Can you please tell me which directive to apply for Independent Contractors? Is it the fixed percentage and are you aware of any changes to the requirements for Independent Contractors?
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
Interpretation Note 17 (Issue 4), that deals with the potential employees’ tax implications of amounts paid or payable to a person carrying on a trade independently, was last amended on 14 March 2018. It didn’t make fundamental changes to the practice generally prevailing.
SARS’s practice of rejecting applications for confirmation as an independent contractor under subparagraph (ii) of the definition of “remuneration” has been codified into the law – see section 80(1)(a)(vii) of the Tax Administration Act. One can therefore, since 1 October 2012, not apply for an advance ruling relating to whether the person is an independent contractor.
In essence there are no changes to the requirements for independent contractors.
The practice generally prevailing states that “it is the employer's duty to determine whether a person is an independent contractor or an employee and whether employee's tax should therefore be deducted or not”. This is because the “employer is in the best position to interpret the facts of each case.”
We accept that the individual that you refer to here, the “independent contractor”, is someone who is “not be deemed to carry on a trade independently”. See the proviso to paragraph (ii) of the definition of ‘remuneration’ in paragraph 1 of the Fourth Schedule to the Income Tax Act. In other words, the amounts paid or payable to this individual is remuneration and the employer must withhold employees’ tax for the amounts.
The Guide for employers in respect of employees’ tax, issued by SARS in respect of the 2020 year of assessment, states that the “employees’ tax for an independent contractor” must be “calculated according to the deduction tables or a tax directive. The practice generally prevailing confirms that the amounts paid to the independent contractor must be coded 3616 on the IRP5 certificate.
In terms of paragraph 11, of the Fourth Schedule to the Act, SARS may, having regard to the circumstances of the case, issue a directive to an employer authorising that employer … to deduct or withhold by way of employees' tax from any remuneration in terms of paragraph 2, a specified amount or an amount to be determined in accordance with a specified rate or scale. SARS can however only issue a directive:
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in order to alleviate hardship to that employee due to circumstances outside the control of the employee
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or to correct any error in regard to the calculation of employees' tax,
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or in the case of remuneration constituting commission or where the remuneration is paid or payable to a personal service provider and that directive must be complied with.