Dawgen Global: Taxation and Contracts to render services

CONTRACTS
Persons may enter into contracts of varying kinds in order to render services. These include:

Contract of Service
Contract for Service
Contract for personal service

Contract of Service:

Once a Contract of Service is identified, then this means that the contract is one of employment. The amounts paid under this contract are emoluments and therefore all statutory deductions are to be made e.g. Income Tax (tax); Education Tax; both employees’ and employers’ contributions, NHT, and NIS.

Under this contract arrangement a person (employee) is under an obligation to render personal services to another person (employer) and the: -

Individual (employee) is subject to the supervision, direction and control of another person.
Individual (employee) holds an integral position within the organization e.g. Accountant/Managing Director
Individual (employee) does not conduct business on his account.
Contract is a legally binding exclusive service agreement between the performer and payer.
Tools, materials and work place are provided by payer.
Individual receives a payment of a fixed salary and reimbursement of the performer’s expenses by the payer.
Performer receives vacation leave and any other staff related benefit.
Performer is required to file regular, oral or written status reports with the payer.

Contract for Services:

This contract represents an independent (business) and the individual is therefore responsible for his/her returns and payments under the self-assessment system, this applies to:

An individual who is not subject to the supervision, direction and control of another person.
An individual who does not hold an integral position within the organization.
Individual who conducts business on his own account.
The performer’s right to provide services to more than one person at a time with a separate contract between the performer and each payer.
Performer provides his own equipment.
Payment of a fixed amount or commission for the complete job rather than periodic payments.
Performer assumes his/her own financial risk and has responsibilities for his/her investment and management.

Personal Services:

The definition of “Personal Services” includes services of a professional, clerical, Technical Administrative or Managerial nature”.

Section 5(1) (c) (ix) of the Income Tax Act relates to contract for services with certain classification and only accounts for the withholding of Income tax and therefore does not apply to his statutory deductions. The other statutory deductions would still be treated under the self- employed system. This can only be applied when personal services are rendered, and what would not otherwise be seen as emoluments are deemed to be emoluments.
Since year 2001 if a person supplies personal services such personal services are subject to the income tax being deducted by the payer.

Education Tax and Contracts of Personal Services

The question of whether Education Tax is to be deducted from payments for this type of service now remains.

The definition of ‘employment’ under the Education Tax Act, First Schedule is as follows: -

“Employment in Jamaica under any contract of Service or apprenticeship written or oral and whether express or implied”.

Based on this interpretation of the Education Tax Act, the contract income of persons rendering personal services is subject to Education Tax, but the tax should not be withheld under Section 5(1) (c) (ix). The employee who receives this income must make his return of Education Tax and make payment to Tax Administration Jamaica. (Please note that no matching payment is due from the deemed employer, that is, the person giving the contract).

Other Categories of Employments and Emoluments – Special Cases

Casual employees

PAYE applies to casual labourers in the same way as it does to regular employees. The income paid should be recorded and the threshold applied accordingly. All relevant statutory deductions should be made where applicable.

Holiday Workers

High school students (irrespective of age), full-time tertiary students and persons participating in youth service programs, should be given the cumulative threshold (nil rate) as at the date of employment, (if it is ascertained such persons were not employed during the year). This does not apply to students doing evenings or part-time work outside the normal holiday times.

(Employers need to request that the employee produces coding from TAJ. If this is not received, emoluments are to be taxed without the application of the threshold.)

Part- time Employees

Part-time employees should be taxed at 25% on all emoluments received without the application of the threshold. These persons should apply to the Commissioner for a refund if at December 31; the total income earned from all sources is below the threshold for that particular year.

Overtime Payments

Overtime payments are taxable in the same way as regular emoluments. The overtime amount is to be added to regular pay and the appropriate accumulative threshold applied.

Bonus Payments, Commission, etc.

These payments are subjected to statutory deductions in the same way as regular emoluments.

Lump sum, honorarium, and ex-gratia payments:

Lump sum payments include:

Payments for loss of office (see Termination and Redundancy Payments page 37 in this booklet for computation of amount that should not be taxed.)
Ex-gratia payments
Payments in commutation or in lieu pensions (except commutation payments made through an approved Superannuation Scheme, or a scheme approved by the Commissioner General).
The taxable portions of the above payments are subject to statutory deductions in the normal way.
Terminal Gratuity paid by Government Entities/Statutory Bodies.

When should a lump sum be not taxed?

Lump sum should not be taxed if it satisfies the following criteria:

If the lump sum is paid from the Consolidated Fund, or payments are made out of a public fund or an account designated thus by the Minister of Finance, - then such payments would not be subject to tax;
Lump sum paid as terminal gratuity in terms of the contract, for the stated contract period, and which is not periodic;
Gratuity payments made by Government Entities/Statutory Bodies whose budget is not entirely financed from the Consolidated Fund, but the lump sum payments are clearly from a warrant from the Consolidated Fund
Lump-sum paid as terminal gratuity by Government Entities/Statutory Bodies whose annual budget is funded solely from the Consolidated Fund.
If a Government Entity or Statutory Body, whose source of funding is not limited to that from the Consolidated Fund makes a lump sum payment, then this payment would be subjected to income tax – if it cannot be clearly shown that its source was from the Consolidated Fund.
Where the contract period is 3 years or more, and the Gratuity payment is not from the Consolidated Fund, then the Regulations under the Income Tax (Termination of Employment Order) Act, should be used to determine the portion of the lump sum payment that should not be taxed. (See computation under Section on Termination of Employment in this booklet.)
Where the contract period is less than 3 years… (e) Applies.