Employment Tax Incentive: Why say no to R1280 per month per qualifying employee

What is it?

ETI is a tax incentive awarded to qualifying employers aimed at encouraging employers to employ employees between the ages of 18 to 29.

It is a temporary programme covering only the first two years of employment. The ETI commenced on 1 January 2014 and will end on 31 December 2019. It applies to qualifying employees employed on or after 1 October 2013 by eligible employers.

Saving on PAYE liability by employer

The amount of PAYE paid to SARS by the employer will be reduced by the amount of ETI utilized.

The ETI is a non-taxable incentive and thus has no income tax implication for the employer. The ETI will also be exempt from VAT.

The total saving per qualifying employee earning minimum wage is thus calculated as follows:

Can you afford not to source for qualifying employees!?

Who qualifies?

The employer is eligible to receive the ETI if the employer –

• Is registered for employees’ tax (PAYE);
• The employer is tax compliant in respect of all taxes.

An individual is a qualifying employee if he or she –

• Has a valid South African ID;
• Is 18 to 29 years old;
• Is not a domestic worker;
• Is not a “connected person” to the employer;
• Was employed by the employer on or after 1 October 2013;
• The employee does not earn less that the minimum wage of the industry or R2 000 per month where no minimum wage is prescribed and not more than R6 000 per month.

How is it calculated?

Calculating the ETI is a complex and technical calculation and has to be done in accordance with the Employment Tax Incentive Bill published in the Government Gazette.

The ETI amount for each employee is calculated according to the table below:

There are a number of technical requirements to adhere to when calculating the ETI. This is not a comprehensive list but are a few of the more practical issues a payroll administrator has to deal with when calculating the ETI:

• Each month it has to be determined if the employer is tax compliant and thus is a qualifying employer;
• The payroll administrator has to determine whether the qualifying employees did not earn less than the basic minimum wage or R2 000 per month as applicable and not more than R6 000 per month. This is a complex calculation where the employee was not employed for the full month, or where over-time and other fringe benefits are included in the remuneration. The ETI calculated has to be apportioned in the manner prescribed by ETI Bill where the employee was not employed for a full month.
• Each employee has to have a valid South African ID. The payroll administrator thus has to make sure that each employee is in possession of a valid South African ID.  In the rural areas not all employees are in possession of a valid South African ID.
• Accurate record has to be kept of the period the employee is in the employment of the employer, since the ETI is only applicable to the first 24 months of employment.  This is particularly difficult in the agricultural sector where employees are employed on a seasonal basis. Only the months the employee is a qualifying employee will be used in determining the employee’s month of employment in order to determine the formula to be used according to the table above.
• Accurate record has to be kept of the ETI the employer qualifies for, the amount utilized against the PAYE due to SARS and the amount rolled over to the following period.

How does the employer claim the ETI?

The ETI is deducted from the employer’s total PAYE liability for the month.  If the ETI exceeds the PAYE liability for the month, the excess may be carried forward to the next month.

The ETI unutilized at the end of each six-month easyfile reconciliation period, will be refunded to the employer if the employer is tax compliant.

Penalties and interest

An employer that receives the ETI for an ineligible employee must pay a penalty to SARS of 100% of the ETI received for that employee.

An employer who has wrongly claimed the ETI would not have been entitled to reduce the monthly employees’ tax payment.  That employer will have underpaid employees’ tax and must pay a percentage-based penalty plus interest levied by SARS.

It is thus of utmost importance that payroll administrators ensure that ETI is only claimed for qualifying employees and that the ETI amount is calculated correctly.

The ETI unutilized at the end of each six-month period will be accounted for by creating a debtor on the balance sheet of the employer and an ETI income on the income statement.  When the unutilized ETI is paid to the employer by the Government, the receipt will be allocated against the debtor on the balance sheet.

Payroll software

Due to the complexity of the ETI calculation, the comprehensive record keeping requirements etc it is recommended that employers use payroll software, for example VIP, for the calculations.

The advantages of VIP are extensive, for example:

• Accurate calculation of ETI if the employer details are setup correctly by the payroll administrator;
• Accurate recordkeeping;
• Less time spent on payroll administration as well as on the six-monthly easyfile reconciliation capturing.

The ETI information has to be captured for each employee when preparing the qualifying employee’s IRP5.  This is a time consuming process and will result in unnecessary costs.

We can help you

Bdk Auditors has the necessary knowledge and expertise to help you maximise your ETI advantage.

We provide payroll services according to the needs and requirements of our clients.  These services include but are not limited to:

• Monthly processing of payroll on VIP (this includes calculation of net salaries, employees taxes, ETI etc)
• Preparing and submitting monthly EMP201 returns
• Preparing of payslips to be distributed to employees
• Bi-Annual easyfile processing and submission
• Preparing of IRP5’s for employees
• Dealing with SARS enquiries, reviews and audits

Please contact us should you wish to discuss your Employment Tax Incentive strategy or would like to receive more information on the payroll services provided by us

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)