If you have casual labourers or independent contractors, you need to see this.

Because calling someone a “contractor” doesn't automatically make them one for tax purposes.

What matters is the actual working relationship.

And getting this wrong can become an expensive problem later.

Here are 3 things every founder should pay attention to:

1️⃣ Know who is an employee and who is a contractor

An employee generally works under your direction and is integrated into your business.

A genuinely independent contractor operates with more independence and is engaged to deliver a service or specific work.

So don't just look at the title on the agreement.

Look at the reality of the relationship.

If someone is effectively working as an employee, treating them as a contractor doesn't necessarily remove your employment and PAYE obligations.

And with casual labourers, be particularly careful.

Under the Employment Act, a casual engagement can convert into a contract of service when the statutory conditions are met.

2️⃣ Apply the correct tax treatment

Once you've correctly classified the worker, you can determine the appropriate tax treatment.

Employees are generally subject to PAYE.

Certain payments to independent contractors may be subject to withholding tax, depending on the nature of the service and the applicable WHT category.

For example, KRA currently lists resident management, professional and training fees at 5%, while contractual payments are listed at 3%.

The point?

Don't assume.

Identify the nature of the payment first, then apply the correct tax treatment.

And don't forget the compliance trail.

WHT deducted must be properly remitted and the relevant certificate issued to the payee.

3️⃣ Keep the paperwork that supports your position

This is where good bookkeeping becomes very important.

Keep:

The signed agreement.

The contractor's KRA PIN details.

Invoices.

Payment records.

WHT certificates where applicable.

And records showing what work was actually delivered.

Your documentation should tell the same story as your contract.

Because when the question comes:

“Why did you treat this person as a contractor?”

You shouldn't have to explain it from memory.

Your records should answer it.

And this is the part many founders overlook:

You don't want to discover a classification problem years later when you're already facing a tax assessment.

Get the classification right.

Apply the correct tax treatment.

Keep the records.

That's much cheaper than trying to fix the problem later.

Your labour arrangements are not just an HR issue.

They can also become a tax issue.