How to Pay Independent Contractors in South Africa

Between 2010 and 2021, the number of self-employed workers in South Africa increased by 75.4% to 5.3 million.¹ With a strong financial industry and talented workforce, it’s no wonder that businesses from around the globe hire contractors in South Africa.

If you work with an independent contractor in South Africa, you’ll need to ensure you remain compliant with local laws.

That means knowing how to classify your workers, how to pay them and what benefits they’re entitled to. This article breaks down how to pay an independent contractor in South Africa and remain compliant while doing so.

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How to Pay Independent Contractors in South Africa

There are a few steps involved in paying your independent contractor in South Africa. Here’s how to go about doing it legally.

Ensure Your Contractors Are Classified Correctly

Before starting a working relationship, check that your contractors are not actually employees

If you classify an employee as an independent contractor, you can get into legal trouble. Specifically, you’ll be fined a failure-to-withhold-taxes penalty of 10% interest. You'll also be fined a 200% understatement penalty. In the worst case, you could face imprisonment.²

This is because employees are entitled to benefits that independent contractors aren’t.

So, what’s the difference between an employee and an independent contractor in South africa?

In the end, the South African Revenue Service (SARS) has the final say. They’ll judge the working relationship using a “dominant impression” test. This captures the nature of the relationship beyond what the law may say on paper.

That said, a general distinction can be made between employees vs. independent contractors.

In South Africa, employees work under a contract of service. In contrast, independent contractors work under a contract for service.³

In a contract for service, you have less control over the independent contractor. You contract them for a specific task over a specific time frame. Upon completion of the task, you'll pay them. But, the contractor is free to decide how they'll complete the task. They'll also typically supply the tools necessary for the job themselves.

The take home message is to ensure your contractors are classified correctly.

Choose a Suitable Payment Method

When paying your independent contractor in South Africa, you have two main options. You can pay them either using a bank transfer or through an alternative payment provider.

If you want to pay your contractor using a bank transfer, you could either:

• set up a bank in South Africa; or
• send them a wire transfer from your US bank

If you want to open a business bank account in South Africa, you’ll have to register your business. You'll need to register with the Companies and Intellectual Property Commission (CIPC). While this can make it easy to pay South African contractors, it could be a long process. It can also come with monthly maintenance fees. If you work with contractors across many countries, this would be impractical.

Alternatively, you could send your independent contractor in South Africa a wire transfer. This is a simpler option than setting up a local bank account. But, international wire transfers come with high fees and often less-than-ideal exchange rates.

Another option is to open an account with an alternative payment provider.

For example, Wise is a Money Services Business (MSB) provider. The Wise Business account allows you to manage more than 40 currencies, all from a single account. It's free of monthly maintenance fees, and you can pay international contractors using the mid-market exchange rate, without hidden fees.

Find out more about Wise Business

Larger businesses could also consider using a third-party global payroll service provider. They can simplify tax reconciliation, help you stay compliant and reduce manual errors. But they do often come with subscription fees.

Alternatively, you could consider paying your contractors using international money orders. But this tends to be slow and costly, and is rarely a preferred payment method.

Provide the Correct Tax Details

You won’t need to withhold income taxes for your independent contractor in South Africa.

But you can still help your contractor by providing them with guidance.

Your contractor will need to register with the CIPC. Once successfully registered, they’ll receive their tax identification number from SARS.

They can then register with eFiling to file their provisional tax returns electronically. Contractors must pay provisional tax in two installments per year. This is based on their estimated taxable income.⁴

Contractors earning less than 1 million ZAR per year can elect to pay turnover tax.⁵ Instead of having to pay multiple taxes, turnover tax keeps things simple. If your contractor qualifies, they’ll only need to pay one tax.

Do Independent Contractors in South Africa Get Employee Benefits?

No. You’re not required to provide statutory employee benefits to contractors.

These are benefits such as:

• sick pay
• paid leave
• pension contributions

In fact, providing such benefits to contractors could lead to a misclassification risk.

What Currency Should I Use to Pay Contractors in South Africa?

Typically, your independent contractor in South Africa will expect to be paid in their home currency, the South African Rand (ZAR).

But, for personal or business reasons, they may prefer to be paid in an alternative currency, such as USD.

It can often be beneficial to pay in your contractor’s preferred currency. This can help keep a good working relationship with them.

Just make sure that the payment currency is clearly stated in the payment terms of your contractor’s invoices. This will help you avoid any disputes or ambiguity in the future.

Discover Wise Business: The Easy Way to Pay Contractors in South Africa

Banks can make things complicated when managing an international workforce. If you want to pay your independent contractor in South Africa, consider opening a Wise Business account.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in 40+ currencies. You can get major currency account details for a one-off fee to receive overseas payments like a local. You can also send money to 160+ countries.

Every time you pay your contractor, you’ll have your money converted at the mid-market exchange rate. This saves you on hidden fees and makes your money go further abroad.

Open a Wise Business account online

Wise’s batch payment tool allows you to pay up to 1,000 payees in different currencies. That’s an easy way to manage payroll for independent contractors in multiple countries.

You can also sync your Wise account with accounting software such as QuickBooks and Xero, saving you time and hassle on account reconciliations.

Sources:

Sources checked February 2024.