Self-employed V’s Employed from an employer’s perspective?

Did you know that it is the responsibility of the business organization to ensure that it applies the correct tax treatment to all payments made to each person working with them. The tax penalties associated with incorrectly treating a person as self-employed can be severe.

Most organization will enagage the services of a self-employed persons e.g. consultants and advisers. These self-employed persons invoice the organization for the work they perform at regular intervals. The payment they receive is not subject to PAYE deductions. They normally provide their own tools and equipment, and they have flexibility in deciding on their hours of work. In otherwords, they are not employees.

There is no single definitive factor which would cause the Revenue to question the status of an individual in such circumstance. However, in considering the specifics of a case the Revenue will take account of the intentions of both parties at the commencement of their relationship, the terms of the contract and working conditions.

The fact that an individual has registered for VAT and for self-assessment does not automatically mean that they are self-employed.

There are a number of key tests (principles established through case law over many years) which are applied.

  • Control – is the self-employed person able to exercise control over the content and direction of the work.
  • Mutuality of obligation – is there an obligation for one party to provide work and for the other to do it. If so this would have the characteristics of an employer-employee relationship.
  • Personal service – does the self-employed person have to complete the work themselves or are they free to have someone else do the work on their behalf?
  • Enterprise test – is the self-employed person in business on their own account i.e. can they share in the profits of doing the task well or is the person exposed to financial risk by having to bear the costs of making good faulty or sub-standard work carried out under the contract?

There are many further factors which can be relied on to support or undermine a particular argument depending on each case.

What are the differences in terms of tax treatment?

  1. The self-employed are entitled to an Earned Income Tax Credit but not a PAYE tax credit i.e € 1,150 instead of €1,650.
  2. A self-employed person pays a class S PRSI contribution which effects there entitlement to certain benefits.
  3. The organisation engaging a self-employed person does not have to pay an Employer PRSI contribution.
  4. The self-employed are responsible for dealing with their own tax affairs.

The cost to an employer of incorrectly treating a “de facto” employee as being self-employed can be severe:

  • The amount paid to the person (adjudged to be an employee) is assumed to be net pay having suffered deductions for tax, USC & PRSI tax at the appropriate rates.
  • The assumed tax deductions are due and payable by the employer. The employer may have difficulty recovering this amount from the other party.
  • In additions the employer must pay an employers PRSI contribution. of 8.5% or 10.75% of the gross payment.
  • Interest will apply to late payment of taxes; PAYE deductions are due to be remitted to the Revenue by the 23rd of the following month.

If you are concerned about your own status or that of persons engaged in your organisation then talk to The Tax Man.

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