SARS decides whether someone is an independent contractor or an employee by looking at how the work is actually done, not what the contract says. If the person is subject to your control or supervision as to the manner of their work or their hours, they are treated as an employee for PAYE purposes — and if you got it wrong, you owe the PAYE you should have deducted, plus penalties and interest at 10.25% per annum.
This is the highest-value payroll question a small business faces, because the exposure is retrospective, uncapped, and lands on the employer rather than the worker.
TL;DR
The substance of the relationship decides it, not the wording of the agreement.
Two statutory presumptions deem a person an employee: control or supervision over the manner of work, and control or supervision over hours.
A labour broker or personal service provider has its own regime.
There is a statutory exclusion where the person employs three or more full-time employees who are not connected to them.
Get it wrong and you fund the unpaid PAYE — you cannot recover it from someone who has left.
Labour law applies a separate test, so you can be a contractor for one and an employee for the other.
Why this matters so much
When a contractor is reclassified as an employee:
You owe the PAYE. Not the worker — you. You were obliged to withhold, and you did not.
You cannot recover it. A contractor paid R45,000 a month for two years, now reclassified, generates a substantial PAYE liability you must fund yourself, especially if they have since moved on.
UIF and SDL arrears follow, with their own penalties.
Interest runs at 10.25% per annum, and understatement penalties may be added.
Labour law consequences may follow separately — leave entitlements, notice, and potentially an unfair dismissal claim at the CCMA.
Two years of misclassification on one R45,000-a-month worker can comfortably exceed R300,000 before penalties.
The statutory tests
The Income Tax Act sets out specific rules. Two of them create presumptions that are difficult to displace.
Presumption 1: control or supervision over the manner of work
A person is deemed not to be carrying on a trade independently if the services are required to be performed mainly at premises occupied by the client and the person is subject to the control or supervision of any other person as to the manner in which their duties are performed.
Note the two limbs together: working at your premises and being told how to do the work.
Presumption 2: control or supervision over hours of work
The same deeming applies where the person is subject to the control or supervision of any other person as to their hours of work.
Fixed hours are close to fatal to contractor status. A "contractor" required to be at their desk from 08:00 to 17:00, Monday to Friday, is very difficult to defend.
The three-employee exclusion
The presumptions do not apply where the person, throughout the year of assessment, employs three or more full-time employees who are engaged in the person's business, and who are not connected persons in relation to that person.
This is the clearest safe harbour in the rules. A genuine agency, consultancy or contracting business with three or more unconnected full-time staff falls outside the deeming provisions.
The common-law tests
Where the statutory presumptions do not settle it, the common law dominant impression test applies. No single factor decides — the overall picture does.
| Points towards employee | Points towards independent contractor |
|---|---|
| You control how the work is done | They decide the method and approach |
| Fixed hours you set | They set their own hours |
| Works only for you | Has multiple clients |
| Uses your tools, equipment and premises | Uses their own tools and premises |
| Paid a fixed amount regardless of output | Paid per project, deliverable or outcome |
| Cannot send a substitute | May subcontract or send a substitute |
| Integrated into your organisation — org chart, email address, team meetings | Operates as an outside supplier |
| You carry the risk of poor work | They carry the risk and must fix defects at their cost |
| Gets leave, sick pay, bonuses | No employment benefits |
| Indefinite relationship | Fixed term or defined project |
| Subject to your disciplinary code | Governed by contract and breach remedies |
| Trained by you | Brings their own expertise |
The three that carry the most weight in practice: control over the manner of work, whether they carry genuine financial risk, and whether they are integrated into your organisation.
Where the risk is highest
The "contractor" who used to be an employee. Converting a resigning employee to a contractor while nothing about the work changes is the clearest case of misclassification there is, and it is not subtle to an auditor.
The full-time, single-client contractor. Someone working exclusively for you, at your premises, on your hours, for years, is an employee in all but paperwork.
Long-term "temporary" staff. A six-month contract renewed eleven times is not temporary.
Family members on invoices. Frequently reviewed, and the connected-person rules cut off the three-employee exclusion.
Sole-member companies invoicing you. Interposing a company does not automatically solve the problem — it may instead make the company a personal service provider, which carries its own consequences.
