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A Fin24 user was turned into an "independent consultant" by the company he works for and is now worried about tax implications. He writes:
The company I work for retrenched all its staff members, apart from a few of us.
We are employed on a consulting basis and are paid "all" our salaries, therefore no deductions.
As an "independent consultant", how do I submit tax returns and how do I calculate the amount to save and pay when tax season arrives?
Gerrie van Niekerk of Tax-Strong.com responds:
To be sure that the South African Revenue Service (Sars) in fact considers you an independent consultant and not just an employee, you should quickly answer the following questions:
- Do you earn more than 80% of your income from this one company?
- Do you get paid the same amount every time and do you receive it at regular intervals, for example weekly or monthly?
- Do you work mainly from the company's offices?
- Do you have a boss at the company who checks up on you and tells you what your working hours are, and when you are allowed to take leave?
- Do you (or will you) receive any benefits from the company that you work for - for example a company car, cellphone or training?
If you answered “yes” to each of the first four questions, Sars will consider you an employee of the company and not an independent contractor.
Your employer will be responsible for deducting tax from the amount that they pay you, and must pay it over to Sars.
If they don't do it and get caught, they are looking at a 10% penalty.
Remember that as long as you are considered an employee by Sars the liability to deduct and pay over your tax to the taxman rests with your employer.
If you answered “no” to all the questions above, you are indeed an independent contractor or consultant.
What to do if the shoe fits
That means that you will be responsible for paying your own income tax.
Ideally, you should also invoice the company for the work you do every month.
Since pay as your earn will not be deducted from the amount that you get paid, you will have to file two provisional tax returns and make payments on them during the tax year.
The deadlines for filing provisional tax returns are the end of August and the end of February every year.
On your provisional tax returns you will have to estimate your yearly income and pay tax on this, using the normal tax tables or a tax calculator.
Depending on how much you earn every month, you might have to pay more tax on your provisional return than your earnings for that month.
It is a very good idea to sit down and calculate now how much you expect to earn during the year and how much provisional tax you would have to pay in August and February.
This way, you can put some money aside every month and be sure that you will have enough to pay your taxes.
Remember that you might face penalties and interest if you underestimate your income on your provisional tax returns.
Your annual tax return will be a bit different, since you now invoice the company you work for instead of receiving an IRP5 from them.
You have to keep accurate records of all the invoices that you issued as well as all the expenses that you incurred. You will be able to deduct all expenses you incurred to help you produce this income.
If you are not confident filing your own taxes, it is a good idea to ask a tax practitioner to help you rather than doing it yourself and risking penalties, interest or worse, paying more tax than you should.
First things first
Your first step will be to determine if you are indeed an independent contractor. If you are not, then you need to discuss this with your bosses.
Tell them about the risk of Sars penalties they face if the company does not deduct tax from your pay.
You could maybe also get the company's auditors involved to back you up on this, if possible.
If they remain adamant that they will not deduct and pay over tax on the amounts that they pay you, then they should change your working arrangement so that you will be able to answer “no” to all of the questions above.
Only once they do this will you be responsible for your own taxes.
I trust that this answers your question. If you have any other concerns, please don't hesitate to ask.
- Fin24
Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.
Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.
Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.
The company I work for retrenched all its staff members, apart from a few of us.
We are employed on a consulting basis and are paid "all" our salaries, therefore no deductions.
As an "independent consultant", how do I submit tax returns and how do I calculate the amount to save and pay when tax season arrives?
Gerrie van Niekerk of Tax-Strong.com responds:
To be sure that the South African Revenue Service (Sars) in fact considers you an independent consultant and not just an employee, you should quickly answer the following questions:
- Do you earn more than 80% of your income from this one company?
- Do you get paid the same amount every time and do you receive it at regular intervals, for example weekly or monthly?
- Do you work mainly from the company's offices?
- Do you have a boss at the company who checks up on you and tells you what your working hours are, and when you are allowed to take leave?
- Do you (or will you) receive any benefits from the company that you work for - for example a company car, cellphone or training?
If you answered “yes” to each of the first four questions, Sars will consider you an employee of the company and not an independent contractor.
Your employer will be responsible for deducting tax from the amount that they pay you, and must pay it over to Sars.
If they don't do it and get caught, they are looking at a 10% penalty.
Remember that as long as you are considered an employee by Sars the liability to deduct and pay over your tax to the taxman rests with your employer.
If you answered “no” to all the questions above, you are indeed an independent contractor or consultant.
What to do if the shoe fits
That means that you will be responsible for paying your own income tax.
Ideally, you should also invoice the company for the work you do every month.
Since pay as your earn will not be deducted from the amount that you get paid, you will have to file two provisional tax returns and make payments on them during the tax year.
The deadlines for filing provisional tax returns are the end of August and the end of February every year.
On your provisional tax returns you will have to estimate your yearly income and pay tax on this, using the normal tax tables or a tax calculator.
Depending on how much you earn every month, you might have to pay more tax on your provisional return than your earnings for that month.
It is a very good idea to sit down and calculate now how much you expect to earn during the year and how much provisional tax you would have to pay in August and February.
This way, you can put some money aside every month and be sure that you will have enough to pay your taxes.
Remember that you might face penalties and interest if you underestimate your income on your provisional tax returns.
Your annual tax return will be a bit different, since you now invoice the company you work for instead of receiving an IRP5 from them.
You have to keep accurate records of all the invoices that you issued as well as all the expenses that you incurred. You will be able to deduct all expenses you incurred to help you produce this income.
If you are not confident filing your own taxes, it is a good idea to ask a tax practitioner to help you rather than doing it yourself and risking penalties, interest or worse, paying more tax than you should.
First things first
Your first step will be to determine if you are indeed an independent contractor. If you are not, then you need to discuss this with your bosses.
Tell them about the risk of Sars penalties they face if the company does not deduct tax from your pay.
You could maybe also get the company's auditors involved to back you up on this, if possible.
If they remain adamant that they will not deduct and pay over tax on the amounts that they pay you, then they should change your working arrangement so that you will be able to answer “no” to all of the questions above.
Only once they do this will you be responsible for your own taxes.
I trust that this answers your question. If you have any other concerns, please don't hesitate to ask.
- Fin24
Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.
Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.
Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.
