Classifying Workers For Tax Purposes in Sierra Leone (Employee versus Independent Contractor)

Theodore Lumpkin

Tax Associate

By Theodore Lumpkin.

There has always been a misunderstanding of the classification of employees in Sierra Leone, and it is having a significant effect on tax compliance and government revenue.

This blog highlights the tax legislation differences between employees and independent contractors. Furthermore, we explore the tax implications and impact on organisations, employees’ wages, and government revenue if workers are misclassified.

Hiring an independent contractor is appealing, as this option can be significantly cheaper since organisations do not have to provide a contractor with end-of-service benefits, health insurance, expensive training, and other lucrative allowances or equipment. It also gives the employer the leverage to scale up or down the service hours. Nevertheless, organisations should be aware that although they classify some workers on “contracts” as independent contractors, the National Revenue Authority (NRA) can classify them as employees in accordance with the tax law.

The key tax difference is that for independent contractors (except individual professionals), the withholding tax rates in line with Section 117 of the Income Tax Act 2000 as amended and Section 36 of Finance Act 2016 (National Health Insurance Levy) are 5.5% (residents) and 10.5% (non-residents), as opposed to Pay As You Earn (PAYE) tax rates with a maximum of 30%. Therefore, workers will receive more money if they are classified as independent contractors.

Policymakers understand the financial incentives to use independent contractors and the enticement to classify workers as independent contractors when organisations truly view and treat them as employees. The government is wary of the revenue loss they will incur if workers are misclassified. Therefore, through the Income Tax legislation and a Business Brief, they have explicitly distinguished between an employee and an independent contractor. Employees offer a “Contract of Service”, and independent contractors offer a “Contract for Service”.

Section 2 of the Income Tax Act 2000 defines an employee as “an individual who receives employment income and includes any individual engaged for short-term or part-time work other than an individual acting as an agent”. Employees receive employment income as a payment or benefit arising from past, present or prospective employment and taxed under Section 23 of the Income Tax Act 2000.

An independent contractor is a person, business, or corporation that provides goods or services to another entity under terms specified in a contract or a verbal agreement.

Unlike an employee, an independent contractor does not regularly work for an employer but works as and when required, during which time they may be subject to the law of the agency. Independent contractors are usually paid on a freelance basis. Contractors often work through a limited company or franchise, which they own, or may work through an umbrella company. People such as carpenters, builders, air conditioner technicians, and painters in an independent trade, business, or profession in which they offer their services to the general public are generally referred to as independent contractors.

Considering this, organisations should be mindful of the classification of workers, not on the business relationship with them, but specifically on laws and policies. If workers are not classified according to the tax legislation, organisations could expose themselves to penalties from the NRA. Therefore, it is imperative organisations have a good understanding of the law.

In conclusion, organisations should understand the aspect of behavioral and financial control of workers according to tax legislation to classify workers appropriately.