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Independent Contractors vs Employees


Employers often prefer to engage workers as independent contractors. They do this for a number of reasons, namely to manage cash-flow, exploit taxation and labour arbitrage and for operational reasons.

On the one hand, employers are responsible for withholding and paying over PAYE, UIF and other levies. On the other hand, independent contractors are obliged to pay income tax. In the latter case, income tax liability is often minimised by applying expenses in the production of income.

SARS has an interest in ensuring that the correct revenue is collected. The approach taken by SARS with regard to deciding if a worker is an independent contractor or an employee is set out in interpretation note no 17 (issue 3), 31 March 2010.

In terms of employees' tax generally it is important to note that:

  • it is the responsibility of the employer to determine whether or not amounts paid are subject to employees' tax; and
  • an employer that has incorrectly determined that an employee is an independent contractor is liable for the employees' tax that ought to have been deducted, as well as the concomitant penalties and interest. Although the employer has the right to recover the tax paid from the employee, this is often more trouble than its worth.


The Fourth Schedule of the Income Tax Act requires the presence of three elements before employees’ tax must be levied, namely, an employer paying remuneration to an employee.

Amounts (that would otherwise be remuneration) paid to a worker as contemplated in the definition of an "employee" in the Fourth Schedule are excluded from the definition of the term "remuneration" in the Fourth Schedule if that person is an independent contractor.

The question is how to determine if someone is an independent contractor?


There are two tests used (and applied by SARS) to determine if a worker is an independent contractor. The first is the statutory test (in terms of the Fourth Schedule) and the second is the common law test.

SARS first applies the statutory test. If the requirements of the statutory test are not met, it will then apply the common law test. The statutory test is conclusive. If the statutory test's requirements are met, the "contractor" is deemed to be an employee, and the taxation regime applicable to employees will be enforced.

Where the "contractor" is found to be independent, in terms of both Fourth Schedule and the common law, the employer is not obliged to deduct employee's tax.


In order to be considered an independent contractor, the worker must NOT:

  • work at the premises of the client; and
  • be under the control or supervision of another person in terms of the manner in which duties are to be performed or working hours.
    If both of the requirements are met, the worker is deemed to be an employee.


The common law test follow the "dominant impression" approach. If the statutory test is passed, SARS will consider the common law approach.

There are various factors that are considered in assessing whether a worker is independent or if there is an employment relationship. These include:

  • control of manner – does the employer have the contractual power to control the manner of use of a worker's productive capacity?
  • payment regime:
    • does the employer pay for effort or result? "Effort" indicates employment;
    • payment at regular intervals, i.e. for hours worked without material reference to output or result indicates an acquisition of the worker's effort (and therefore employment);
  • person who must render service – is it personal? If so, it indicates employment. If the work can be subcontracted, then the worker is more likely to be independent. There is also the question of if the worker may freely hire, fire, pay and supervise his own assistants;
  • nature of the obligation – an obligation to work to "time", as opposed to "result", is indicative of employment;
  • multiple client base – is the worker economically dependent on one employer?
  • extent of supervision;
  • training of worker - this is typically offered to employees, not to independent contractors;
  • control over worker's productive time - an employer's exclusive entitlement to all of a worker's productive hours is a near-conclusive indicator of an employer-employee relationship, examples of which include control of work periods and/or work hours (depending on the circumstances); and
  • other factors, such as viability of the worker on termination, industry norms and standards, and whether worker incurs his own expenses (i.e. stationery, cell phone, travel).

An independent contractor who employees three or more full time employees who are not connected persons and are engaged in his business throughout the year of assessment will be deemed to be independent.


There is no "hard and fast checklist" that can be used to determine whether a worker will be considered by SARS as an employee. SARS will look at various factors. The interpretation note, provides a handy mechanism for making the assessment. In the event of doubt, the permanency of the relationship and dominant control by one over the other, the worker will probably be considered an employee for tax purposes.

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