How much PAYE do we need to deduct from Independent Contractors? Where in the Tax Act can we find info regarding this?
Important:
This answer is based on tax law year ending 28 February 2016.
Answer:
The issue, as far as the services is rendered by ‘independent contractors’ are concerned, is whether they are rendered by the individual in a capacity as a person carrying on a trade independently. Generally speaking, a person deriving an amount (in respect of services rendered) by way of a fee would be in receipt of remuneration UNLESS the individual rendered the services in the course of a trade carried on independently (as required by proviso (ii) to the definition of remuneration in paragraph 1 of the Fourth Schedule to the Income Tax Act) by him or her).
Remember that, a person “shall not be deemed to carry on a trade independently as aforesaid if the services are required to be performed mainly at the premises of the person by whom such amount is paid or payable or of the person to whom such services were or are to be rendered and the person who rendered or will render the services is subject to the control or supervision of any other person as to the manner in which his or her duties are performed or to be performed or as to his hours of work”. See the proviso to paragraph (ii) of the definition of ‘remuneration’ in paragraph 1 of the Fourth Schedule.
As explained in the current practice generally prevailing (issue 4), it “is the responsibility of the employer to determine whether the provisions of exclusionary subparagraph (ii) of the definition of “remuneration” are applicable and whether payments are subject to employees’ tax.” It is SARS’s view that the employer “is in the best position to evaluate the facts and the actual situation”. The ‘employer’ in this instance would be the person paying the ‘contractors’.
The legal relationship between the parties must therefore be gathered from the terms of the (written) agreement between them. The general principle was explained as follows by Judge Streicher in the Niselow case. The Judge said that "… an employee is a person who makes over his or her capacity to produce to another; an independent contractor, by contrast, is a person whose commitment is to the production of a given result by his or her labour…" The judge then concluded by saying that the relationship between the parties must remain one in terms of which the person doing the work undertook to produce a certain result and not to render personal services to person paying for it to be a contract in terms of which independent services are rendered.
If the person is in receipt of remuneration, not independent, the tax must be withheld according to the tables (in some instances, at 25%).