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Independent Contractor and PAYE
- 26 February 2024
- Accounting for Income Tax
- Marita Jordaan
This FAQ article is based on tax law for the year ending 29 February 2024.
1. The Problem / Facts
Is a company at risk of tax-related issues by having a director who is also a shareholder, invoice the company monthly for services rendered, claiming to be an "independent contractor" and not receiving a salary with PAYE deductions?
2. Applicable Law
- Income Tax Act 1962 Fourth Schedule para 2
- SARS Interpretation Note 17 Issue 5
3. Application of the Law to the Facts
In the case of independent contractors, a distinction must be drawn between true independent contractors and those who are deemed to be employees. The distinction is based on whether or not any amounts paid to the independent contractor meet the definition of remuneration in the Fourth Schedule to the Income Tax Act. For a more in-depth explanation, please see SARS’s Interpretation Note 17 (issue 5) on the subject.
An independent contractor should be added to the company’s payroll from which PAYE is deducted if their income meets the definition of remuneration. This will be the case if they render services mainly at the premises of the person by whom they are paid; and they are subject to the control or supervision of any other person as to the manner in which his or her duties are performed. The elements of the definitions of employee, employer and remuneration, therefore, need to be satisfied in order for an independent contractor to be deemed an employee.
An independent contractor is a person who employs three or more full-time employees, who are not connected persons in relation to him or her and are engaged in his or her business throughout the particular year of assessment. Such contractors are not employees and, therefore, are not subject to employees’ tax or UIF and should not be added to the payroll system.
In terms of section 234(p) of the Tax Administration Act, if an employer wilfully and without just cause fails or neglects to withhold and pay PAYE to SARS, the employer is guilty of an offence and, upon conviction, subject to a fine or imprisonment for a period not exceeding two years.
Join Carmen Westermeyer for Advising High Net Worth Individuals where she will unpack topics such as relevant Interpretation Notes, and the correct disclosure requirements for SARS.