January 26, 2022


Accounting + Finance Blog

Meaning of Contract for Employment in Nigeria

Meaning of Contract for Employment in Nigeria

An employment contract is a different ball game. A person involved here is not paid wages nor salary. Also, he or she won’t be able to pay PAYE tax. This contract is for individuals or groups of people that own a business. What is this term? Let’s see this through together.

Meaning of Contract for Employment

1. An employment contract is an agreement whereby an individual or group of individuals carry out a job for an entity for a fee.
2. According to the Institute of Chartered Accountant of Nigeria (ICAN) study pack for taxation: it is an “agreement whereby a person is engaged as an independent contractor, such as a self-employed person or vendor engaged for a fee to carry out an assignment or project for the company.

Key Explanations

An agreement. The agreement is usually within the individual and his entity or for another entity. An individual selling fashion wears has an agreement with his or her entity to sell such goods. While a group of accountants providing bookkeeping and tax services to small businesses has an agreement with each small business to help provide the aforementioned services. Also, they have an agreement with other firms to provide such services.

READ ON  Cash Emoluments Meaning and Key Explanations

Independent contractor or self-employment. An employment contract involves an individual who is either an independent contractor or self-employed. A contractor seeks the services of another company for a fee. A plumbing service, electricians, building engineers, computer contractors, and software engineers are a few examples of independent contractor. They may also be referred to as self-employed. Why? They own a personal business.

A fee. The fees are paid to the self-employed person on completion of the job. Such a fee is called revenue. The fee must include the total cost to provide the goods or service and a profit margin.

Employer-employee relationship. A contract for employment does not have an employer-employee relationship. Therefore, it is excluded from the Nigeria Labor Act. Furthermore, a self-employed person is not paid a salary. However, he or she can withdraw from the business regularly to meet personal and family needs.

How Taxation affects Contract for Employment

An individual or group of individuals involved in an employment contract is not bonded by Pay As You Earn (PAYE) tax. However, its tax return is computed based on the laws in the Personal Income Tax Act.

READ ON  Tax administration Meaning and Key Explanations

He or she has access to tax on a preceding year basis. This means that he pays tax liabilities for 2020 in 2021. This is different from a contract of employment that pays taxes on an actual year (PAYE) basis. That is, the tax is paid on the month the salary is received. He received his salary net of taxation.

It is the fee earned by the individual in a contract for employment that is access to tax after adjusting for allowable and non-allowable expenses. To qualify, the business must be registered as a business name with the corporate affairs commission (CAC).


To conclude, an employment contract is a type of employment for self-employed individuals. Here, he or she owns a firm that is registered either as a business name. And not as a company. More so, such individuals have access to tax on a preceding year basis after deducting allowable expenses and adding back non-allowable ones.