Personal service providers and labour brokers
Where the worker interposes a company or trust, a separate regime applies.
A personal service provider is broadly a company or trust where the service is rendered personally by a connected person, and one of several conditions is met — including that the person would be regarded as an employee if the entity did not exist, or that they are subject to control or supervision as to manner or hours, or that more than 80% of the entity's income comes from one client.
Where an entity is a personal service provider:
The client must deduct PAYE at 27% for a company, or at the individual rates for a trust, from payments made to it.
The entity's deductions are severely restricted — most ordinary business expenses are not deductible.
A labour broker without a valid exemption certificate is similarly subject to PAYE withholding by the client.
The 80% test is the one to watch. A one-person consulting company earning more than 80% of its income from a single client is squarely in personal service provider territory.
Labour law asks a different question
This trips up even well-advised businesses: being a contractor for tax does not make you a contractor for labour law, and vice versa.
The Labour Relations Act contains its own presumption of employment, which applies where any one of several factors is present — including control over manner or hours, integration into the organisation, working an average of more than 40 hours a month over the last three months, economic dependence on the client, provision of tools by the client, or working for only one person.
That presumption applies to people earning below the BCEA earnings threshold, and it is triggered by a single factor rather than requiring several.
Practical consequence: a person can be correctly treated as an independent contractor for PAYE and still succeed at the CCMA in claiming they were an employee. The two systems are assessed separately, and losing at the CCMA does not automatically create a SARS liability — but it is strong evidence if SARS looks.
How to structure a genuine contractor relationship
If the relationship really is independent, make the paperwork and the practice reflect it.
Contract for a defined outcome, not for time. Pay per deliverable, project or milestone. Hourly billing against fixed daily hours looks like employment.
Do not dictate hours. Deadlines are fine. Set working hours are not.
Do not control the method. Specify what must be delivered and to what standard, not how to do it.
Let them use their own tools and premises wherever the work allows.
Allow substitution. A genuine contractor can send a qualified substitute. Insisting on one named person is an employment marker.
Keep them out of the organisation. No company email, no place on the org chart, no performance reviews, no disciplinary code, no team-building.
Make sure they have other clients — and keep evidence that they do.
Give no employment benefits. No leave, no sick pay, no bonus, no medical aid, no pension.
Have them invoice you, with their own tax reference and, if registered, their VAT number.
Put risk on them. Defective work is fixed at their cost.
Get an IRP30 or take advice where the position is genuinely borderline. Guessing is the expensive option.
Four real-world scenarios
Scenario 1 — The developer with three clients Works from home, uses their own equipment, invoices per sprint, sets their own hours, has two other clients, and can bring in a colleague to help. Verdict: independent contractor. No control over manner or hours, genuine financial risk, not integrated, multiple clients. This one is defensible.
Scenario 2 — The "consultant" in the office five days a week Sits at a desk you provide, works 08:00 to 17:00, attends the Monday team meeting, has a company email address, has worked only for you for three years, invoices a fixed monthly amount. Verdict: employee. Both statutory presumptions are triggered — premises plus control over the manner of work, and control over hours. The fixed monthly invoice with no link to output removes any financial risk. The label on the contract is irrelevant.
Scenario 3 — The bookkeeper who comes in two days a week Attends your premises on Tuesdays and Thursdays, uses your accounting system because the data lives there, sets which two days suit her, has six other clients, is paid a fixed monthly fee, and does the work her own way. Verdict: genuinely borderline, leaning contractor. She is at your premises and uses your system, but she controls the method, sets her own days and has a real client base. The dominant impression favours independence — but this is exactly the case where an opinion is worth paying for.
Scenario 4 — The former employee who resigned and came back as a contractor Same desk, same duties, same hours, same manager, now invoicing through a sole-member company. Verdict: employee, and the worst possible fact pattern. Nothing about the work changed. Interposing a company likely makes it a personal service provider as well, requiring PAYE at 27% and severely restricting the entity's deductions. If the conversion was intended to reduce tax, understatement penalties are a real risk.
