Employee vs Independent Contractor - Inland Revenue Division

MINISTRY OF FINANCE
INLAND REVENUE DIVISION
EMPLOYEE VS INDEPENDENT CONTRACTOR
An employer is required to deduct income tax from an employee’s emoluments in
accordance with the Income Tax Act and the PAYE Regulations.
A problem may arise where the person making the payment has to determine whether
the person providing the service is an employee or an independent contractor.
The determination is arrived at by applying various tests to ascertain whether a
“contract of service” or a “ contract for services” in-fact exists. The fact that a written
agreement states that an individual is an independent contractor is by itself
immaterial. This is to be ignored until the full terms of the agreement have been
established. Even when there is no written or verbal contract the facts of the actual
work conditions must be examined.
Outlined below are some of the tests that may be applied to ascertain the nature of the
relationship that exists and by extension the method to be used for the payment of
taxes.
• The “organization” test – here the person performing the job is usually a regular unit
of the business and is engaged in its ordinary operations as opposed to being
engaged only to do something extraneous. In addition, the question should be
asked, whether the individual is performing the services as a person in business i.e.
on his own account.
• The ‘control’ test – an employer usually tells the employee how the work is to be
done. The greater the amount of control the more likely that the relationship is one
of employment. In the case of professional or skilled employees though there may
be little or no control over the details of the work the employer can give, however he
can direct as to what work is to be done.
• The power to dismiss – where dismissal is given by a period of notice this implies
the existence of an employee – employer relationship.
• The payment of wages or salary is usually an indication of an employee – employer
relationship however it is possible for remuneration to take the form of commission.
The manner of payment is also important as payment by hours worked “time”
generally implies employment as opposed to per “job”.
• The power to fix when and where a person works is another indication of an
employment contract but it is not conclusive by itself.

• Personal Performance and Exclusivity – an employee cannot normally delegate the
entire performance of his work to another person. Where a contract entitles some
one to the full time or exclusive services of another this suggests the existence of an
employment contract. This degree of commitment is not necessary in every case,
what is necessary is that there is some degree of continuing mutual obligation on the
employer to offer employment and on the employee to accept employment – such as
casual workers.
• The deduction by the employer of PAYE and NIS indicates clearly that the parties
view their relationship as that of employer – employee. The failure to make these
deductions is however not conclusive as to the nature of the relationship.
• The Economic Reality Test – whether the person performing the service provides his
own equipment, hires his own workers, what degree of financial risks he takes, what
degree of responsibility for investment he has, and whether and how far he has an
opportunity of profiting from sound management in the performance of his task.
In the summary any one or a combination of the conditions outlines above can prove
that a contract of employment / contract of service exist. That is, the relationship
between the parties is that of employer and employee.
Where a contract of employment is deemed to exist taxes MUST be withheld in
accordance with the PAYE System.
The Board is the authority in determining who pay taxes in accordance with the PAYE
System or the Quarterly Instalment Method. Thus when in doubt, advice should be
sought from the Inland Revenue Division.
The Income tax Act and the PAYE Regulations provide the following definitions.
An employee is – “Any person, not being the holder of an office, in receipt of emoluments”
and an employer as – “Any person paying emoluments whether on his own account or on
behalf of another person to an employee, and shall be deemed to include any person paying
emoluments, whether on his own account or on behalf of another person, to the holder of an
office” – The PAYE Regulations (Income Tax Employment Regulations).
In relations to an employee or the holder of an office emolument income includes
“Salary, wages, overtime, bonus, remuneration, perquisites including the value of board and
lodging, stipend, commission or other amounts for services, directors’ fees, retiring
allowances or pension, arising or accruing in or derived from or received in Trinidad and
Tobago and which are assessable to income tax” – The Income Tax Act (Chap. 75:01)
TAXPAYER RELATONS SECTION, INLAND REVENUE DIVISION
Tel : 623 7106 ext. 321, 323-326
Visit us at www.ird.gov.tt
November 2006