How SARS Decides If You’re a Personal Service Provider (PSP) When You Have One Client

If you’re a South African:

• Running a company that only services a foreign client, or
• Earning 100% of your income from one local or international client,…you may be classified as a Personal Service Provider (PSP) — and the tax consequences are serious.

PSP classification triggers harsh limits on deductions, higher compliance requirements, and a flat corporate tax with no access to small business incentives. Let’s break down exactly how SARS makes this decision, and what it means for your tax return.

Step 1: Are You Receiving “Remuneration”?

(Fourth Schedule, Paragraph 1)

The first question SARS asks is whether your company is receiving remuneration, not business income. If you’re the one doing the work — and the company exists only to channel payments — SARS may treat the company’s income as remuneration. This especially applies if the working arrangement looks like employment.

Important: The independent contractor exclusion doesn’t apply to PSPs. Once your company is flagged, that defence falls away.

If remuneration applies → move to Step 2.

Step 2: Is the Work Done by a “Connected Person”?

(Fourth Schedule & Section 1(1) of the Income Tax Act)

Next, SARS checks if the person doing the work is a connected person to the company. That includes:

• Shareholders (with 20%+ shareholding)
• Directors
• Beneficiaries of trusts
• Family members of the above

If yes → move to Step 3.

Step 3: Do You Employ 3 or More Full-Time Unconnected Employees?

(Fourth Schedule, Paragraph 1(b)(ii))

This is your one big escape hatch. If your company:

• Employs 3 or more full-time staff
• They are not connected persons
• They are directly involved in service delivery

Then SARS will not treat you as a PSP. If yes → no PSP status. If not → move to Step 4.

Step 4: Would You Be an Employee Without the Company in Between?

(Fourth Schedule, Paragraph 1(b)(ii)(aa))

This is the “substance over form” test. Would you legally be an employee if your company didn’t exist? SARS will look at:

• Control or supervision by the client
• Whether you use the client’s systems or tools
• If you are financially dependent on the client
• Whether you bear any business risk

If yes → PSP classification applies.

BONUS TEST: The 80% Rule

(Fourth Schedule, Paragraph 1(b)(ii)(bb))

Even if you’re independent, you can still be a PSP if:

• 80% or more of your company’s income comes from one client, or
• From clients that are connected to each otherThis test catches:
• South Africans contracting full-time to foreign companies
• Ex-employees who invoice their former employer
• One-person companies with only one source of revenue

If you fail this and Step 3 → you’re a PSP.

What Happens If You’re a PSP?

Once classified, your company:

• Is taxed at 27% (or 45% if it’s a trust)
• Can’t deduct most expenses
• Must withhold PAYE if applicable

Section 23(k): What You Can’t Deduct

Here’s what SARS won’t let you claim if you’re a PSP:

Salary to Yourself

Even if you:

• Pay yourself a director’s salary

• Withhold PAYE

• Submit IRP5s You cannot deduct the salary. You can only claim the PAYE paid — and only as a tax credit (section 6quat(1)(b)(ii)). 

Fringe Benefits

No deductions for:

• Company cars
• Cellphone allowances
• Travel reimbursements
• Medical aid contributions for connected persons

Training and Education

You can’t deduct costs for courses or upskilling for directors/shareholders — even if it’s to improve your earning potential.

Mixed-Use Assets

Section 23(k)(vi) allows deductions for asset-related costs only if used wholly and exclusively for trade. That means:

• No cellphone bills if used personally
• No rent for your home office
• No shared car or internet expenses

Entertainment and Soft Costs

Client lunches, tools, and subscriptions used by the connected person are non-deductible. Even if they help you earn income, they’re linked to a blocked remuneration path.

What You Can Deduct

(Section 23(k)(ii)–(vi))

You’re allowed to deduct:

• Salaries to non-connected full-time employees (23(k)(ii))

• Legal fees tied to income generation (23(k)(iii))

• Bad debts already included in income (23(k)(iv))

• Retirement contributions for staff (23(k)(v))

• Costs of assets used only for business (23(k)(vi))

Final Takeaway: If You Earn from One Client, Know the Rules

Whether you’re:

• A software developer working for one US client
• A consultant invoicing your old employer
• A professional offering services via a company

You need to be very clear about PSP rules. The moment SARS decides you’re a PSP:

• Your tax position changes
• Your deductions shrink
• Your business could look like a disguised salary structure