For many Payroll and/or HR departments, dealing with the processing of independent contractors falls into the “not sure what to do with” category. At Paymaster People Solutions, one of our most frequently asked questions relates to whether an independent contractor ought to be taxed, and if so, then how does one process it? When it comes to the taxing of independent contractors, part of the confusion stems from not always understanding what an independent contractor is.
Independent contractors—Who are they?
The increasing prevalence of independent contractors is notable in the South African business environment. An independent contractor is not an employee of an organisation. By way of explanation, a good example of an independent contractor may be encountered in the electrical industry where certain skills are needed for specific jobs. The electrician is a specialist at performing specific tasks. As such, the independent contractor electrician delivers an extended or improved service to a business.
Once you know the difference between and employee and an independent contractor, it is relatively easy to keep to the rules laid down by the South African Revenue Service (SARS). But how do you tell the difference?
Interpretation Note 17 (4th schedule) relating to Income Tax Act 1962 which deals with Employees’ tax for Independent contractors, states that there are certain tests you can perform to determine the facts around pay as you earn (PAYE) considerations. Two of these are the statutory first test and the common law dominant impression test.
Note: The important thing to remember is that an independent contractor does not pay PAYE.
Statutory first test
The statutory first test is straightforward. Two questions which may only have one answer need to be answered—namely:
- Does the person work mainly or solely at the client’s premises?
- Does the person work under instruction or supervision of the client with defined or governed hours of work?
Both questions may only have a YES or NO answer. If the answer to both questions is YES, then the type of employment by a particular person is considered to be that of an employee. Accordingly, the employee is liable to pay PAYE tax. Such tax monies are to be deducted from the employee’s salary and paid over to SARS. There are certain exceptions though.
Common law dominant impression test
Another test is the common law dominant impression test which is used when the statutory first test does not apply. This particular test is slightly more complex than the statutory first test. This test asks a number of questions that will determine whether a person is employed or contracted. The questions typically asked in this test may include:
- Does the person have an exclusive relationship with a single employer?
- Is the person eligible for any benefits such as sick leave or general leave?
- Is the person trained by the company or is his/her current training being paid for by the company?
- Even if there is no work required, must the person arrive for work?
- Are the working hours set and controlled by the employer?
- Can the person sub-contract (i.e. use another person) to undertake the given tasks, or must he or she personally perform the job tasks expected of him/her?
Furthermore, Interpretation Note 17 (click to download) also states the following about independent: “There are no hard and fast rules in determining whether or not a person is an independent contractor. [For this reason] an ‘overall’ or ‘dominant impression’ of the employment relationship must be formed.”
Remember this: independent contractors do not pay PAYE. However, if you make a mistake, SARS takes no responsibility for an inaccurate assessment as to whether a supplier might be an independent contractor or not. Should you have paid an employee as if they were an independent contractor then you must seek the refund directly from the said employee, or accept it as your loss.
If you are still concerned about whether a person is an independent contractor or not, you are invited to speak to your tax adviser or contact Paymaster People Solutions for more information.