How to exit from being classified as a Personal Service Provider in South Africa
If you are a business in South Africa falling into the personal service provider classification you will not qualify for small business tax rates, So, you are probably wondering, can I exit the personal service provider classification? Well, the answer is yes, as long as you meet the criteria.
A company or trust that employs three or more people on a full-time basis to be engaged in the core income producing activities can escape the personal service provider classification. Important to note is these employees should not be related to the ownership structure of the entity.
The reason SARS makes this allowance is so that employment opportunities can be created to boost the economy which in turn boosts tax revenue, it's all connected.
What is a full-time employee? This is someone who works for a single employer (can also include students or scholars) for at least 22 hours in every full week.
Important to note is that gardeners and domestics do not fall into the classification of full-time employees for the purposes of considering exit from the personal service provider classification. However, in a food and beverage business like a restaurant a domestic would be considered to be part of the main income producing activity as the hygiene is part of the service provided. Hence these cases must be analysed on a case-by-case basis.
The main consideration is whether the employee is hired to perform activities that are closely connected to the nature of the business considering the industry it is in.
Frequently asked questions
What is a personal service provider?
A personal service provider (PSP) is where the owner of a business, that is, a company or a trust renders service in his or her personal capacity using the business as a vehicle. Read our blog on personal service providers
What happens if I don't have 3 employees?
Then you would be taxed as a personal service provider at 28%.
Is there another way around personal service provider classification?
Yes, if you don't earn 80% or more from one source then you can exit the classification.
What is the application of the law?
Employees' tax depends on three things: an employer, an employee, and remuneration. If one or more of these three elements are not present, employees cannot be charged tax.
If, for example, an “employee” is removed from the equation, then the person paying the remuneration has no obligation to deduct employees’ tax.
Similarly, if the term “remuneration” is removed from the equation, no employees’ tax liability arises. If remuneration is therefore paid to an individual who is not an “employee” as defined, or if something other than “remuneration” is paid to an individual, then no employees’ tax needs to be deducted or withheld.
Previously, it was a popular tax-saving method for employees to offer their services to their employers through the medium of private companies, close corporations or trusts. In order to discourage the use of corporate entities or trusts as intermediaries to provide personal services to a client that are, in essence, services provided under a contract of employment, legislation was introduced that required remuneration payable to such a company, close corporation or trust by the client to be subject to employees’ tax and that limited the available deductions from income in the determination of taxable income for these entities.
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