05/05/2026
Should You Be Paid as an Independent Contractor Instead of an Employee?
If you have ever worked and paid even a cent of tax, you have probably wondered how to reduce your tax legally.
And somewhere along the line, usually next to a braai fire, someone’s clever brother-in-law will make a suggestion:
“My ou, you are doing it wrong. You should register a company and let your boss pay your salary into the company. Then you pay all your expenses from the company, and you only pay tax on the little bit that is left. Plus, your company will qualify as a small business, so you will pay even less tax.”
Sounds great, doesn’t it?
But before you resign on Friday and start invoicing through a company on Monday, let’s fact-check this properly.
1. What is the difference between an employee and an independent contractor?
A genuine independent contractor is a self-employed person who provides services or goods to a client while operating independently. They are usually not under the direct control, supervision, or employment of the client. They generally manage their own tax through provisional tax, issue invoices, carry business risk, and decide how the work will be performed.
A salary earner, or employee, is a natural person who receives remuneration from an employer. This may include salary, wages, bonuses, overtime, commission, and taxable benefits. Employees usually have PAYE deducted from their salary every month, and this is reported to SARS on an IRP5 certificate.
The main difference between an employee and an independent contractor is not just the wording in the contract. The difference lies in the substance of the relationship.
In simple terms:
An employee works under the control and supervision of an employer.
An independent contractor runs their own business and contracts to deliver a specific service or result.
2. How does SARS determine which one you are?
Or, as your brother-in-law might say:
“But how will SARS know?”
SARS does not only look at what the contract says. SARS looks at the actual working relationship.
There are two important tests to consider.
The statutory test
In terms of SARS Interpretation Note 17, a person may be deemed to be an employee, and not an independent contractor, if both of the following apply:
Location
The services are performed mainly, meaning more than 50%, at the client’s premises.
Control or supervision
The worker is subject to the control or supervision of another person regarding either:
the manner in which the duties are performed; or
the hours of work.
So, if you work at the client’s office, during the client’s normal working hours, using the client’s systems, while being supervised by the client’s management, you may have a problem proving that you are truly independent.
The “escape clause” - the three-employee rule
Even if the above conditions are met, the person may still be treated as an independent contractor if they employ three or more full-time employees throughout the year, who are not connected persons, to assist with the business.
This is important because SARS is trying to distinguish between a real business and a person who is simply trying to convert a salary into contractor income.
The common-law “dominant impression” test
If the answer is still not clear, the broader relationship must be considered. This is sometimes called the dominant impression test.
The more the relationship looks like employment, the more difficult it becomes to argue that the person is an independent contractor.
Why the distinction matters
The classification affects more than just income tax.
It affects:
PAYE;
UIF;
SDL;
labour law protection;
leave benefits;
unfair dismissal protection;
tax deductions;
the risk carried by the employer or client.
If an employee is incorrectly treated as an independent contractor, the employer may become liable for backdated PAYE, penalties, and interest.
This means that both parties are exposed: the person doing the work and the business paying them.
3. If you genuinely qualify as an independent contractor, what can you deduct?
A genuine independent contractor can deduct business expenses that are actually incurred in producing income.
That does not mean everything suddenly becomes deductible. The expense must be linked to the income-earning activity and must not be private, domestic, or capital in nature, unless specifically allowed.
In plain English:
You can deduct business expenses.
You cannot simply deduct your lifestyle.
Examples of possible deductions include:
Business travel
You may claim business-related travel costs, such as:
fuel;
repairs and maintenance;
vehicle licence;
vehicle insurance;
finance charges, where applicable;
wear and tear;
parking;
toll fees.
However, you must keep a proper logbook and split business travel from private travel. Private kilometres are not deductible.
Home office expenses
If you work from home and have a dedicated area used for your trade, you may be able to claim a business portion of certain home expenses.
This may include:
rent or bond interest;
rates and taxes;
electricity;
cleaning;
repairs to the office area;
internet, to the extent used for business.
But be careful: working from your dining room table now and then does not automatically create a home office deduction.
Cellphone and internet
You may claim the business-use portion of cellphone, data, fibre, and internet costs.
For example, if 60% of your cellphone use is genuinely business-related, then 60% may be claimed.
Laptop, equipment, and tools
You may claim wear and tear on business assets such as:
laptop;
printer;
office furniture;
specialised tools;
camera or equipment used for work;
cellphone used for business.
If the asset is used partly privately, only the business portion may be claimed.
Software and subscriptions
Deductible expenses may include:
accounting software;
Microsoft 365;
design software;
industry-specific programs;
cloud storage;
professional platforms required for the work.
Stationery and office supplies
Examples include:
paper;
printer ink;
files;
pens;
client folders;
small office consumables.
Professional fees
You may deduct costs such as:
accounting fees;
tax practitioner fees;
legal fees directly related to the business;
professional body memberships;
licences or registrations required for the work.
Training and courses
Training may be deductible if it relates directly to your current income-earning activity.
For example, a bookkeeper attending a VAT update course is easier to justify than someone claiming a course for a completely new and unrelated career.
Advertising and marketing
Examples include:
website costs;
business cards;
social media advertising;
Google ads;
branding;
flyers;
client proposal documents.
