Consultant or Employee: How KRA Tells the Difference

KRA looks at how the work really runs, not at what the contract calls it. If your business controls how and when the person works, pays them regularly and treats them as part of the team, expect KRA to see an employee and ask for PAYE, whatever the contract says. A genuine consultant runs their own business, invoices you for the work and decides how to do it.

Why the answer matters

The two routes are taxed very differently:

• Employee: pay, fees and benefits are employment income under section 5 of the Income Tax Act, and section 37 makes the employer deduct PAYE. Our PAYE guide explains how it works.
• Consultant: the Act treats a payment for consultancy or professional services as a professional fee, but only if it is not a payment to an employee by the employer. For a resident, you deduct 5 percent withholding tax once fees reach KES 24,000 in a month (section 35(3)(f) and the Third Schedule).

If KRA decides you got it wrong, the bill falls on you as the employer. Section 37(2) allows a penalty of 25 percent of the tax or KES 10,000, whichever is greater, and interest can also apply. The same people may also raise questions on NSSF, SHIF and the Housing Levy, which have their own rules.

How the test works

The Income Tax Act gives no checklist for this. The test comes from decisions of the Tax Appeals Tribunal and the courts, which separate a contract of service (employment) from a contract for service (an independent business). In a 2025 decision, the Tribunal considered four things: control, integration, economic reality and mutual obligation.

In plain words, these questions come up:

Question	Points to employee	Points to consultant
Who controls the work?	You set the hours, methods and daily tasks	They decide how to deliver an agreed result
Are they part of the team?	They have a line manager and a role in your structure	They come in for a defined job
Whose business is it?	They rely on you, on fixed pay	They invoice, use their own tools and can serve others
Is the work ongoing?	There is a steady flow of work, month after month	The engagement has a clear scope and end
What benefits do they get?	Leave, payslips, allowances	None of these

No single answer decides it. The whole picture does.

What recent cases show

These are decisions on their own facts, and a Tribunal decision can be appealed. They do not give a formula.

• Palladium Development and Consultancy (2024): KRA succeeded. The Tribunal found the people named in consultancy agreements were under the company’s control and were to that extent employees. KRA pointed to reporting lines, integration into teams, per diems, recurring work and daily-rate pay. A lack of invoices in the consultants’ own names counted against the company.
• Qhala Limited (2025): the taxpayer succeeded. KRA treated 43 people as employees. The Tribunal disagreed. There were no fixed hours, benefits or payslips, the consultants used their own tools and invoiced for their work, and they ran their work independently.
• Cipla Kenya (2025): KRA succeeded. Two people moved from employment contracts to consultancy arrangements. The company could only show an agreement with a separate company, and it did not prove that PAYE did not apply.

The lesson from the three is the same: proof of how the work actually ran matters more than the wording. The burden is on you, because section 56(1) of the Tax Procedures Act requires the taxpayer to prove KRA’s decision is wrong.

Do not relabel staff

Moving employees to consultancy contracts to take them out of PAYE, while the job stays the same, is not tax planning. The cases above show why it does not hold up. Knowingly giving KRA a false picture can also bring a tax shortfall penalty of 75 percent under section 84 of the Tax Procedures Act. If someone works like an employee, put them on payroll.

What to do

1. List everyone you pay fees to regularly. Run each one through the questions above, honestly.
2. Move anyone who looks like staff onto payroll, and take advice on past periods before KRA asks.
3. For genuine consultants, make the paper match the reality. Agree a defined scope, get invoices in their own name and let them control the method.
4. Do the withholding properly. Deduct the tax, then pay and file within five working days under section 35(5) of the Income Tax Act. Ask for an eTIMS invoice too.
5. Keep the evidence. Contracts, deliverables, invoices and proof of other clients are what you will rely on in a dispute.
6. If KRA assesses you, watch the clock. You have 30 days to object to the assessment, not counting weekends and public holidays.

If you have people in the grey area, our tax team can go through the arrangement with you.