Inside Construction Firm Owners' Struggle With KRA Tax Compliance

A version of this article appeared on The Business Daily.

Stakeholders in the local construction sector are increasingly seeking clarity on their tax obligations as the Kenya Revenue Authority tightens its grip on small and medium-sized enterprises. The focus has shifted to the specific roles of sole directors and shareholders, many of whom are unsure if they qualify as employees of their own firms for tax purposes.

Under current Kenyan law, a company director is legally classified as an office-holder rather than an automatic employee. This distinction is critical for those running private construction companies, as it determines whether they should be remitting Pay-As-You-Earn (PAYE) on their own compensation.

To be recognized as an employee and thus eligible for PAYE, a director must have a formal contract of service with the company. Without this document, the KRA may view payments to directors as something other than salary, which can lead to complications during audits.

For sole shareholders who do not hold a director’s portfolio, the situation is even more precarious. A shareholder is an owner, but does not necessarily have the legal authority to manage daily operations unless they are also appointed as a director. If such individuals take money from the business without a clear payroll structure, the taxman may classify those funds as dividends, which attract a different set of tax rates.

Construction firms, particularly those in the "Mjengo" sector, are feeling the heat. Recent queries from industry players suggest a growing realization that many have been operating outside the required regulatory framework. This lack of formal structure is now leading to significant trouble with the tax collector as enforcement becomes more automated through the iTax system.

Beyond PAYE, employers must also navigate the 2026 statutory requirements. These include the Affordable Housing Levy, which remains a mandatory 1.5% deduction for both the employer and the employee. Furthermore, the transition to the Social Health Insurance Fund (SHIF) is now fully operational, requiring a flat rate of 2.75% of gross salary with no upper limit.

Compliance also extends to the National Social Security Fund (NSSF). As of February 2026, the Tier II Upper Earnings Limit has increased to 108,000 Shillings. This adjustment means that high-earning directors who are on the payroll will see a significant jump in their monthly contributions compared to previous years.

Failure to observe these deadlines is proving costly. The KRA currently imposes a penalty of 5% of the tax due for late PAYE payments, along with a 1% monthly interest charge. For construction startups, these compounding fines can quickly lead to financial distress or even the seizure of assets.

Tax experts advise that sole directors should formalize their engagement through written contracts if they intend to draw a regular salary. This provides a clear trail for KRA auditors and ensures that all statutory deductions are handled correctly. Proper documentation is no longer just a formality but a survival strategy for those in the building industry.

President Ruto has previously emphasized the need for all citizens to contribute their fair share to the national basket. For the construction sector, which is a key driver of the Bottom-Up Economic Transformation Agenda, this means a shift from informal "Mjengo" operations to structured, tax-compliant businesses.