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Work with independent contractors? Use this simple test to decide how to pay and tax them correctly

by , 02 January 2014
You must tread carefully when working with independent contractors. Why? Well, if for example you have an employee masquerading as an independent contractor, SARS will investigate. And if it finds the contractor's actually an employee, it'll slap you with a 10% penalty for under deducting Pay As You Earn (PAYE). Don't take that risk. ? Use this test to decide how to pay and tax independent contractors correctly.

If you hire an independent contractor, you MUST NOT deduct employees' taxes from the pay you give him. You only deduct employees' taxes from the pay you give to employees.

The Practical Tax Loose Leaf Service explains that SARS applies a certain test to your workers if it has any doubts about your policies.

If you understand how SARS tests your employment relationships, you'll never make a mistake in your treatment of independent contractors.

Let's take a look at the test.

Use this test to see if your worker is an independent contractor so you can tax him pay and tax them correctly

SARS uses a statutory test to see if the worker is independent. The three questions SARS asks in the statutory test are:

  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.

If the answer is YES, the worker ISN'T an independent contractor. BUT he's not automatically an employee!

If he employs three or more full-time staff (and they aren't his relatives), then he's said to be conducting an independent trade.

Remember, if you understand how SARS tests your employment relationships, you'll avoid mistakes in your treatment of independent contractors. So use this test to decide how to pay and tax independent contractors correctly.

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