Tax law relating to Personal Service Provider Companies
Many people continue to believe that it is better to provide their personal services, typically consulting, through a company rather than as individuals. Not so.
A Personal Service Company is one which provides services such as consulting, bookkeeping, designing etc which are actually services provided by a person rather than product supplied or non personal services, such as rental property. In order for it to be classified as a Personal Service Company a number of tests are applied. You can research more deeply if you are unsure whether these tests are satisfied in your case or not.
Remuneration. Does it receive remuneration for the services rendered? If so apply the next test.
Services. Are the services provided personally by a person or persons who are connected persons in relation to the company (e.g. shareholders or relations of shareholders)? If so proceed to the next test.
Employee. If it were not for the company, would the person normally be considered to be an employee of the customer? If so, proceed to the next test.
Employees. Does the company employ less than three independent full time employees directly in the business of rendering the service?
If all of the above are satisfied, then the company is a Personal Services Company.
This has three ramifications for tax purposes –
1) The company cannot be classified as a Small Business Corporation and loses the opportunity to save up to R95 000 in tax each year.
2) The customer must deduct PAYE at the rate of 28% from all remuneration as if the company was, in fact, an employee. This PAYE is deducted from the tax liability of the company as if it were a Provisional Tax payment.
3) If provided with an Affidavit to the effect that the company is not a Personal Services Company as defined, then the customer does not have to deduct PAYE.
4) No expenses may be deducted except salaries, legal costs, bad debts, retirement funding for its employees and also premises, finance charges, interest, maintenance if used entirely for the business and for no other purpose.
The Personal Services Company must deduct PAYE from its employee(s) when paying salaries.
Don’t go there! What you should rather do is either sell your services as a sole trader and advise your client that he should deduct PAYE or, have your client put you on the payroll.