Independent Contractor and PAYE

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Independent Contractor and PAYE

• 26 February 2024
• Accounting
• 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.

• Intro Video
• More Information

 

FAQs

1. What is the difference between an independent contractor and an employee in South Africa?

An independent contractor is self-employed and provides services to clients under a contract, while an employee works under the control and supervision of an employer. The distinction affects how tax is handled—employees are subject to PAYE (Pay As You Earn), while independent contractors typically manage their own tax affairs.

2. Does PAYE apply to independent contractors in South Africa?

Yes, PAYE can apply to independent contractors if they are deemed employees based on the nature of their working relationship. SARS applies two main tests—the common law test and the statutory test—to determine whether a contractor should be treated as an employee for PAYE purposes.

3. How does SARS determine if you're an independent contractor or employee?

SARS uses the common law control test and the statutory test to assess your employment status. These tests look at factors like control, supervision, hours worked, and integration into the business. If you fail these tests, you're treated as an employee and subject to PAYE.

4. Can a company deduct PAYE from an independent contractor?

A company must deduct PAYE from a contractor only if SARS considers them an employee. If the contractor passes both the common law and statutory tests and is truly independent, no PAYE deduction is required.

5. Do independent contractors in South Africa pay tax?

Yes, independent contractors are responsible for paying provisional tax on their income. Unlike employees, they don’t have PAYE automatically deducted, so they must submit provisional tax returns twice a year and an annual tax return.

6. What is the 50% rule for independent contractors in South Africa?

Under the statutory test, if more than 50% of a contractor’s income comes from a single client, they may be classified as an employee by SARS, making them subject to PAYE, even if they consider themselves independent.

7. How do I avoid PAYE as an independent contractor?

To avoid PAYE, ensure you meet SARS’s definition of an independent contractor:

• Work for multiple clients

• Control your hours and workflow

• Use your tools or equipment

• Operate independently, without supervision

8. What are the tax obligations of an independent contractor in South Africa?

Independent contractors must:

• Register as a provisional taxpayer

• Pay tax in two or three instalments annually

• Submit a final income tax return

• Keep accurate financial records for SARS audits

9. Can an independent contractor be paid through a payroll system?

Technically, yes, but only if classified as an employee. True independent contractors should be paid via invoices, not through payroll, unless SARS deems them employees and requires PAYE deductions.

10. Is it better to be an independent contractor or an employee in South Africa?

It depends on your goals. Independent contractors enjoy flexibility and tax deductions but carry more risk and admin. Employees get job security, benefits, and PAYE handled by the employer. SARS’s classification rules should guide the decision.

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