Tax and independent contractors

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(Shutterstock)
(Shutterstock)

A Fin24 user works as an independent contractor via an agency and is not sure what she can claim in her tax submission. She writes:

I am contracted to a company that declares me as an independent contractor.

They pay my taxes and I have a contract which stipulates that I am expected to work 160 hours per month. I have set fees, which are calculated at an hourly rate.

I am outsourced to clients on a contractual basis. The current contract is for two years. My contract with my agent is linked to the contract with the client. If the client terminates the contract, my contract with the agency ends.

I do not receive training or any benefits from the agency.

Can I claim my training and my professional books and publications in my tax submission?

READ: Sars not fooled by "independent consultants"

Pieter Faber, technical executive: tax law & policy at the SA Institute of Tax Professionals (Sait), responds:

The determination of your employment status is an obligation imposed on the “employer” in terms of the provisions of the fourth schedule to the Income Tax Act.

It is an arduous task, as can be seen in interpretation note 17 of the SA Revenue Service (Sars) and should be determined from the legal and factual relationship between the parties by the application of the common law test and the dominant impression test.

This determination has a direct impact on whether you may deduct certain expenses or not and whether employees’ tax should be withheld.

A person for which neither the tests result in an employee determination, will be an independent contractor to which no employees’ tax withholding applies.

If the common law - that is a normal employee - determination does not apply, but the dominant impression test does find application and results in a “deemed employee status”, then the person is still an independent contractor, but will be subject to a fixed 25% employees’ tax withholding if in non-standard employment (according to the definition in paragraph 11B of the fourth schedule as read with Sars’ employers guide) and withholding according to the tax tables if in standard employment.

Importantly, the income is still to be coded on the IRP 5 under code 3616 (independent contractor) which means that section 23(m), which limits the deductible expenses for employees, would still not apply.

It should, however, be noted that if Sars should at a future date successfully dispute the determination, they will be legally entitled to recover the employees’ tax from the employer who may then recover from you, irrespective of how you were assessed for personal income tax.
 
As to the deductibility of the stated expenses, on the basis that the employer has correctly made the determination of your employment status as independent contractor and that the work constitutes a trade, the prohibition in section 23(m) will not apply and you would then only have to comply with the requirements of s11(e) - that is wear and tear - in respect of the books and section 11(a) for the training and short publications - like monthly magazines - to claim the deduction against your income.

The books can be deducted over three years (Sars’ IN 47) if more than R7 000 and or once off in the year of incurral if less than R7 000.

You would also have to consider whether these expenses are directly related to the contract income you earn, for instance, if you are a sales consultant for machinery, a publication on arranging flowers will not be deductible.

ALSO READ: Contract workers and provident funds

- Fin24
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