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The Employee Tax Incentive (ETI) scheme — What it’s all about

The Employee Tax Incentive (ETI) scheme — What it’s all about

Without stating the obvious, South Africa has a huge unemployment problem. Stats SA estimates that unemployment is at 27.5%—that’s almost 3 in every 10 people. Even worse, according to Stats SA, unemployment among the youth (between the ages of 15 and 34) is at a staggering 38.2%. When fully analysed, some reports suggest that real unemployment among the youth could be closer to 60%. These are not nice figures to read. In the tough economic times we currently find ourselves in, addressing the unemployment problem is a tremendous challenge.

On the positive side, there are a growing number of employment schemes and programs that train young people to become more employable. Government is doing its best to turn things around. But, some critics say that not enough is being done—significantly more needs to be done. Fact: one of the established mechanisms of improving levels of youth-employment (specifically those aged 18 to 29 years) is the Employee Tax Incentive (ETI) scheme. Some employers say it works, whilst other say that it doesn’t. Another fact: The ETI scheme serves a purpose and employers need to understand it.

The Employee Tax Incentive (ETI) scheme — What it’s all aboutWhat is ETI?

ETI is a tax mechanism aimed at enabling companies to employ young job-seekers. The program entails cost-sharing that partners with government. It does not affect the wage of the employee at the end of each week or month. With ETI, a reduced level of PAYE (Pay As You Earn) tax is payable for all qualifying employees, thereby benefiting the employer in the long-run. The ETI scheme was introduced in January 2014.

Who qualifies for ETI?

There are many employers who might well be missing out on benefiting from the ETI scheme, simply because they do not know who qualifies. The set of criteria for ETI qualification is straightforward.

Employers

For employers to qualify for ETI they must be registered with the South African Revenue Services (SARS) for PAYE. Companies that are non-compliant may conditionally qualify (with restrictions) until they are fully tax compliant.

Employees

For employees to qualify for ETI the guidelines are equally as straightforward. SARS defines qualifying employees as follows:

  • Employees must have a valid South African ID.
  • Employees must be from 18 to 29 years old.
  • Employees must not be domestic workers.
  • Employees must not be related or “connected” to the employer.
  • Employees should earn at least a minimum wage in terms of the national minimum wage.
  • Employees should earn less than R6 000 per month in total remuneration (basic salary plus all other benefits).

Claiming ETI

Claiming ETI is straightforward. Firstly, there is no limit on the number of ETI employees that can be hired. Additionally, no refunds may be claimed if the employer is unable to produce a valid South African ID for the employee that the employment tax incentive is being claimed for.

To claim the employment tax incentive, the employer will simply decrease the amount of PAYE payable for each qualifying employee. This is done by completing the ETI fields on EMP201 document that is submitted to SARS each month.

Ed. — For more on how to do this, contact Paymaster People Solutions for more information.

The Employee Tax Incentive (ETI) scheme — What it’s all aboutCalculating ETI

When using the Paymaster Payroll system, calculating ETI is dead-easy. The standard process of calculation is as follows: in order to calculate ETI amounts, there are 5 straightforward steps that need to be followed for all qualifying employees in a company. These 5 steps are as follows:

  1. All qualifying employees for the month must be identified — very easy when using the Paymaster Payroll system.
  2. The employment period of each employer (1st twelve months or 2nd twelve months) must be determined — handy tools within the Paymaster Payroll system can automatically identify this.
  3. Calculate and determine the monthly remuneration for each employee.
  4. Work out the amount of the employment tax incentive for each employee being claimed for.
  5. Aggregate the amount.

The following table outlines the calculation:

Year 1Year 2
Monthly RemunerationEmployment Tax Incentive per month during the first 12 months of employment of the qualifying employeeEmployment Tax Incentive per month during the next 12 months of employment of the qualifying employee
R0 - R2000 50% of Monthly Remuneration 25% of Monthly Remuneration
R2001 - R4000R1000 R500
R4001 - R6000Formula: R1 000 – (0.5 x (Monthly Remuneration – R4000))Formula: R500 – (0.25 x (Monthly Remuneration – R4000))

Simple Example of ETI

A company has 5 employees that qualify for ETI. Their remuneration is as follows:

  • Employee 1 earns R2000
  • Employee 2 earns R3500
  • Employee 3 earns R4500
  • Employee 4 earns R5000
  • Employee 5 earns R6500

The calculation is summed up in the table below:

EMPLOYEEMONTHLY REMUNERATION
FIRST 12 MONTHS
SECOND 12 MONTHS
CalculationAmount which may be claimed on EMP201 per monthCalculationAmount which may be claimed on EMP201 per month
1R2000R2000 X 50%R1000R2000 X 25%R500
2R3500Fixed deductible amount for remuneration from R2001 to R4000R1 000Fixed deductible amount for remuneration from R2001 to R4000R500
3R4500R1 000 – [0.5 X (R4500 – R4000)]R750R500 – [0.25 X (R4500 – R4000)]R375
4R5000R1 000 – [0.5 X (R5000 – R4000)]R500R500 – [0.25 X (R5000 – R4000)]R250
5R6500Does not qualifyDoes not qualifyDoes not qualifyDoes not qualify
TotalR3250R1625

Penalties surrounding ETI

As with many tax incentives there are penalty clauses within the parameters of the ETI scheme. Before the introduction of the minimum wage, there were 2 instances when penalties had to be applied. However, with the new minimum wage in force, there is now only one reason where a penalty will apply; namely: an employer will be liable for a penalty of R30,000 when deemed to have displaced an employee in order to employ an eligible individual. Remember this (as a cautionary warning): ETI is about job creation, not moving people around to save on tax.

To conclude

The ETI scheme is a simple tax incentive scheme to understand. It is also fairly easy to calculate. However, should you have any concerns or questions surrounding the ETI scheme, you are urged to contact your nearest SARS branch. Alternatively, you are invited to contact Paymaster People Solutions—why not allow Paymaster’s payroll specialists to offer you the best professional advice on which course of ETI scheme action to take for your business.

Matt Newnham

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