In terms of the Fourth Schedule to the Income Tax Act No 58 of 1962 (“Income Tax Act”), every resident employer who pays or becomes liable to pay any amount by way of remuneration to any employee shall be obliged to withhold employees’ tax from that amount.
The term “remuneration” includes any amount of income that is paid or payable by way of inter alia salary, wage, gratuity, or fee, whether in cash or otherwise, but excludes any amount paid or payable for services rendered or to be rendered by any person in the course of any trade carried on by him independently of the person by whom such amount is paid or payable and of the person to whom the services have been rendered. Two statutory tests are available to conclusively determine whether a person acts independently (i.e., as an independent contractor) for employees’ tax purposes.
Firstly, a person shall be deemed to carry on trade dependently if:
- the services in question are required to be performed mainly at the premises of the person by whom the amount is paid or to whom such services are rendered; and
- that person is subject to the control or supervision of someone else as to:
- the manner in which his/her duties are performed; or
- as to his/her hours of work.
Secondly, a person will be deemed to be carrying on a trade independently if he/she employs three or more full-time employees throughout the relevant year of assessment who are not connected persons in relation to such person.
If neither of the statutory tests applies, it must be determined if a person trades independently based on the so-called common law “dominant impression test”. This test considers all the relevant facts of the employment environment to establish dependence or independence. The dominant impression test has been reduced to an analytical tool provided by SARS as part of SARS’ Interpretation Note 17, Annexure C.
To ensure compliance with all tax liabilities, it is important to determine whether employees’ taxes should be deducted in relation to every person that provides services. If you are unsure, we recommend that you consult a tax expert, noting that the responsibility to determine a person’s employment status for purposes of the Income Tax Act lies with the (potential) employer. It should also be noted that a mere clause in an agreement stating that a person is an independent contractor and not an employee will not suffice to definitively exclude a person from the scope of employees’ taxes. If that person’s determination is incorrect, it alone is liable for the employees’ tax that should have been deducted.