Independent contractors have long known the challenges of correct employment classification, and the requirement to prove to the revenue authorities that their status is truly “independent”, and not pseudo-independent while being employed in all but title. While arguably a contractor working for one client for an extended period of time could be said to be more “employed” than “independent”, most contractors have been conscientious in making sure they pass the necessary tests of independence.

Latest position from SARS

However, the South African Revenue Service recently clarified its stance on the taxation of so-called Independent Contractors and/or Consultants. In its Interpretation Note 17 of 14 March 2018, it outlines stringent conditions for the taxation of Independent Contractors. In essence, the tests are so onerous that in most instances companies are obliged to deduct PAYE and to treat “Independent Contractors” as employees for income tax purposes.

SARS has adopted a “substance over form” approach. What this means is that even if an Independent Contractor passes the statutory test, this is over-ridden by the common law test. In other words, even if the contractual arrangements are that of an Independent Contractor, if the true nature of the work approximates the definition of an “employee”, then employers are required to deduct PAYE as they would for a standard employee.

In adopting a “substance over form” approach, SARS has applied both “control” and “intuitive” tests.

Tests of independence

If the Independent Contractor works under the supervision of the company and the company is therefore liable for the actions of that person (“vicarious liability”), then the contractor is not seen as independent – the “control test”.

The “intuitive test” is an arguably subjective evaluation of status, based on how an average member of the public would classify the worker – if someone would be described as an employee, then that person is not an Independent Contractor.

The “organisation test” assesses how integral the person is to the functioning of the company. If the role is seen as critical, rather than incidental, then that individual is not independent.

Finally, the “dominant impression” test measures the contractor against a range of criteria; failure to meet any of them may mean the person is regarded as an employee and therefore must be taxed as such. The “dominant impression” test is exhaustive and multi-factoral. Foremost amongst these is the need to be able to answer yes to the following criteria, inter alia:

  • Person uses and/or chooses their own equipment and tools in the production of outputs
  • Person directly bears all risk for the work performed
  • Person determines own work, sequence of work, etc.
  • Prson is bound by contract terms and not orders from company managers
  • Person’s services are incidental to the employers operations
  • Person is only paid when the work is complete, i.e., piece-work as opposed to remuneration by time period

What this means in practice

What does this mean for contractors and employers? If you operate as an Independent Contractor and thus avoid paying PAYE, you may be in for a nasty surprise: SARS will apply the “substance over form” approach and you may be deemed eligible for PAYE. Employers who employ contractors may be obliged to deduct PAYE; failure to do so will result in substantial penalties.

The decision tree provided in the SARS Interpretation Note makes it clear that a natural person resident and receiving remuneration in South Africa, who does not pass the “dominant impression” test, must be taxed as an employee. Furthermore,  anyone working for a labour broker must be taxed as an employee. Personal service providers are also subject to employees’ tax.

Employers who apply the statutory test and are confident they have contracted a person as an Independent Contractor may be exposing themselves to huge risks. They are mistaken in thinking there is no obligation to deduct PAYE. If contractors do not pass the “control” and “intuitive” tests, they must be taxed as employees. The same applies to individuals who present themselves as “independents” but fail to comply with the true definition of an “Independent Contractor”.

Navigating the minefield

While tax law and independent contracting has never been simple, it has become much more complex with this latest guidance from SARS and the stakes are much higher. It’s not worth taking risks.

Whether you are an employer or a contractor, if you need advice on classification and tax status of independent contractors, contact Highveld on 012 367 5600 or We have extensive experience in managing and advising contractors and we can help you stay on the right side of SARS.