Independent Contractors or ‘Deemed Employees’ and Tax Consequences

4 Aug

Member Query

We’re considering awarding a performance bonus to a contractor and would like guidance on the correct approach. Specifically, how should this be structured in the contractor agreement, and what are the legal and payroll implications for both parties?

Our Response

To conclude on the treatment of paying a performance bonus to a contractor you should first determine if SARS will classify them as a “deemed employee.”

If they meet SARS's criteria for a deemed employee, the bonus is taxable remuneration and PAYE must be withheld.
Simply calling someone a contractor in a contract does not protect you—SARS looks at how the relationship works in practice.

Statutory Test (Fourth Schedule)

A person is a deemed employee if:

They personally perform services to the client;
They don’t employ at least three full-time staff who perform income-generating work (excluding admin staff);
They are under the control or supervision of the client about how or when the work is done.

If these apply, the person is not trading independently—and PAYE must be withheld from all payments, including bonuses.

Inclusionary vs. Exclusionary Test (Interpretation Note 17)

Inclusionary Test: If the contractor works mainly at your premises and renders services personally, SARS treats them as not independent → PAYE applies.
Exclusionary Test: If the contractor employs 3+ unrelated, full-time staff doing core work, they’re seen as running an independent business → no PAYE needed.

Even with a contract in place, SARS applies the principle of substance over form—meaning it’s how the relationship works in reality that counts.