Get the tax details right

BE PRECISE: INCORRECT CLASSIFICATION OF STAFF COULD COST EMPLOYERS

If employers don’t withhold employees’ tax from employees where appropriate, they could incur penalties and interest and be responsible for tax.

Employers run a severe risk of incurring significant tax penalties and interest if they incorrectly classify employees as independent contractors and neglect to withhold employees’ tax (PAYE) from them. A ruling issued this year confirmed nonexecutive company directors are regarded as independent contractors. Most companies consider these directors to be employees and deduct employees’ tax. This raises questions about whether employers correctly distinguish between employees and independent contractors for tax purposes.

Payments to independent contractors for services rendered are generally not regarded as remuneration and employers have no liability to deduct employees’ tax from the amounts paid. Where workers are regarded as employees and receive remuneration from an employer, employees’ tax must be deducted.

As people increasingly work two or three jobs to make ends meet, the issue is set to receive more prominence. Sars is also under pressure to step up compliance. In the first quarter of the current financial year, tax revenue was more than R13 billion lower than expected.

Sage’s Yolandi Esterhuizen said the onus is on employers to correctly distinguish between employees and independent contractors.

She said Sars would typically pick up an incorrect classification during employer audits, which might go back several years. Although the employee may not be working at the company anymore, the employer would still be held responsible for the employees’ tax, unless Sars absolves the employer from the liability.

But the distinction between employees and independent contractors may not be as clear-cut as it seems.

Esterhuizen said human resources departments or payroll administrators aren’t necessarily equipped with specialist tax skills and may not understand the implications of deciding on and applying the applicable tests.

Two tools are available to determine whether a person is an independent contractor for employees’ tax purposes: the statutory tests and the common-law tests.

Esterhuizen said there’s a risk that employers could interpret the tests differently to a Sars auditor. Although the interpretation note is quite comprehensive, it might seem contradictory in some places.

While one wouldn’t expect an independent contractor to receive benefits, in practice they find these individuals do sometimes receive travel allowances, incentives and even shares, said KPMG’s Cecelia Madden.

“I’d say, watch this space. You would have seen something in the newspaper about Sars not collecting as much as they should have. It just takes one company to get this ball rolling,” added Vedika Andhee of EY.

There’s also a risk that the onslaught could be initiated by workers themselves, not by Sars. Andhee said in the US there are issues about the distinction between employees and independent contractors at Uber and rival Lyft; attacks come from individuals who argue they aren’t independent contractors but employees, and are therefore entitled to benefits.

She said the worst situation an employer could be in is for a worker to approach Sars, arguing that he/she is an employee – thereby triggering an investigation. Employers must be careful and ensure the necessary controls are in place.