In the case of independent contractors, a distinction must be drawn between true independent contractors and those who are deemed to be employees. The distinction is based on whether or not any amounts paid to the independent contractor meet the definition of remuneration in the Fourth Schedule to the Income Tax Act.
The distinction is explained briefly in the two sections below. For a more in-depth explanation, please see SARS’s Interpretation Note on the subject.
Independent Contractors Included in Payroll
An independent contractor should only be added to the company’s payroll if their income meets the definition of remuneration. This will be the case if
- they render services mainly at the premises of the person by whom they are paid; and
- they are subject to the control or supervision of any other person as to the manner in which his or her duties are performed
The elements of the definitions of employee, employer and remuneration, therefore, need to be satisfied in order for an independent contractor to be deemed an employee.
Note: independent contractors who are deemed to be employees for PAYE purposes may still be treated as true independent contractors from a labour law perspective.
Employers are generally required to withhold PAYE and contribute SDL for all employees earning remuneration. The income of these independent contractors is, therefore, subject to PAYE (and SDL, if applicable) but not UIF and will be reported on their IRP5s under code 3616. For more information on these topics, please see the following section:
Independent Contractors Excluded from Payroll
True independent contractors are individuals who invoice clients for services rendered or goods supplied – there is no discernible employment relationship; thus, their income does not meet the definition of remuneration. Such contractors are not employees and, therefore, are not subject to employees’ tax or UIF and should not be added to the payroll system.