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DEPENDANT OR INDEPENDENT ? IT MAY COST YOU YOUR BUSINESS!

Are you a Dependant Contractor or Personal Service Company? You are at risk of your corporate clients deducting up to 35% off your next cheque!

A brief summary of the fourth schedule of the income tax act 58 of 1962 states that: A company paying an enterprise, classified as a personal service company or dependant contractor, for providing a service or labour, must deduct employees tax at a flat rate of 35% from the payment.

How does this impact the SMME?
If you are classified as a Dependant Contractor or Personal Service Company you will find that your corporate client will deduct 35% off the amount on your invoice. If you did not allow for this deduction in your costing, it will lead to financial losses and eventually even the failure of your business!

How do I know if I am classified as a Dependant Contractor or Personal Service Company?
The classification is complicated and requires one-on-one evaluation. I have however included a summary of the critical points below. Please note that this is a simplification of the application of the act and that you must undergo evaluation to calculate your status.

DEFINITIONS
Deductions made from: Not at risk
Personal service company Dependent contractor Labour brokers
Type of entity CC or PTY LTD Sole proprietor / individual (trading as) CC or PTY LTD or Sole Proprietor or Individual CC/PTY LTD/ sole proprietor/individual classified as Independent Contractor or “non-personal-service-company”
Type of enterprise Provides a service Provides a service
  • Provides labour (persons)
  • Does not have a valid and current tax exemption certificate (IRP30)
  • Enterprise that supplies only products and not any services or labour
  • Labour brokers with valid and current IRP30 certificate
  • Employment Has less than 4 full time employees who are:
  • not related to the owners (family)
  • not shareholders/members of the enterprise
  • The client gives approval for staff hire / fire Enterprise can hire/fire or subcontract without permission from the client
    Supervision The client controls or supervises the manner in which work is done or the hours during which the duties are performed (the contract can be interpreted that the client has supervision or control) The client controls the work hours, manner of work ( e.g. instructs which tolls to use or which member of staff does the job or what materials or technology is being used etc) or supervises the job Enterprise chooses which tools / equipment/staff etc to use and where and when what will be done.
    No reporting required.

    Payment Receives regular payments (fixed amount or per hour payment) whether or not the enterprise achieved a specific result or delivered a specific product Receives regular payments (fixed amount or per hour payment) whether or not the enterprise achieved a specific result or delivered a specific product. Payment can be per hour but must be linked to a result or payment output

    Independence
  • More than 80% of income of enterprise comes from one client
  • The person doing the job would normally have done it as an employee
  • 1. The enterprise/individual must be at work even if there is nothing to do
  • 2. The enterprise/individual may not work for anyone else while working for this client
  • 3. Client gives training to the enterprise according to their work methods
  • 4. Client provides tools, equipment, material, stationary, office/workshop space without contract
  • 5. The client finances premises/tools/raw material/training etc
  • 6. The enterprise's service is an integral part of the client's business
  • 7. The contract is open ended/renewable
  • 8. The contract ends on death of worker
  • 9. The contractor forms part of the organogram / management structure of the client
  • 10. The client or enterprise may terminate the contract by giving notice.
  • 11. The client provides employment benefits
  • 1. Enterprise is only on site if there is work to be done.
  • 2. Enterprise may have more than one client simultaneously
  • 3. Enterprise trains staff in own work methods
  • 4. Enterprise provides own tools, materials, stationary, office/workshop space, or has contract with client to use theirs.
  • 5. Finances own equipment/tolls/raw materials/training etc
  • 6. Enterprise/individual's services are not critical to the success of the client
  • 7. The contract is limited with regards to results
  • 8. The contract with the client goes on even if the enterprise owner dies.
  • 9. The contractor has no position in the hierarchy of the client's business
  • 10. If the client terminates the contract prematurely / if the enterprise does not deliver according to contract there is a breach of contract.
  • 11. The enterprise/individual does not get employee benefits
  • Risk The enterprise does not carry any risk The enterprise carries risk (bad workmanship, price increases, over schedule etc)
    Statutory compliance Enterprise not registered for TAX/WCA/UIF/with trade associations etc. Enterprise registered for TAX, UIF, WCA etc,
    Ownership costs Enterprise has no business expenses or is reimbursed by the client Enterprise calculates overheads into contract prices.
    Getting new work Approaches employment agency or labour broker for new work Has other clients to get new work form.
    Deductions PAYE according to SARS tables, RSC levy-salaries, UIF & SDL deductions 35% PAYE, RSC Levy on salaries none

    Article written by: Karin Janse van Rensburg

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