A labour market made up of freelancers, short-term and on-demand work is not only reshaping the way individuals structure their own careers, it’s also changing the way organisations get work done.
Global trends research firm, Intuit, in its latest workforce trends report found that more than 40% of the global workforce is already made up of people working in the gig economy.
Annette Muller, CEO and Founder at Flexyforce.com, agrees and says all signs point to the trend continuing for years to come, with international and local studies showing that top executives see value in a future contingent workforce made up of contractual, temporary and agile outsourced suppliers alongside full-time employment.
“The benefits for companies are vast, including a reduced wage bill, lower recruitment fees, faster onboarding, access to a variety of skills and experts on-demand and reduced expenses related to running a full-time workforce,” Muller explains.
A tax blindspot that could cost you
As the business environment changes, companies cannot afford to ignore the tax implications of a dynamic on-demand workforce.
Tax authorities classify independent workers in different ways, and these classifications directly affect your obligations and potential liability as a business owner. Muller explains that “there are different possible scenarios. First, an individual who will pay individual tax, because they trade as a sole proprietor or freelancer. In these cases, the client usually withholds a 25% pay-as-you-earn (PAYE) tax deduction on every invoice.”
Muller says that this type of freelancer would still get a payslip, with their remuneration coded 3616 on the payslip. Additionally, the freelancer’s clients will submit their IRP5 to SARS. The upshot is that the freelancer has all the paperwork they need to easily claim business expenses when doing eFiling with SARS.
“This scenario usually applies to freelance writers, journalists or presenters who often work for a particular newsroom or publication, but are able to set their own work sequence and do not work under supervision,” Muller says.
Individuals who earn a commission or a variable fee can apply for a tax directive where their client or employer will be instructed by SARS to deduct a specific rate or amount of PAYE.
By contrast, provisional taxpayers earn income on top of their monthly salary or remuneration, such as rental income from property or interest income from investments, or from a trade like having a hair salon. Additionally, provisional taxpayers don’t rely on one client for the majority of their income.
“However, there are exceptions that SARS can apply according to particular thresholds,” Muller explains. ”Understanding where your freelance talent and workforce falls is a step to remaining compliant.” Finally, independent contractors who are registered and trade as a small business pay small business tax. SARS advises that in many cases there can be significant tax benefits for individuals registering as a small business.
The employer’s responsibility according to SARS
From a company perspective, however, the outcome of these tests are not always self-evident. It therefore makes sense to err on the side of caution, and save yourself from inadvertently falling foul of the tax code.
That’s because if contractors do not file their tax returns, and do not meet the prescribed SARS definition, they must be taxed as employees. Even in instances where an individuals present themselves as independent but nonetheless fails to comply with the true definition of an independent contractor, the client could ultimately face penalties from SARS.
Choosing the right taxpayer type
“There are lots of different forms an individual contractor can formalise their business to remain tax compliant. Being invested in the tax affairs of your independent contractors is the smart thing to do.” advices Muller.
SARS has introduced various tax regimes with a focus on small businesses.
The Micro Business and Small Business Corporation regimes make things easier for smaller businesses with simplified tax rules and lower tax rates.
Freelancers can check out Tax Tim’s decision tree to see if they are truly an independent contractor for tax purposes or if they should be treated as an employee.
You can find additional resources around independent contractors on SARS website.
Muller warns that although there are several options available, none of these are possible if you simply turn a blind eye to your independent contractors’ remaining tax complaint.