Employers run a severe risk of incurring significant tax penalties and interest if they incorrectly classify employees as independent contractors and neglect to withhold employees’ tax (PAYE) from these individuals.
Although the South African Revenue Service (Sars) had published an Interpretation Note on the issue several years ago, it remains a contentious issue.
A ruling issued earlier in 2017 confirmed that non-executive company directors are regarded as independent contractors and have thrown the cat among the pigeons anew. Most companies considered these directors to be employees and deducted employees’ tax. This has raised questions about whether employers correctly distinguish between employees and independent contractors for tax purposes.
Payments to independent contractors for services rendered are generally not regarded as “remuneration” and employers have no liability to deduct employees’ tax from the amounts paid. Where workers are regarded as employees and receive remuneration from an employer, employees’ tax has to be deducted.
As workers increasingly work two or three jobs to make ends meet, the issue is set to receive more prominence. Moreover, Sars is under pressure to step up its compliance efforts. During the first quarter of the current financial year, tax revenue was more than R13 billion lower than expected.
Speaking to Moneyweb on the sidelines of the Tax Indaba, Yolandi Esterhuizen, compliance manager at Sage, said the onus is on employers to correctly distinguish between employees and independent contractors.
If they did not withhold employees’ tax from employees where appropriate, they could incur penalties and interest and be held responsible for the tax.
She said Sars would typically pick up an incorrect classification during employer audits, which might go back several years. Although the employee might not be working at the company anymore, the employer would still be held responsible for the employees’ tax, unless Sars absolved the employer from the liability.
But the distinction between employees and independent contractors may not be as clear-cut as it seems.
Esterhuizen said the human resources department or payroll administrators aren’t necessarily equipped with specialist tax skills and might not understand the implications of deciding and applying the applicable tests.
Two sets of tools are available to determine whether a person is an independent contractor for employees’ tax purposes – the statutory tests and the common law tests.
Esterhuizen said there is a risk that the employer could interpret the tests differently to a Sars auditor. Although the interpretation note is quite comprehensive, it might seem contradictory in some places.
While one would not expect an independent contractor to receive benefits, in practice they find that these individuals do sometimes receive travel allowances, incentives and even shares, Cecelia Madden, associate director for global mobility services at KPMG, said during a panel discussion.
“I’d say watch this space. You would have seen something in the newspaper about Sars not collecting as much as they should have. It just takes one company to get this ball rolling,” added Vedika Andhee, partner at EY.
There was also a risk that the onslaught could be initiated by workers themselves, and not necessarily by Sars.
Andhee said in the US there were issues about the distinction between employees and independent contractors at Uber and its rival Lyft, and attacks came from individuals who argued that they were not independent contractors, but employees, and that they were therefore entitled to benefits.
She said the worst situation an employer could be in was for a worker to approach Sars, arguing that he or she was an employee – thereby triggering an investigation.
Against the international background and the pressure on Sars, employers have to be careful and have to ensure that the necessary controls are in place, she said.
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