A common error made by HR departments is to assume that independent contractors are truly independent and that no PAYE needs to be deducted from payments made to these individuals. This often happens because the individuals in question previously worked for the organisation, have slipped into a consultants role (usually on retirement), and HR haven’t had the time to check whether they are truly independent both initially and on an ongoing basis. HR should be aware however that if they are audited by SARS, any independent contractors will be reviewed and if they are not independent then SARS will require the employer to deduct PAYE (penalties and interest for historic non-payment would also apply).
Independent contractors earn income for the services they render, and SARS made changes to the Fourth Schedule of the Income Tax Act in 2000 to bring these individuals into the PAYE net if certain criteria are satisfied (please see Interpretation Notes 17 and 35) to protect the fiscus as far as possible. Note, that while labour law Independent contractors are not necessarily employees for UIF (as the definition is linked to labour law), they may very well be for PAYE purposes.
Simply, in terms of interpretation note 17, a statutory test is first carried out to see whether an independent contractor is actually independent and thereafter a common law test is applied.
Statutory test
This test has two parts and the second part takes preference:
- If part one is positive then the person is deemed not to be carrying on an independent trade and therefore any earnings are remuneration and PAYE should be deducted. The first test has two sub-parts both of which need to apply for the person not to be independent:
- The first element is that the services or duties are required to be performed mainly (which is a quantitative measure of more than 50%) at the premises of the client; and
- The second element of the test is whether the worker is subject to the:
- Control of any other person as to the manner that the worker’s duties are or will be performed, or as to the hours of work; or
- Supervision of any other person as to the manner that the worker’s duties are or will be performed, or as to the hours of work
Second test
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, is deemed to be carrying on a trade independently.
So, if a person meets the second part then they will be an independent contractor even if they fail the first test.
Common law tests
Assuming the statutory tests are not applicable then the common law test can be applied to see whether the person is independent. These tests are not a checklist and hence are not conclusive. They rely on the definition of an employee in section 200A of the Labour Relation Act. If the person is an employee per these definitions then payments made to them should be treated as remuneration and PAYE should be deducted.