Zakat Guide for Business Owners
Calculating Zakat for your business
Calculating Zakat for a business can often feel like a daunting task. Some owners may even worry that the amount is too "expensive", leading to hesitation in fulfilling the Zakat that is due.
To put this into perspective, consider government tax obligations. All businesses pay a range of taxes to the government every year, and many employ full-time staff just to manage these obligations. Business owners are acutely aware of the consequences of avoiding taxes, which is why so few fail to fulfil them.
The Zakat obligation should be treated with the same or even greater seriousness. We must remember the punishment for withholding Zakat and neglecting this duty, as mentioned in the Qur’an and Sunnah.
Allah says:
وَٱلَّذِينَ يَكْنِزُونَ ٱلذَّهَبَ وَٱلْفِضَّةَ وَلَا يُنفِقُونَهَا فِى سَبِيلِ ٱللَّهِ فَبَشِّرْهُم بِعَذَابٍ أَلِيمٍ
“And those who hoard gold and silver and spend it not in the way of Allah – give them tidings of a painful punishment.” Surah At-Tawbah (9:34)
The Messenger of Allah ﷺ said:
مَا مِنْ صَاحِبِ ذَهَبٍ وَلاَ فِضَّةٍ لاَ يُؤَدِّي مِنْهَا حَقَّهَا إِلاَّ إِذَا كَانَ يَوْمُ الْقِيَامَةِ صُفِّحَتْ لَهُ صَفَائِحَ مِنْ نَارٍ فَأُحْمِيَ عَلَيْهَا فِي نَارِ جَهَنَّمَ فَيُكْوَى بِهَا جَنْبُهُ وَجَبِينُهُ وَظَهْرُهُ كُلَّمَا بَرَدَتْ أُعِيدَتْ لَهُ فِي يَوْمٍ كَانَ مِقْدَارُهُ خَمْسِينَ أَلْفَ سَنَةٍ حَتَّى يُقْضَى بَيْنَ الْعِبَادِ فَيُرَى سَبِيلُهُ إِمَّا إِلَى الْجَنَّةِ وَإِمَّا إِلَى النَّارِ( صحيح مسلم 987ا).
"Any person who possesses gold or silver and does not pay what is due on it (i.e., the Zakat); on the Day of Resurrection, sheets of silver and gold would be heated for him in the fire of Hell, and with them his flank, forehead, and back will be branded. When they cool down, they will be heated again, and the same process will be repeated during a day the measure of which is fifty thousand years. This will continue until Judgement is pronounced among Allah's slaves, and he will be shown his final abode, either in Jannah or in Hell." Sahih Muslim 987a
This serves as a serious reminder that paying Zakat is not only an act of worship but also a protection against severe punishment in the Hereafter.
Unlike ordinary taxes, Zakat carries immense rewards. Spending in the way of Allah brings divine compensation and blessings:
Allah says:
قُلْ إِنَّ رَبِّى يَبْسُطُ ٱلرِّزْقَ لِمَن يَشَآءُ مِنْ عِبَادِهِۦ وَيَقْدِرُ لَهُۥ وَمَآ أَنفَقْتُم مِّن شَىْء ٍ فَهُوَ يُخْلِفُهُۥ وَهُوَ خَيْرُ ٱلرَّٰزِقِينَ
“Say, 'Indeed, my Lord extends provision for whom He wills of His servants and restricts [it] for him. But whatever thing you spend [in His cause]—He will compensate it; and He is the best of providers.” Saba’ (34:39)
Understanding Business Zakat
The word Zakat is the infinite of the verb zaka, meaning to grow, increase, and purify. Consequently, Zakat means blessing, growth, cleanliness, and betterment. Pay your Zakat and watch your business grow!
Two types of businesses are addressed in this guide:
- Goods-Based Business: (e.g., Supermarkets, clothing stores, car accessories, etc.)
- Service Business: (e.g., Accounting, consulting, marketing, design, etc.)
Note: Agricultural businesses, such as farming and animals, are not covered in this guide.
Is Zakat obligatory on business?
