Independent Contractors vs Employees: Why It Matters for Your Payroll and SARS
In South Africa, many business owners use both employees and independent contractors to get things done but not everyone realises how important it is to correctly classify them. Getting it wrong can lead to SARS penalties, extra admin, or even labour law issues.
So, what’s the difference between the two, and why should it matter to you?
What is an Employee?
An employee is someone who works directly for your business. You control how, when, and where they work. They’re part of your team often working regular hours, using your tools or equipment, and following your company’s policies. Because of this, the law expects you to register them for PAYE, UIF, and sometimes SDL. You’re also expected to give them annual leave, sick leave, and possibly even extra benefits like medical aid or pension fund contributions depending on your agreements.
What is an Independent Contractor?
An independent contractor is different. They usually work for themselves and are hired to do a specific job or provide a service. They work on their own time, may use their own tools, and often serve multiple clients. Instead of being on your payroll, they send you an invoice, and you pay them like any other supplier. They also don’t get leave or benefits, and you’re not responsible for registering them for UIF.
Why Getting it Wrong Can Cost You
Many businesses accidentally treat contractors like employees, or the other way around. But if SARS believes you’ve misclassified someone, they may charge you backdated PAYE, penalties, and interest. As an employer of a business, you must ensure that you treat the situation correctly. Worse still, labour disputes can arise if someone claims they were actually an employee and entitled to leave pay or severance.
SARS uses the 80% rule to help determine if someone truly qualifies as an independent contractor. If a contractor earns more than 80% of their income from one client (i.e. from your business), they may be seen as a “deemed employee” which means you have to deduct PAYE and comply with all the payroll rules. On the other hand, if they earn less than 80% of their income from your business, and work independently, they are classified as an independent contractor.
Not Sure? We Can Help. At Business services we help businesses stay compliant and avoid costly mistakes. Whether you’re hiring new staff, working with freelancers, or unsure about how to process someone’s pay let us guide you.