Why this test matters
Contracting through a company is ordinary and lawful. What is not always understood is that it does not, on its own, take the arrangement out of the pay-as-you-earn system. The Fourth Schedule to the Income Tax Act includes a personal service provider in the definition of “employee”, and it excludes personal service providers from the exemption that would otherwise apply to payments made to companies and trusts. The duty to deduct then falls on the client, and a client that does not deduct is liable for the tax it should have withheld, with penalties and interest.
The consequence for the contractor’s entity is separate and just as real: section 23(k) strips out most of its deductions.
Section 23(k) limits the deductions available to personal service providers and labour brokers without a certificate of exemption.
Figures last reviewed 9 September 2026.
The definition
The whole test lives in one definition. Read it once slowly: it applies only to a company or trust, only where the work is done personally by a connected person, and then only if one of three limbs is met — with a single exception at the end that overrides all three.
“personal service provider” means any company or trust, where any service rendered on behalf of such company or trust to a client of such company or trust is rendered personally by any person who is a connected person in relation to such company or trust, and— (a) such person would be regarded as an employee of such client if such service was rendered by such person directly to such client, other than on behalf of such company or trust; or (b) where those duties must be performed mainly at the premises of the client, such person or such company or trust is subject to the control or supervision of such client as to the manner in which the duties are performed or are to be performed in rendering such service; or (c) where more than 80 per cent of the income of such company or trust during the year of assessment, from services rendered, consists of or is likely to consist of amounts received directly or indirectly from any one client of such company or trust, or any associated institution as defined in the Seventh Schedule to this Act, in relation to such client, except where such company or trust throughout the year of assessment employs three or more full-time employees who are on a full-time basis engaged in the business of such company or trust of rendering any such service, other than any employee who is a holder of a share in the company or settlor or beneficiary of the trust or is a connected person in relation to such person;
The steps SARS follows
Interpretation Note 35 sets the order out as a sequence, and it is worth following exactly: two of the steps can end the enquiry before you reach the limbs at all.
- Are any of the receipts “remuneration”? If not, no employees’ tax is deductible. The exclusion for independent contractors does not rescue a personal service provider, so there is no need to ask whether the entity is an independent contractor.
- Is the service rendered personally by a connected person? If it is not, the test ends.Source — the actual words
If the service is rendered personally by any person who is a connected person in relation to the company, close corporation or trust, then proceed to the next test below. If this is not the case, the company, close corporation or trust is not a “personal service provider”, and it is not subject to the deduction or withholding of employees’ tax.
SARS Interpretation Note 35 (Issue 5): Employees’ tax — personal service providers and labour brokers, para 4.1.1(b)Read it on SARSPDF - Does the entity employ three or more unconnected full-time staff in the service business, all year? If it does, the test ends there whatever the limbs would say.Source — the actual words
Determine whether the company, close corporation or trust employs (or is likely to employ) three or more full-time employees throughout the particular year of assessment who are, on a full-time basis, engaged in the business of rendering the service, and who are not holders of shares or members of the company or close corporation, nor settlors or beneficiaries of a trust, nor connected persons in relation to such persons
SARS Interpretation Note 35 (Issue 5): Employees’ tax — personal service providers and labour brokers, para 4.1.1(c)Read it on SARSPDF SARS is specific that support staff do not count towards the three:
Source — the actual wordsauxiliary staff such as cleaning staff do not enable the service delivery business and, therefore, do not qualify under the legislation for purposes of determining the “three or more full-time employees” requirement.
SARS Interpretation Note 35 (Issue 5): Employees’ tax — personal service providers and labour brokers, para 4.1.1(c)Read it on SARSPDF - Then the three limbs. Any one of them makes the entity a personal service provider: the person would be an employee if engaged directly; or the duties must be done mainly at the client’s premises under its control as to the manner of the work; or more than 80% of the entity’s service income comes from one client or its associated companies.
What follows from a finding
A personal service provider is an “employee” for pay-as-you-earn purposes. The client withholds employees’ tax from each payment at a flat rate, pays it over monthly with its EMP201 and reports it as remuneration.
Personal service providers that are companies: 28% · Personal service providers that are trusts: 45% · Labour brokers: the tax tables applicable to natural persons
The Note’s own footnote records the company rate as 27% for years of assessment ending on or after 1 March 2023, matching the corporate rate; the trust rate is 45%. Three further consequences follow: section 23(k) limits the entity’s deductions to salaries and a short list of specified items; the entity cannot be a small business corporation or a micro business; and the arrangement is a standing signal that the individual may be an employee at common law too.
On the labour-law side, the company is transparent. The Code of Good Practice is explicit, and the Labour Appeal Court has described an interposed close corporation as no more than a device.
The fact that a person provides services through the vehicle of a legal entity such as a company or a closed corporation does not prevent the relationship being an employment relationship covered by labour legislation.
The affidavit route
There is one relief valve, and it is narrow. Where the only limb in play is the 80% limb, the entity may give the client an affidavit or solemn declaration that the limb does not apply. A client that relies on it in good faith need not withhold.
Notwithstanding the provisions of subparagraph (1), a person shall not be required to deduct or withhold employees’ tax in respect of any year of assessment of a company or trust solely by virtue of paragraph (c) of the definition of “personal service provider” where the company or trust has in respect of such year of assessment provided that person with an affidavit or solemn declaration stating that the relevant paragraph does not apply and that person relied on that affidavit or declaration in good faith.
Two limits are worth being clear about. It does not help where limb (a) or (b) applies. And if it turns out to be wrong, the client is protected but the entity is not:
If it later emerges that the company, close corporation or trust is, in fact, a personal service provider, then employees’ tax will not be recoverable from the client. However, the prohibition of deductions under section 23(k) will apply as far as that personal service provider is concerned.
Practically: ask every entity you pay for services to complete a short declaration at the start of the engagement and again each year, keep it on file, and re-run this test whenever the client mix or the staff complement changes. If the answer is that you must withhold, the consultancy agreement should say so plainly, so the entity is not surprised by a net payment.
For the labour-law side of the same engagement, see employee or independent contractor? and contractor and consultancy agreements.
Questions about the test
A company, close corporation or trust that invoices for work actually done by a person connected to it — typically a one-person consultancy invoicing through the owner’s company. If the arrangement looks like employment in one of three ways, SARS treats the entity as an employee for PAYE: the client withholds at 27% (a company) or 45% (a trust) and the entity loses most of its deductions.
The client, because the client carries the risk. The duty to deduct sits with the person paying, and a payer that fails to withhold is liable for the tax with penalties and interest. The entity carries a separate consequence: section 23(k) limits what it may deduct.
Only for the 80% limb. If the entity gives an affidavit that the limb does not apply and you rely on it in good faith, you need not withhold on that ground alone. It does nothing where the first two limbs apply, and section 23(k) still limits the entity’s deductions either way.
Not automatically — they are separate tests. But the facts that trigger the first two limbs are the facts that point to employment, and labour law looks through the company in any event. Run the employee or contractor test as well.
Every year of assessment. The three-employee exception and the 80% limb are both measured over the year, so an entity outside the definition last year can fall inside it this year.