Yes, Zakat is obligatory on business and trade according to the most correct opinion, based on the following evidence:
Allah says:
يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوٓا۟ أَنفِقُوا۟ مِن طَيِّبَـٰتِ مَا كَسَبْتُمْ وَمِمَّآ أَخْرَجْنَا لَكُم مِّنَ ٱلْأَرْضِ وَلَا تَيَمَّمُوا۟ ٱلْخَبِيثَ مِنْهُ تُنفِقُونَ وَلَسْتُم بِـَٔاخِذِيهِ إِلَّآ أَن تُغْمِضُوا۟ فِيهِ وَٱعْلَمُوٓا۟ أَنَّ ٱللَّهَ غَنِىٌّ حَمِيدٌ
“O you who have believed, spend from the good things which you have earned and from that which We have produced for you from the earth...” Al-Baqara (2:267)
Narration from Umar ibn al-Khattab (may Allah be pleased with him):
عن أبي عمرو بن حماس، عن أبيه، قال "مر بي عمر بن الخطاب رضي الله عنه، فقال: يا حَماس، أَدِّ زَكَاةَ مَالِك. فقلتُ: ما لي مالٌ إلا جِعَابٌ وأَدَمٌ. فقال: قَوِّمْهَا ثم أَدِّ زَكَاتَهَا."
Abu ‘Amr ibn Hamas reported from his father that Umar ibn al-Khattab passed by him and said: ‘O Hamas, pay the Zakat on your wealth.’ I replied: ‘I have no wealth except some leather and quivers.’ He said: ‘Value them and then pay their Zakat.’
When and How to Calculate
Zakat is obligatory if:
- A whole lunar year (Hawl) has passed.
- The value of business commodities and earnings is beyond the Nisab. We use the Nisab of silver (595g of pure silver).
Fixed Assets: Resources used to run the business (buildings, factories, office equipment, IT systems, vehicles) that are not for sale have no Zakat due upon them. Capital investments, like office renovations, can be deducted from Zakatable wealth.
The Intention Factor:
Zakat is due on commodities bought and sold with the intention of profit.
- Personal Use: If you buy a car for personal use but intend to sell it only if you find a "good price", no Zakat is due.
- Resale: If you buy a car to resell it but use it in the meantime, Zakat is due.
- Changing Intention: If you decide to keep a resale item for personal use before the year passes, the Zakat obligation is removed.
Good Based Business Calculation
- Stock-take: On your Zakat anniversary date (Hawl), balance all stock from all your businesses.
- Valuation: Value saleable stock based on its saleable price (bulk or retail depending on your business).
- Balance Accounts: Add cash at hand and in bank accounts, including non-delinquent loans (good credits).
- Deduct Liabilities: Subtract immediate liabilities (taxes, salaries, periodic payments) due on or before the anniversary date. Deferred/long-term debt is not deducted.
- Final Figure: Add the cash figure to the saleable stock value.
- The Rate: Pay 2.5% of the total.
Note: If using the Gregorian calendar, apply a correction factor of 0.077%, making the total rate 2.577%.
What if I don't have the cash?
If you have plenty of stock but limited cash, you can follow the view of the Hanafiyyah (also preferred by Ibn Taymiyyah) to pay Zakat from the trade goods themselves. If the goods do not benefit the recipient, they should be sold and the proceeds given.
You may also pay Zakat in advance (monthly), as the Prophet ﷺ allowed Al-‘Abbas to do:
روى علي بن أبي طالب رضي الله عنه أن العباس رضي الله عنه أنَّ العباسَ بنَ عبدِ المطلبِ سألَ النَّبيَ صلَّى اللهُ عليهِ وسلَّمَ في تعجيلِ صدقتِه قبلَ أنْ تَحلَّ فرخصَ لهُ في ذلكَ. رواه الإمام أحمد
Ali ibn Abi Talib reported that Al-‘Abbas asked the Prophet ﷺ about giving his Zakat early... and the Prophet ﷺ allowed him to do so.
Service Business Calculation
Calculating Zakat for service businesses is similar to individual Zakat.
- Sole Owners: You can combine business and personal Zakat.
- Partnerships: Owners/directors are responsible in proportion to ownership. If you are a silent partner, you are still liable, and those running the business must calculate the amount.
Example: Ahmed (60%) and Sarah (40%) own a business with $800,000 in net Zakatable assets. The total Zakat is $20,000. Ahmed owes $12,000 and Sarah owes $8,000. They must still calculate their personal Zakat separately.
Ready to calculate and pay your Zakat?
Use our online resources to calculate and pay your Zakat today:
All donations over $2 to NZF are 100% Tax Deductible. If you require a tax invoice, please email us at finance@nzf.org.au.