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If you hire independent contractors, use these two tests to determine if you must tax them

by , 18 November 2014
If you hire independent contractors, you may be wondering if you have to tax them. After all, there are some situations when you will deduct tax from your independent contractors pay and some when you won't.

Because of this, it can become extremely confusing and complicated. If you get the tax for your independent contractors wrong, you'll land yourself in hot water with SARS.

We have a solution though. We have two easy tests that will help you determine if you must tax your independent contractors.

Read on to find out how to do them...

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To determine if you must deduct tax from your contractor's wages, use this test

Test #1: A statutory test, to see if the worker is independent
To do a statutory test, ask these three questions:
1. Is the worker subject to the control of any other person in your company? Does this person tell the contractor how to carry out his work and what his work hours are?
2. Is the worker subject to the supervision of any other person, as far as his work and working hours are concerned?
3. Does he receive regular payments of a regular amount either weekly, monthly or another regular period?
If the answer is 'no': Then the worker is independent, and you don't tax his pay.
If the answer is 'yes': The worker ISN'T an independent contractor. But this doesn't mean he's automatically an employee!
If he employs three or more full-time staff, then he could be an independent trader.
Here's an example to clarify the use of this test:
Malcolm is an independent contractor. He provides his services to The Bigger Picture as a journalist. He does his work mainly at The Bigger Picture's premises and is subject to control or supervision. He doesn't employ three or more qualifying employees.
According to the statutory test, Malcolm, isn't an independent contractor for the purposes of the Fourth Schedule of the Income Tax Act (the statutory test applies). Because of this The Bigger Picture must deduct employees' tax from the amounts it pays him. 
If this test doesn't give you any clarity about your contractor's taxes, you can use the second test. 
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Test #2: Apply the common law dominant impression test
There are 18 common factors that SARS auditors take into consideration when deciding if a worker is an independent contractor, or an employee.
Here are five of these factors:
1. Do you control the way in which the person does the work, i.e. which tools and materials he uses? 
2. Do you pay the person at regular intervals, without stipulating a result for that interval? And are you entitled to the person's services during working hours?
3. Does the person need permission from you to hire someone else to perform the work for you?
4. Is the person contractually obligated to work for you a certain number of hours a day i.e. full-time?
5. Is the person prevented from working for other businesses or competitors?
If you answer 'yes' to any of these then your contractor is an employee. If you answer 'no' he's an independent contractor.
You can find these 13 factors in the Practical Tax Loose Leaf Service
According to SARS, this test indicates whether or not you acquired 'productive capacity' from your contractor. This is your contractor's maximum possible output. There are three categories you use when you determine if you acquired this productive capacity. They are:
Near-conclusive (these relate to the most direct acquisition of this productive capacity);
Persuasive (these establish 'the degree of control of the work environment'); and
Resonant of either an employee/employer relationship or an independent contractor/client relationship.
Depending on the specific circumstances, some of these factors might not apply to your employment relationship with your contractor, so only consider the ones that are relevant. 
If you find that your contractor is truly an independent contractor, you mustn't withhold his tax or you may find yourself in serious trouble with SARS. 
For more on how to treat your independent contractor's tax, check out the Practical Tax Loose Leaf Service.

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