supportbaywiser-com | Jul 3, 2019 |
Why should one differentiate between employees, contractors and consultants
Differentiating between an employee, a contractor and a consultant may not be decisive for companies or start-ups, because all of them supply services (or goods in some cases). The Income Tax Act however recognises them separately and hence all of them get different tax treatment.
Why is this classification vital
According to Indian income tax law, a person has to deduct tax at source (TDS), while making specified payments to another person.
TDS is deducted at different rates under different sections, and the minimum exemption limit is distinct under each such section.
Since interest is charged on lower deduction or late deposit of TDS, erroneous classification can lead to severe financial implications. Hence, you should read this blog carefully to understand the tax treatment for all three types of persons
How is TDS deducted on salaries paid to employees
Every month, while paying salary to an employee, the employer deducts tax (TDS) under section 192. It is deducted at the average rate of income tax calculated by income tax slab rates, applicable in a financial year.
After end of financial year under tax laws (March 31), the employer issues Form 16 to the employee, containing the amount of payment and tax deducted on such payment to the employee.
As per the Income Tax Act, a person is considered an employee when an explicit employer-employee relationship exists, as mentioned in the agreement. Salary includes
How is TDS applicable to contractors
Every time, while paying amount to a contractor, a person must deduct tax (TDS) from such payment under section 194C. If the contractor is an individual or HUF, the rate of TDS will be 1%, otherwise 2%.
TDS will apply only if the payment amount (each time a payment is made) is more than INR 30,000 or the aggregate amount paid to the contractor in a financial year is more than INR 100,000.
A person will be considered a contractor when he carries out any work that includes
How will TDS apply on payment to consultants
Any person (other than an individual or HUF), will deduct taxes (TDS) at the rate of 10% under 194J while paying for
An individual/ HUF will also have to deduct taxes (TDS) under section 194J if the total sales, turnover or gross receipts from business or profession is more than INR 2 crores (limit specified for tax audit under section 44AB), in the last financial year.
Thus, it is important to independently label the service providers to ensure due compliance with tax provisions.
Still in a dilemma to categorise a person correctly
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