Date added: 18 November 2008

Reproduced below is an article which appeared in Costa Divaris’ newsletter Tax Shock Horror, issue no. 67, October 2008:

PAYE: independent contractors not a software problem

Hestie van der Merwe writes:

One of our clients entered into a agreement with independent contractors to do marketing of his company’s products. (The contractors are not performing work at the client’s premises and are not subject to control.) Our client pays them regularly and previously PAYE was deducted, owing to the regularity of payments. With the adjustments to legislation, it is no longer necessary to deduct PAYE. We are however experiencing a problem with our Payroll, as a tax directive number is required when the code is entered for independent contractors. We contacted our Payroll supplier and according to then we need to obtain tax directives. We contacted SARS and they told us that no directives are issued for independent contractors.

SARS is neither required nor prepared to give directives on independent contractors. I understand that most users do not use the ‘3616’ independent contractors code.

Rob Cooper’s excellent suggestion is that the payment be administered via the creditor’s system, since it doesn’t affect the payroll at all.

Strictly speaking, I cannot go along with the idea of keeping independent contractors out of the payroll system yet issuing them with IT 3(a) certificates to be issued only to ‘employees’, that is, employees for PAYE purposes.

Ron Warren read the article and replied to Costa Divaris on 4 November 2008.

Ron’s reply is reproduced below:

I have come across the piece in TSH 67, October 2008 headed PAYE: independent contractors not a software problem, a sentiment with which I do not agree. A few points may be of interest.

• Over the years, I have periodically queried at meetings with the Head Office officials responsible for the running of the PAYE system why there is a reason code 03 provided on the IT3(a) to indicate that no tax has been deducted because the person is an independent contractor. SARS only has authority to require employers to give it information regarding employees, and genuine independent contractors are not employees. They agree that an IT3(a) is not required, but say that they got many requests from employers who wanted to report such earnings, just to be on the safe side (of what?). To accommodate them, SARS provided the code, and employers who use this mechanism feel they are doing their duty. SARS would prefer not to receive such IT3(s)’s, as the individuals concerned have to submit statements of income and expenditure on assessment, just like any business.

• To claim that this is not a software problem is not, in my opinion, true. A payroll should cater for all the “employees” of an organisation, whether they pay tax or not. Independent contractors of this type fit neatly into the payroll area of an organisation, and are paid in the same way. A payroll system that does not handle them correctly is not doing its job.

• As you know, the nuQ payroll system which I designed boasts that it handles all statutory requirements regarding employees’ tax to the full letter of the law. It will not require a directive (even a dummy one) to be entered to enable the law to be obeyed. Independent contractors who are not liable for employees’ tax can be paid through the system without any problem, as can independent contractors who are employees for PAYE purposes. The same earnings and deduction “codes” as are used for normal employees are used by the payroll clerks on input, as it is a bit much to expect a payroll clerk to have to determine an employee’s tax status before he (or usually she) can decide what code to use. So, for the payroll clerk, all “employees” are the same.

• When an independent contractor (employee or non-employee) is put on the payroll it is merely necessary to set an indicator (once only) to specify the type of independent contractor. Tax (including zero tax) is automatically determined in accordance with this indicator, and when tax certificates are prepared, the earnings codes are automatically converted to the correct code (3616) to be used for such persons. (The code to be used is not 3602 as suggested by you.)

• The employer can also choose whether or not tax certificates are to be prepared for such individuals for submission to SARS. If they do choose to create certificates for submission to SARS, certificates are prepared with reason code 03 being shown. If they don’t want the certificates to go to SARS, but wish the “employee” to get an IT3(a) to assist him or her in producing their income account, a certificate is produced with the bold overprint “Not for submission to SARS”, and such certificates are obviously automatically omitted from the file sent to SARS.

This is what an intelligent payroll should do – solve an employer’s problems, and not be bound by imaginary restrictions.