The liability of an employer to withhold and deduct employees’ tax (known as PAYE) depends upon a worker’s status as being either an employee or an independent contractor. When an employer pays remuneration to its employees, PAYE must be withheld, but a similar obligation does not ordinarily exist for payments made to independent contractors. It is thus important to understand the difference between an employee and an independent contractor.
It is the employer’s responsibility to determine whether payments are subject to PAYE. This is dependent on whether “remuneration” as defined in the Income Tax Act is paid. An amount paid to an independent contractor for services rendered is generally excluded from the definition of remuneration. There are statutory and common law tests to determine whether a person is an employee or independent contractor.
There are two statutory tests. The first test looks at whether a person is carrying on a trade independently. Here one must consider whether the services are mainly (i.e., more than 50%) being performed by the worker at the “client’s” premises. In addition, consideration must be given to whether the worker is under the control or supervision of any person as to the manner in which the worker’s duties are performed, or as to the hours of work. If the worker mainly performs services at the client’s premises under its control or supervision, the worker is not carrying on a trade independently, and the amount received by the worker is subject to PAYE.
If the second statutory test applies it will override the first test. This test says that a person who employs three or more full-time employees, who are not connected persons in relation to him and are engaged in his business throughout the particular year of assessment, is deemed to be carrying on a trade independently. In such circumstances the worker would be an independent contractor.
In addition to the statutory tests, there is the common law “dominant impression test”. This test examines a list of indicators with differing significance that are applied to the context of the enquiry.
If a person is uncertain whether a worker is an independent contractor or employee, professional advice should be sought. An employer can be held personally liable for the PAYE which should have been withheld but was not so withheld. Furthermore, a person who wilfully or negligently fails to deduct or withhold PAYE is guilty of an offence.
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