[Question] Self Employed / Sole Proprietor > Deductions at Source

[Marce]

Hi All,

My cousin is a sole proprietor, but is not registered as a provisional tax payer.

He has a client who pays him monthly and deducts PAYE and UIF, paying him a net salary.

How would this be recorded in his books?

He issues the client with an invoice, who then pays him and issues him with a payslip.

I was thinking the deductions would go into a Prepaid Liabilities account (for SARS), and then this would be set off against what SARS says he owes at the end of the tax year. But then how to record?

For instance, Gross Pay = R 10,000.00 pm, PAYE = R 675.00 and UIF (employee's contribution only) = R 100.00.

So, invoicing a debtor (ultimately, his "employer") would go like this....

DR ABC Ltd (the invoice to the 'debtor') R 10,000.00


When payment is received (his net pay), then as follows:

DR Bank R 9,225.00
CR ABC Ltd R 9,225.00

DR SARS Control (Prepaid Liability) --> R 675.00 (PAYE)
--> R 100.00 (UIF)
CR ABC Ltd (the balance remaining in the debtor's account) --> R 675.00 (PAYE)
--> R 100.00 (UIF)

So, essentially, it looks like an asset sitting in his balance sheet.

At year-end, one would then calculate his PAYE and UIF on net profit?

This would then go to the SARS Control account, and the difference would be what he would have to pay SARS, not so?

If he'd received the same pay for the full 12 months, then there would be R 8,100.00 PAYE and R 1,200.00 UIF sitting in the SARS Control account as a prepaid liability.

So, say for instance he owes SARS R 9,000.00 PAYE and R 1,500.00 UIF at year-end, it would mean he'd have to pay over R 900.00 PAYE and R 300.00 UIF.

How do we record this then?

Payroll deductions are not deductible expenses, as far as I understand. So what is the double-entry for the final balancing payment?

Thanks in advance - I have Really been struggling to find an answer to this one!!!

[Dave A]

For instance, Gross Pay = R 10,000.00 pm, PAYE = R 675.00 and UIF (employee's contribution only) = R 100.00.

That would seem to indicate the client is treating this as full time employment.
(If it was part time employment or employment as an independent contractor, the correct PAYE deduction would be 25%).

Let's start with some basic question -
How many clients does your cousin have?
How many employees does your cousin have?
What percentage of your cousin's income does this client represent?

[Marce]

Morning, Dave.

Thank you for your questions.

He only has the one client.
He doesn't have any employees.
100%

I double-checked, and yes, they are deducting PAYE according to the tax tables.

Further, they regard my cousin as a "sub-contractor". They only deduct PAYE and UIF, my cousin is not entitled to any benefits or even paid annual leave. They have also issued contracts for their sub-contractors to sign (no copy to hand as yet), but I suspect this is for the client to cover their bases with SARS for this arrangement.

Lastly, my cousin is responsible for his own expenses - phone, vehicle, fuel, tools, etc. In terms of materials for jobs, he buys these, and then invoices the client for payment of such.

[EAB]

Morning Marce,

Based on the information you gave your cousin will most likely be classified as an employee by SARS, no matter what the contract says. We've had numerous companies claiming their employees are "sub-contractors" and clients claiming to be sub-contractors at a company they work for. SARS has in the past denied any expense claims as they deem them to be employees and not sub-contractors.

Just a few questions to add to the test of your cousin is a sub-contractor or employee. You are NOT an independent contractor if:
- You are subject to control in the manner that you work and/or the hours that you work.
- You are subject to supervision in the manner that you work and/or the hours that you work.
- You receive payment at regular intervals, eg. weekly or monthly.

[Andromeda]

The decision tree on page 17 should help
LAPD-IntR-IN-2012-17 - Employees Tax Independent Contractors.pdf

[Marce]

Thanks everyone for your help.