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How do independent contractors get taxed?

Posted 15 January 2015 under Tax Questions



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I will be taking a new job that requires me to be a contractor. There are mixed opinions on how contractors get taxed. The consulting company assures me this is a flat rate of 25%, but on reading SAICA's website I found this little nugget: " If the independent contractor works more then 22 hours a week, he/she must be taxed in terms of the income tax tables".

I will definitely be working more than 22 hours a week.

Also the consulting companies response to this was:
"Typically, by law and Independent contractor does not have to be taxed, provided you can work through your own cc or PTY in other words, provide us with an invoice. However, if not, we deduct (based on recommendation from our CA's/Auditors) 25% from the billing rate. This is to almost ensure that when our contractors submit their tax returns, that they do not owe SARS anything and rather (more often than not) ?%u20AC%u201C would get money back."

Can you expand on the following:
1. If I bill through my PTY will this yield any benefit to being taxed less?
2. Do independent contractors get taxed a flat 25%?, if not what should be taken into account?

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TaxTimTaxTim says:
16 January 2015 at 8:18

Will you only be working for this company, what is the nature of your work, where will it be performed and what is the outcome of the work you are performing?


Momo says:
21 January 2015 at 10:39

Well, I am being retrenched due to the company consolidating its staff in JHB, I prefer to stay in CPT. The company as part of its retrenchment obligations have given us February and March to obtain a new job (Notice period, No need to be in the office). We will still be technically employed until the end of March, but I will be contracting to another (New) company through February and March.

The work I will be doing will involve software development and business intelligence reporting, This will be performed within the company that is contracting me out, so it will not be at home. The outcome of my work will be used internally.

On top of the first two questions, can I ask this as well please,
Are there any limitations or considerations to me working a contract position and still receiving the notice period salary?

Thanks!


TaxTimTaxTim says:
23 January 2015 at 9:39

To answer your second question first, no there are no legal considerations to working both jobs, unless there is something specific in either contract prohibiting you from doing so.

The question of tax relates to how you are perceived to be working for the "employer" whom you will be contracting out to. From the information provided it would appear that you would fit the statutory requirements of an "Employee" even though on contract you are an independent contractor. When this happens and, as you have already said you will be working longer then 22 hours, the company needs to apply the normal tax tables and deduct whatever is owing to SARS. They would use the independent contractor code however and you will still be able to deduct the business expenses used in earning this income.

It would appear the company is playing it safe by deducting 25%. What will you be earning?


Momo says:
23 January 2015 at 9:44

I will be earning 440 per hour , so that would be (440*160) = 70400 - 25% = 52800


TaxTimTaxTim says:
25 January 2015 at 22:04

The R70 400 is under the tax bracket per annum of R70 700 so in fact you will be due all this a refund anyway.


Momo says:
25 January 2015 at 22:45

What are the common expenses I should claim for or prepare to log?


TaxTimTaxTim says:
29 January 2015 at 14:10

My apologies, yes you will have to have PAYE deducted. At that rate you will be taxed at the 40% bracket - you can make use of our SARS income tax calculator to see what the pre-expenses deductions will be. I would advise asking the company to deduct more than 25% otherwise you may have to pay in at the end of the tax year.

Business expenses would be the costs involved in doing your work, so this would be travel, equipment that you may use, business calls, cellphone. Essentially any expense that you incur in relation to earning that income would be allowed as a deduction against the income earned.


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