According to an Outsized survey, 81.5% of university-educated South African workers are interested in freelancing to craft a better work-life balance and pick up new skill sets. The country, which has a talented workforce and growing GDP in industries like finance and IT, is becoming a hotbed for independent contractors—no matter where the hiring company is headquartered.
But before you hire a contractor in South Africa, you have to figure out how you’ll pay them. Our step-by-step guide takes you through everything you need to know about paying independent contractors—navigating South African laws, avoiding misclassification penalties from the South African Revenue Service (SARS), and handling currency conversions.
Step #1: Classify your workers in South Africa
South Africa’s Labour Relations Act distinguishes employees from independent contractors, and companies need to be careful not to misrepresent an employment relationship. If employers are found to have misclassified workers, they’re subject to consequences from South African courts and the SARS, including a failure-to-withhold-taxes penalty at 10% interest, an additional 200% understatement penalty, retroactive benefits administration, and even imprisonment.
Broadly speaking, South African labor law defines an employment relationship as a contract of service, while a contractor fulfills a contract for services which, when rendered, ends the working relationship.
Other distinctions made by South African authorities are laid out in the table below. Courts use a “dominant impression” test that ventures beyond the contract terms and looks at all the criteria together to consider worker classification.
High level of worker control.
Contractors are not beholden to strict supervision or control from their clients.
More direction from the employer. Employees are subject to more control and direction from their employer, who dictates the terms of the working relationship.
Equipment and tools are owned by the worker.
Equipment and tools are typically provided by the company.
Less integrated. Contractors are normally independent and more likely to work remotely and asynchronously.
Highly integrated. Employees are a central part of their employer's organization, taking part in day-to-day office affairs.
No entitlement to benefits. Contractors do not receive the same benefits and protections as employees.
Entitled to benefits. Employees are entitled to employment benefits and protections, such as paid leave, sick days, and often transition payment (i.e. severance pay).
Time-bound agreement. Contractors are typically engaged for a constrained time or specific project.
Indefinite engagement. Employees are hired without a time limitation and work an average of at least 40 hours per week.
Not (necessarily) economically dependent. Contractors often have other sources of income and don’t exclusively rely on one company to financially support them.
Economically dependent. Employees are financially dependent on their employers.
Non-exclusive services. Contractors are allowed to perform work for other companies.
Exclusivity of service. Employees generally only render services to their company.
Step #2: Determine the best way to pay your contractors in South Africa
Before working with contractors, companies need to figure out how to pay them. Here are the most common options:
- Bank wires. You can open a bank account in South Africa and deposit funds, but you’d have to do the same for every country where you hire contractors. You could also use your native bank account to send a global wire transfer to pay a South African contractor. These come with service fees and are subject to exchange rates.
- International money orders. Similar to writing a paper check, this method involves sending a physical payment in the mail to a contractor living abroad. Companies usually go to a Western Union, bank, or post office to buy the money order. Then, contractors must go to their bank to deposit it once it’s received. In addition to being slow, money orders come with wire fees and unfavorable exchange rates.
- Digital wallets or payment platforms. These services, like Wise and Paypal, allow funds to be sent and received online. While some platforms can process transfers instantaneously, others are unavailable in South Africa (e.g., Venmo only works within the US). You also need to mind vendor fees and volatile exchange rates.
- Global payroll services. Since independent contractors handle their own taxes, they typically aren’t included in the same payroll system as employees, and send invoices instead. This can be a slow process. But Rippling allows you to pay South African contractors alongside your full-time employees—all in a single pay run.
Step #3: Use global payroll software to process payments for South African contractors
Instead of worrying about service fees, volatile exchange rates, and slow processing times, you can pay South African contractors through global payroll software.
With Rippling, you can pay employees and contractors around the world simultaneously—in their local currency. You can also send locally compliant consulting agreements out for e-signature. Here’s a glimpse of Rippling in action:
Step #4: Ensure your South African contractors have the right tax information
Employers typically don’t have to withhold and pay income taxes for South African contractors, and contractors don’t have to make any social security contributions.
However, self-employed workers in South Africa have to pay a provisional tax, based on their estimated taxable income, in at least two installments over the course of the tax year (the SARS details how to do so online in this guide).
If the contractor earns less than ZAR 1 million, they can pay a turnover tax, which fulfills all their tax obligations at once. If the contractor is a sole proprietor, they can pay income tax on their business profits without filing a separate tax return.
To file taxes, contractors typically need:
- A personal tax number (SARS TIN)
- ID number
- A registered eFiling account with the SARS
- A filled-out income tax return (ITR12)
- A filled-out IRP6 return for provisional payments
- Value Added Tax (VAT) registration, if taxable income is greater than ZAR 1 million
If this sounds like a lot to keep track of, one of the benefits of processing payments through a global payroll system like Rippling is offloading the paperwork—and letting us do the calculations and filing for you.
Frequently asked questions about running payroll for contractors in South Africa
Do you need to withhold taxes when paying contractors in South Africa?
No, foreign employers don’t need to withhold taxes when paying South African freelancers. You do, however, withhold taxes for full-time employees based on their remuneration through a system called Pay-As-You-Earn (PAYE). Some employers can deduct PAYE on a South African contractor's behalf but typically aren’t required to.
Do South African contractors get benefits?
No, independent contractors in South Africa are not entitled to benefits—including paid leave, statutory holidays, and pension—in the same way as employees. Offering employee benefits to independent contractors could indicate an employment relationship and expose you to misclassification penalties.
Can you pay contractors in South Africa in your home currency?
South African contractors generally expect to be paid in ZAR. With a contractor’s knowledge and permission, they can be paid in other currencies, but the income has to be converted into ZAR to file and pay taxes accurately.
Can you manually pay contractors in South Africa?
Yes. Some small business owners manually process contractor payments in an attempt to cut costs. But, the process can be cumbersome when you work with multiple South African contractors and potentially others in different countries. If the process is slow and you don’t pay an independent contractor quickly, they may seek to render their services elsewhere.
Additionally, manually processing payments comes with some risks:
- Compliance. Running payroll manually leaves companies vulnerable to errors and omissions. Rippling enforces compliance with all applicable local laws—no matter where your contractors live.
- Security. Manual payroll processing—through spreadsheets, paper records, and other DIY ledgers—can lead to sensitive employee data being lost, stolen, or misused.
Instead, you can make payroll automatic by using Rippling, which syncs all your business's HR data with payroll, eliminating the need for manual data entry.
How do you turn a contractor into an employee in South Africa?
Say your South African contractor does stellar work and both parties crave a full-time commitment with more responsibility. Matriculating that freelancer into a full-time employee means registering for PAYE deductions, social security, and other benefits. Instead of using a South African HR expert to manage the transition, you can use Rippling. The platform quickly transitions contractors to full-time employees— taking care of legally compliant paperwork, benefits administration, payroll, and more.
Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.