When can I regard someone as an independent contractor for tax purposes?

When can I regard someone as an independent contractor for tax purposes?

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5 min read
Employee or appoint someone

If you fail to withhold pay as you earn (PAYE) taxes where required to do so, then SARS may recover the PAYE as well as penalties and interest from you (the employer).

Generally, from a tax perspective, you need to know whether you need to withhold taxes or not when paying the person you appoint.

So what are the important things that you must consider? Firstly, you need to understand what SARS regards as an independent contractor.

An Independent Contractor is a natural person that carries on an independent trade. An example would be a plumber or an electrician who works for their own account for a number of customers. 

Next, you must consider:

  1. Does the person employ 3 or more unconnected persons?
  2. Are these employees engaged full time in the person’s business that provides the service?

If both of these questions are answered “yes”, then the Service Provider is an Independent Contractor and can be paid without PAYE withholding.

If either or both are answered “no”, then consider the following questions:

  1. Does the person provide the services mainly at your premises?
  2. Is the person subject to your control or supervision as to the manner in which duties are performed or hours of work?

If questions 3 and 4 are answered “yes”, then the person is not an independent contractor and you will need to withhold PAYE for this person.

If either or both questions 3 and 4 are answered “no”, then you will need to apply the Dominant Impression grid. For guidance on applying the Dominant Impression grid see SARS - SARS Interpretation note 17.

What if I just pay the person’s company instead? Do I still need to withhold taxes?

Paying a company instead will not necessarily mean you do not have to withhold any taxes.

If the service provider is a company / CC / trust, then you need to consider whether the service provider will be deemed to be a personal service provider by SARS.

An example of a personal service provides is where an accountant provides services through a connected company to a single client where the accountant would be regarded as an employee of such client if the services were rendered directly to the client and not via the company.

Payments to personal service provider entities are subject to PAYE withholding at the rate of 28% (in the case of a company or close corporation) or 41% (in the case of a trust).

How do I assess if an entity is a personal service provider?

Firstly, there are two things that you need to consider:

  1. Does the service provider employ 3 or more unconnected persons?
  2. Are these employees engaged full time in the service provider’s business of rendering such service?

If both of these questions are answered “yes”, then the entity is not a personal service provider and can be paid without PAYE withholding.

If either or both questions are answered “no”, then ask the following questions –

  1. Would the person rendering the service on behalf of the service provider entity be regarded as an employee of the client if the services were rendered directly to the client rather than on behalf of the service provider entity?
  2. Does the service provider render services mainly at the premises of the employer and is the service provider subject to the control or supervision of the client as to the manner in which his duties are performed?
  3. Is more than 80% of gross income earned by the service provider entity from any one client?

If one or more of these questions are answered “yes” then the Service Provider is a personal Service Provider and must be paid subject to PAYE withholding.

Only if all of the questions are answered “no” can the entity be paid without PAYE withholding.

Considering the risk to the employer, it is critical that service providers are assessed against the deeming provisions to determine their status and if PAYE is required to be withheld.

The docninja contract generator will guide you through the questions considered above to ensure that you enter into the correct contract.

Generate employment contract - https://docninja.io/available-documents/document/117-employment-agreement/show

 

Generate independent contractor agreement - https://docninja.io/available-documents/document/160-independent-contractor-agreement/show