One fixed cost to the company - R100 000 a month by default - three ways, side by side: a salary, sole-prop contractor or your own (Pty) Ltd with your spouse. Gross, costs, tax and take-home in three columns, and the 80% one-client rule that can turn the company into a personal service provider.
Questions
What is the 80% rule for personal service providers?
If more than 80% of a company's or trust's income from services comes from one client (or an associated institution of that client), and the work is done by a connected person - you or your spouse - the company is a personal service provider under paragraph 1 of the Fourth Schedule. Being under the client's control at its premises, or being someone who would be the client's employee anyway, has the same effect. SARS Interpretation Note 35 sets out the tests.
Does my spouse count as one of the three employees?
No. A company escapes the PSP rules only if it employs three or more full-time employees throughout the year who do the service work and are not shareholders or connected persons. A spouse or relative is a connected person, so they never count - however real their job is.
Can the company pay my spouse a salary?
Yes, if the spouse really works for it and the pay is what the work is worth. Pay to employees is one of the few deductions a PSP keeps (s23(k)). But income a spouse gets from the other spouse's company that is excessive for the work is taxed in the other spouse's hands (s7(2)), and pay for no real work is not an expense in the production of income (s11(a)).
What does being a personal service provider cost?
The company pays 27% on its taxable income with no small business corporation rates, may deduct only pay to employees, their retirement contributions, legal costs, bad debts and the costs of premises and assets used wholly for the trade (s23(k)), and the client must withhold 27% employees' tax from each payment - unless the company gives it an affidavit that it will not earn more than 80% from one client.
Does the 80% rule apply to a sole proprietor?
No - SARS says the personal service provider rules apply only to companies and trusts. But if a client controls how and when you work and you work mainly at its premises, what it pays you is remuneration: it deducts PAYE and you are limited to employee deductions (s23(m)).