More people are finding themselves outside the permanent labour force and are conducting their work removed from the traditional employer-employee relationship.
The employment landscape increasingly
includes freelancers, independent
contractors, personal service providers and
part-timers, bringing with it a whole range
of complex tax rules that can make life
quite difficult if not applied correctly.
Essentially, employers should deduct employees’ tax (PAYE) when
remuneration is paid to employees.
However, where a person trades
‘independently’, their earnings are not
regarded as remuneration and should not
be subject to PAYE.
Elle-Sarah Rossato, head of dispute
resolution and tax controversy at
PwC, says the concept of independent
trade is complex and can easily be
“The basic principle is that in order to
qualify as being independent, the person
must be independent of both the person
paying them and the person to whom
the services are provided.”
The employer is not absolved from the
potential labour and tax laws that may be
applicable simply because someone calls
themselves an independent contractor,
says Beatrie Gouws, head of stakeholder
management and strategic development
at the South African Institute of Tax
When dealing with either an entity or a
natural person in a non-permanent labour
environment, the employer should apply
the available tests to determine the exact
status of the individual or entity to ensure
the labour and tax obligations are clear,
Negotiating this new landscape is
made more complicated by the fact that
the rules are not contained in one single section of the Income Tax Act, says Anthea Scholtz, tax director at Deloitte.
Personal service providers
The water has been muddied even more with the introduction of personal service provider (PSP) companies in the legislation. This was done to put a stop to a so-called popular tax-saving method.
Employees used to establish
companies, closed corporations (no longer
available under the Companies Act) or
trusts and offer their services through this
entity back to the employer.
In this way
they used the tax arbitrage opportunity to pay 28% tax as a company instead of
anything between 30% and 45% as an
employee. If an entity is regarded as a
PSP it will be subjected to tax of 28% on
its income and the deduction of business
expenses is limited.
There is a carve-out in the legislation.
When a company employs three or more
people on a full-time basis, who are
directly involved in the business activities
and not connected to the company or the
owner, it will not be classified as a PSP.
There are broad categories under
which workers can be classified,
namely unincorporated entities and
This is usually individuals
who trade in their own
name as sole traders. Unless
the individual is classified as independent, they will be
subject to employees’ tax at
a flat rate of 25%.
The premises test (that determines
whether work is done mainly at the
premises of the client) and the control or
supervision test (the client determines
how and when the work is done) generally
must be satisfied before one can state that the person is not independent.
“The onus to make the correct
classification is on the person who is making the payment. We have found in
practice that employers err on the side of
conservatism and many simply withhold
employees’ tax at 25%,” says Scholtz.
Nicci Courtney-Clarke, financial
manager and head of tax at TaxTim, says when employment tax has been
deducted, it is mandatory to issue a tax certificate to the contractor. If it is
disclosed under the basic salary code, the
contractor or freelancer may not be able to
claim normal business expenses.
Scholtz advises contractors to request
in writing that all their clients voluntarily
deduct employees’ tax.
The most common
incorporated entity has been
PSPs, but there has been a
sharp decline since the change
in the legislation.
The decision to incorporate
as a company rests on
business principles, but there
are some tax considerations
to keep in mind. Rossato says although
the corporate tax rate is 28%, dividends
paid by the company is subject to a20% dividend withholding tax rate. If all
profits are distributed to shareholders, the
effective tax rate can be as high as 44%.