Independent contractors – part 1

2008-05-07 00:00

"Is the person an independent contractor or an employee?" That is the question! This debate is very controversial and widely misinterpreted. In an effort to provide concise guidance for taxpayers, the SA Revenue Service (SARS) have released issue two of Interpretation Note (IN) No. 17 dated January 9, 2008.

The purpose of the IN is to explain the statutory tests and common law tests to assist SARS and employers to classify a worker as an employee or an independent contractor. This classification is crucial as it enables the employer to determine the correct employees’ tax to be deducted and paid over to SARS. The employer must determine whether the amounts paid to the independent contractor are remuneration.

It must be noted that, subject to certain conditions, amounts paid to independent contractors in respect of services rendered are excluded from "remuneration" and thus no employees’ tax is withheld by the employer.

The IN sets out two sets of tools to assist in determining whether a person is an independent contractor for the purposes of employees’ tax. The first test is known as the statutory test. In the event that the statutory test is conclusive, it means that a person is deemed not to be an independent contractor for the purposes of determining employees’ tax. The second test is known as the common law test. This test comprises rigid rules in determining whether or not a person is an independent contractor. The IN states that the statutory test must be considered first in determining whether the person is an independent contractor. The common law test will be applied where the statutory test is not applicable.

The statutory tests provide that a person is not independent if the services are performed mainly at the client’s premises and:

o the person is subject to control in terms of duties to be performed or hours to be worked or;

o the person is subject to supervision in terms of the duties to be performed or hours to be worked.

Where any of these tests are positive, the person is not independent and the amount received will fall into the definition of remuneration. It is important to note that if one of the tests is positive, the deeming provision will apply. An important point to note is that if either of these tests are positive, it will not be necessary to consult the common law dominant impression test in order to ascertain whether an amount should be classified as remuneration. Notwithstanding the above, an independent contractor who employs more than three unconnected full-time employees and who is engaged in his business throughout the year will be deemed to be carrying on an independent trade.

In next week’s article, I will discuss the application of the statutory test as well as the common law dominant impression test.

Usha Maharaj

Associate Director

083 284 8760

usha.maharaj@kpmg.co.za

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