Bank charges and payment fees
Business bank account fees, card machine fees, payment gateway fees, and transaction charges may be deductible if they relate to the business income.
Insurance
Business-related insurance may be deductible, such as:
professional indemnity insurance;
business asset insurance;
public liability insurance.
Income protection policies need to be considered separately, depending on the policy and tax treatment.
Subcontractor costs
If you pay someone else to help complete the work, that cost may be deductible, provided it is properly supported by invoices and proof of payment.
What you usually cannot deduct
You generally cannot deduct:
private groceries;
normal clothing, unless it is specific protective clothing or a uniform not suitable for everyday wear;
personal travel;
family cellphone costs;
entertainment with a weak business purpose;
fines and penalties;
private medical expenses, except through the normal medical tax credit rules;
capital repayments on loans;
school fees;
family holidays;
personal household costs not linked to the business.
So yes, a genuine business can deduct many expenses. But only if those expenses are actually incurred in producing income.
The company cannot simply pay for your private life and call it tax planning.
4. What if you trade through a company?
This is where many people get caught.
Let’s say you register a company and your client, or former employer, starts paying the company instead of paying you directly.
That does not automatically solve the tax problem.
The money in the company is not automatically your personal money. If you need money for personal living expenses, you must take it out of the company properly.
This could be through:
salary;
dividends;
loan account movements;
reimbursements;
or a combination, depending on the facts.
If you pay yourself a salary as an employee or director of the company, the company may need to register for payroll, deduct PAYE and UIF where applicable, and issue an IRP5.
If there is profit left in the company, that profit may still be subject to company tax.
So the idea that “everything gets paid through the company and then no tax is left” is not how it works.
5. Will the company qualify for small business tax rates?
This is where we need to use the correct terminology.
People often say:
“My company will be an SME, so I will pay less tax.”
But for tax purposes, the important question is not whether the company is generally a small business or SME.
The important question is whether the company qualifies as a Small Business Corporation, also called an SBC.
A company may qualify as an SBC if, broadly:
it is a private company, close corporation, co-operative, or personal liability company;
its gross income does not exceed R20 million for the year;
all shareholders or members are natural persons throughout the year;
the shareholders do not hold shares or interests in other companies, except for certain permitted exclusions;
not more than 20% of its income consists of investment income and income from rendering personal services;
the company is not a Personal Service Provider.
If the company qualifies as an SBC, it may benefit from lower tax rates.
But if it is classified as a Personal Service Provider, the SBC tax benefit will not apply.
6. What is a Personal Service Provider?
A company, close corporation, or trust may be classified as a Personal Service Provider, or PSP, if the services are rendered personally by a connected person, usually the owner or director, and one or more of the following applies:
The person would be regarded as an employee of the client if the company did not exist; or
The services are performed mainly at the client’s premises and the person is subject to the client’s control or supervision; or
More than 80% of the income from services comes from one client or an associated institution of that client.
In other words, if the company is basically being used to sell the personal services of one person, especially to one main client, SARS may classify the company as a PSP.
Important PSP exception
The company will generally not be a PSP if it employs three or more full-time employees throughout the year who are:
not shareholders, members, or beneficiaries; and
not connected persons in relation to the owner or company.
This is often the main exception, because it shows that the company is more than just one person selling their own labour through a company.
7. What are the tax consequences if the company is a PSP?
This is the part many people do not consider.
A PSP can become the worst of both worlds:
You have the administration of a company, but without many of the small-business tax benefits.
If the company is a PSP:
the client may have to withhold PAYE from payments made to the company;
the company’s deductions may be restricted;
the company will not qualify for SBC tax rates;
the company will not qualify for turnover tax;
the company may still need to deal with VAT, where applicable;
the company will still have CIPC, accounting, payroll, and tax compliance obligations.
A PSP company is generally taxed at the normal company tax rate, currently 27%.
This means the structure may not give the tax saving the person expected.
8. So, is it worth it?
The honest answer is:
Yes, it can be worth it - if you are genuinely running a business.
If you have multiple clients, carry business risk, use your own equipment, control how and when you work, advertise your services, invoice for results, and operate independently, then the independent contractor structure may make sense.
But if you resign on Friday and start invoicing your old employer through a company on Monday, while doing the same work, at the same desk, under the same manager, during the same office hours, you may have a hard time proving that anything really changed.
Before changing from employee to contractor, ask:
Will I have more than one client?
Will I control how and when I do the work?
Will I use my own equipment?
Will I carry business risk?
Will I invoice for a result, not simply receive a monthly salary replacement?
Will I have a proper contract?
Will the company be at risk of being classified as a PSP?
Will the tax saving still be worth it after accounting fees, payroll admin, CIPC compliance, provisional tax, and VAT considerations?
Final thought
Tax planning is allowed. Artificial tax planning is where the trouble starts.
Registering a company does not automatically turn an employee into an independent contractor. SARS looks at the real relationship, not only the paperwork.
So next time your clever brother-in-law gives tax advice around the braai, smile politely - but maybe check with your accountant before resigning on Friday and invoicing through a company on Monday.
Vectigal Accounting
076 051 6559
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