To ensure tax compliance
- To reduce tax evasion
- To provide government with steady revenue
- To make tax collection easier
- To act as advance income tax payment
Withholding tax helps the government collect taxes gradually instead of waiting until year-end.
How Do I Calculate Withholding Tax In Nigeria?
Calculating withholding tax in Nigeria is very simple.
Withholding Tax Formula
- Withholding Tax = Gross Amount × Applicable WHT Rate
Step-by-Step Example
If:
- Contract value = ₦200,000
- Withholding tax rate = 5%
Calculation:
₦200,000 × 5% = ₦10,000
So:
- Contractor receives ₦190,000
- ₦10,000 is remitted to the tax authority
Common Withholding Tax Rates In Nigeria
| Transaction Type | Withholding Tax (WHT) Rate |
|---|---|
| Contracts | 5% |
| Consultancy & Professional Fees | 10% |
| Rent | 10% |
| Interest | 10% |
| Dividends | 10% |
| Royalties | 10% |
| Commissions | 10% |
| Supplies (Non-Contract) | 5% |
| Construction (Companies) | 2% |
| Construction (Individuals) | 5% |
What Is 15% Withholding Tax?
The 15% withholding tax rate usually applies to royalties paid to non-residents or in special cross-border transactions, depending on tax treaties.
What Is 1% And 2% Withholding Tax?
- 1% WHT often applies to VATable supplies by companies
- 2% WHT usually applies to construction or contract services by companies
These reduced rates are meant to avoid over-taxing businesses.
What Is The Minimum Amount Of Tax Withholding?
There is no official minimum amount. Once a transaction falls under withholding tax rules, deduction must be made regardless of amount, unless exempted by law.
How Is Withholding Tax Paid In Nigeria?
Withholding tax is paid through the following steps:
- Deduct the tax at source
- Pay the net amount to the vendor
- Remit the withheld tax to the tax authority
- Obtain a withholding tax credit note
Payments are made to:
- FIRS for companies
- State Internal Revenue Service for individual.
How To Declare Withholding Tax
To declare withholding tax:
- Complete the WHT remittance schedule
- Attach payment evidence
- Submit to FIRS or State IRS
- Issue a WHT credit note to the beneficiary
This credit note allows the recipient to claim the tax later.
Why Is Withholding Tax Paid?
Withholding tax is paid to:
- Track income
- Prevent tax evasion
- Ensure early tax collection
- Serve as proof of tax compliance
What Is The Difference Between PAYE And Withholding Tax?
| PAYE | Withholding Tax |
|---|---|
| Applies to salaries | Applies to services & contracts |
| Paid monthly | Paid per transaction |
| Final tax | Advance tax |
| Employee-based | Business-based |
How To Avoid 30% Withholding Tax
A 30% withholding tax usually applies to non-residents without proper documentation.
To avoid it:
- Register with FIRS
- Obtain a Tax Identification Number (TIN)
- Provide valid tax documents
- Claim treaty benefits (if applicable)
What Is The Penalty For Late Payment Of Withholding Tax?
Failure to remit withholding tax attracts:
- 10% penalty of the tax due
- Interest at prevailing CBN rate
- Possible fines and prosecution
- Late remittance is treated as tax evasion.
FAQs On Withholding Tax In Nigeria
Can I Get A Refund On Withholding Tax?
Yes. Withholding tax is not final tax. You can use it to offset future tax liabilities or apply for a refund if overpaid.
Why Am I Charged Withholding Tax?
You are charged because your payment falls under a taxable transaction defined by Nigerian tax law.
When Should Withholding Tax Be Paid?
Withholding tax must be remitted within 21 days of the month the deduction was made.
Can Withholding Tax Be Claimed Back?
Yes. You can claim it using your WHT credit note when filing tax returns.
Can I Stop Withholding Tax?
No. If your transaction is taxable, withholding tax must be deducted by law.
What Happens If I Don’t Withhold Tax?
Failure to withhold tax can lead to:
- Penalties
- Interest
- Tax audits
- Legal action
Is Withholding Tax The Same As FICA?
No. FICA is a U.S. payroll tax, while withholding tax in Nigeria applies to contracts and services.
