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What to do when your independent contractor becomes an employee over time

by , 10 July 2013
You probably know that if you hire an independent contractor in your business, you MUST NOT deduct employees' taxes from the pay you give him. But will you know what to do when your independent contractor becomes your employee and is no longer your independent contractor? Read on to find out so you can avoid SARS penalties.

One of the key differences between an employee and an independent contractor is you get productive capacity from an employee and you use this productive capacity to create products and services the Practical Tax Loose Leaf Service explains.

But with an independent contractor, you simply get the end result of the work.

But what happens to the tax treatment when your independent contractor becomes an employee over time?

Here's what you must do…

Has your independent contractor become one of your employees? Here's how to deal with their remuneration tax

As an employer, it's up to you to differentiate between the independent contractor and the employee. To do this you can apply the SARS statutory test. You must ask these three questions:

#1: Is the worker subject to the control of any other person? Does this person tell him how to carry out his work, and what his hours of work 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.

BUT if you've hired someone who was an independent contractor and overtime has actually become your employee, you MUST take steps to change your tax treatment of their remuneration.

To avoid penalties and interest, deduct employees' tax from the time that the person becomes an employee. If you haven't been deducting employees' tax, recover the due taxes from the employee now and pay it over to SARS.

You can then lodge a request with SARS to waive any penalties. Remember, SARS is more likely to waive penalties if you approach it and attempt to correct your errors.

There you have it. Ensure you handle the tax treatment of your independent contractor correctly once he becomes your employee.

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