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Do you know how to tax your independent contractor?

by , 17 September 2013
One of the most common types of contactor your business will deal with is an independent contractor. And it's crucial that you get the tax treatment right. Read on to discover how to tax an independent contractor so you can save your business up to 200% in SARS penalties.

The Practical Tax Loose Leaf Service defines an independent contractor as a contractor who is a natural person, such as a sole proprietor.

One way to trigger a SARS audit is to get the tax treatment of an independent contractor wrong.

Don't take that costly risk.

Here's how to get the tax treatment of an independent contractor right

'There are limitations on deductions an independent contractor can deduct from his taxable income so ensure you get the IRP5 code right,' says the Practical Tax Loose Leaf Service.

Section 23(m) of the Income Tax Act affects contractors where an employment or office-bearing relationship exists.

SARS will know whether to apply Section 23(m) by looking at the income code used on the employees' tax certificate (IRP5).

If the IRP5 tax certificate is incorrect (for example you've use the wrong income source code), SARS will assess the taxpayer incorrectly as the deduction of expenses will be limited if the taxpayer was an employee.

To get it right, you must deduct the tax and issue an IRP5 against source code 3616. But if the independent contractor gives you an invoice, you don't need to issue an IRP5.

Remember, you must only use source code 3616 on the IRP5. This'll help ensure you tax an independent contractor correctly.

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