What an IRP30 does and does not do
An IRP30 is an exemption certificate that a labour broker can apply for, allowing clients to pay it without deducting PAYE. Two points worth understanding:
It applies to labour brokers, not to every contractor arrangement. A one-person consulting company is generally not a labour broker.
It does not settle the classification question generally. Even where a valid certificate exists, the arrangement may still fail the labour law tests, and the certificate can be withdrawn where the holder becomes non-compliant.
Where the position is genuinely uncertain and the amounts are material, the more useful route is a written opinion from a tax practitioner, or in rare cases an application to SARS for a ruling. Neither is cheap, and both are considerably cheaper than a reclassification assessment covering three years.
What to do if you think you have got it wrong
1. Assess the exposure properly. Which workers, over what period, at what remuneration.
2. Do not simply stop and start again. Changing the arrangement prospectively does not extinguish the historical liability, and an abrupt change can itself draw attention.
3. Consider the Voluntary Disclosure Programme. Applied for before SARS opens an audit, inquiry or investigation, the VDP gives 100% relief from understatement penalties where there was no intention to evade. Interest remains payable. Once an audit notice is issued for the period, it is unavailable.
4. Fix the labour law position too. If the person is genuinely an employee, they have BCEA rights — leave, notice, and protection against unfair dismissal — that also need regularising.
5. Take advice before acting. If they should be on payroll, see when you must register for PAYE. This is one of the areas where the cost of getting it wrong dwarfs the cost of an opinion.
Frequently asked questions
How does SARS decide if someone is an independent contractor? By examining the substance of the relationship rather than the wording of the contract. Statutory presumptions deem a person not to be independent where they work mainly at the client's premises and are subject to control or supervision as to the manner of their work, or are subject to control or supervision as to their hours of work.
Does having a contract that says "independent contractor" protect me? No. The label is close to irrelevant. SARS and the CCMA look at how the relationship actually operates — control, integration, financial risk, exclusivity and the ability to substitute.
What happens if SARS reclassifies my contractor as an employee? You become liable for the PAYE you should have deducted, plus UIF and SDL arrears, interest at 10.25% per annum and potentially understatement penalties. The liability sits with the employer, and it cannot practically be recovered from a worker who has left.
Can a contractor work full-time hours for one client? It is possible but risky. Working exclusively for one client, on hours you set, at your premises, is close to the definition of employment. The presumptions bite on control over manner or hours, and the labour law presumption is triggered by exclusivity and economic dependence.
Does invoicing through a company solve the problem? Not necessarily. Where the service is rendered personally by a connected person and the tests are met, the entity may be a personal service provider — which requires the client to deduct PAYE at 27% for a company and severely restricts the entity's deductions. Earning more than 80% of income from one client is a key trigger.
Is the three-employee rule a safe harbour? It is the clearest one available. The statutory presumptions do not apply where the person employs three or more full-time employees throughout the year of assessment who are engaged in the business and are not connected persons in relation to them.
Can someone be a contractor for tax but an employee for labour law? Yes. The two systems apply different tests. The Labour Relations Act presumption is triggered by any single listed factor, for people earning below the BCEA threshold, so a person correctly treated as a contractor for PAYE may still succeed in an employment claim at the CCMA.
Should I convert my contractors to employees? If they fail the tests, yes — and sooner is cheaper. Prospective correction does not remove historical liability, so pair it with proper advice on regularising the past, including whether the Voluntary Disclosure Programme applies.
Get the classification right before SARS does
This is not a filing question, it is a structural one — and the businesses that get caught almost always knew the arrangement was borderline and hoped it would not be looked at.
Smartbook reviews contractor arrangements against both the SARS tests and the labour law presumption, quantifies the exposure where there is one, and sets up payroll properly for anyone who should be on it.
Last reviewed: 26 July 2026. Written by the Smartbook team — SAIPA and SAICA accredited, SARS registered tax practitioners. Classification is highly fact-specific and frequently disputed. This article is general guidance and should not be relied on to classify a specific relationship — take advice on the facts.
Primary sources: SARS — Pay As You Earn · SARS — Interpretation Note 17: Employees' tax — independent contractors · SARS — Voluntary Disclosure Programme · Department of Employment and Labour — Labour Relations Act