Paying someone as an "independent contractor" who invoices you each month means you do not register as an employer, deduct PAYE or run payroll for them. SARS decides the question on how the arrangement works in practice. If it works like employment, you owe the tax you didn't deduct, backdated, with penalties and interest, whatever the contract says. This guide sets out how SARS decides, the common errors and how to set up a contractor arrangement that holds up.

Why SARS cares who's an employee

When you employ someone, you're legally required to deduct PAYE and UIF from their pay and hand it to SARS every month. When you use an independent contractor, that responsibility sits with them. They invoice you and handle their own tax. The classification decides who collects the tax and when, so SARS checks it. Because the duty to deduct sits with the payer, the payer carries the cost if an employee was treated as a contractor.

If SARS reclassifies your contractor as an employee, you become liable for the PAYE and UIF that should have been withheld, which can be backdated across the whole arrangement, plus penalties and interest. The business pays the bill, and recovering it from the worker is difficult in practice.

The two statutory tests

Two statutory rules can settle the question on their own. A person is not treated as an independent contractor for PAYE purposes if either applies:

  • They're subject to your control or supervision over the manner in which they work, meaning how the job gets done as well as the result
  • Their hours of work are set or controlled by you

If you set someone's hours and tell them how to do the work, the statutory tests point to employee, whatever the contract says. There is a narrow exception for a person who runs their own business employing three or more of their own full-time staff. For a single individual doing the work personally, these two tests can decide the question.

The dominant-impression test

Beyond the statutory rules, SARS forms a "dominant impression" of the whole relationship — the overall picture of whether this person runs their own business or is, in substance, your employee. No single factor decides it. SARS weighs all of them together. The factors that point towards employment:

  • Control and supervision: you dictate how, when and where the work is done, as well as the outcome
  • Integration: the person works as part of your organisation
  • Set hours and a fixed workplace that you provide
  • Payment by time, such as a monthly wage
  • You provide the tools, equipment and training
  • Economic dependence — they work only for you and earn all or nearly all their income from you
  • They can't send a substitute; the work must be done personally
  • Ongoing work with no end date

The factors pointing to an independent contractor are the opposite: they run their own business, carry their own risk, use their own tools, serve several clients, can subcontract or send a substitute, and are paid for results.

One job done two ways

A graphic designer who works from your office nine-to-five, on your equipment, under your art director, only for you, paid a fixed monthly amount — that's an employee, whatever the invoice says. A graphic designer who works from her own studio, for several clients, quotes per project, uses her own kit and can hand overflow to an assistant — that's an independent contractor. SARS would reach opposite conclusions on those two, and the first would count as employment whatever the paperwork says.

Working at your premises under your control

If a person mainly works at your premises and is subject to your control or supervision over how they work or their hours, the rules lean hard towards employee for PAYE — regardless of what the contract calls them. A contractor who must arrive at nine, work at your desk and follow your method is treated as an employee for PAYE. Invoicing does not change that result.

The cost of getting it wrong

If SARS reclassifies the relationship, the business is treated as having failed to deduct employees' tax, and it can be assessed for everything that should have been withheld — potentially back across the whole period of the arrangement — plus penalties and interest.

What a reclassification costs

You paid a "contractor" R40,000 a month for two years — R960,000 in total — deducting nothing. SARS reviews it, applies the dominant-impression test, and reclassifies them as an employee. The business is now assessed for the PAYE that should have come off each month across those two years, plus the employer and employee UIF, plus a late-payment penalty and interest running the whole time. On R960,000 of pay that is a six-figure liability, due at once. Recovering it from the worker is difficult in practice, so the business bears it.

Arrangements that sit in between

Some arrangements have features of both. Review these closely:

  • A contractor who started on a project and now works permanently and full-time in the business
  • The freelancer who technically has other clients but earns nearly all their income from you — economic dependence
  • Someone paid by invoice but working your exact hours, at your desk, on your login and equipment
  • A family member or friend paid informally with no contract at all

In each case, ask what SARS would conclude from how the arrangement works day to day. The invoice wording does not decide it.

Mistakes to avoid

  • Relying on the contract wording. SARS decides on how the work is done. A document titled "independent contractor" does not change an employment relationship.
  • Setting their hours and supervising the work. That trips the statutory tests on its own, whatever else you do.
  • Letting a project engagement drift into a permanent one without ever revisiting the classification.
  • Assuming "they have a company" settles it. A one-person company doing personally what an employee would do can still be caught by the personal-service rules.
  • Ignoring the labour side. A misclassified worker can later claim they were an employee from the start, with leave, notice and unfair-dismissal protections.

How to set up a contractor arrangement

If you need a contractor, the arrangement has to work as a contracting arrangement day to day, as well as on paper:

  1. Contract for a defined outcome or project with an end
  2. Let them control how and when the work gets done. You specify the result and they choose the method
  3. Have them use their own tools and, where possible, their own workspace
  4. Leave them free to work for other clients, and allow a substitute where practical
  5. Pay against invoices for deliverables
  6. Keep a written agreement that reflects all of the above, and make sure the day-to-day work matches it

SARS looks at how the work is done day to day. If the arrangement works like employment, a contract that says "independent contractor" does not protect you.

Labour law risk

Misclassification also carries a labour law risk. An independent contractor can be engaged and released under the contract terms. A misclassified worker can go to the CCMA and claim they were an employee from the start, with the leave, notice and unfair-dismissal protections that come with it. The business can then face a tax liability and a labour claim at the same time.

If you have doubts about one of your contractors, review the arrangement before SARS does. Talk to us and we'll look at how your people are engaged, tell you where the risk sits, and help you either restructure the arrangement or move them onto payroll.