As an employer, it is your responsibility to withhold tax from your employees’ salaries and remit it to SARS.
Employee tax is a key component of the South African tax system and is the mechanism through which employers withhold and remit income tax on behalf of their employees. Commonly known as PAYE (which stands for Pay-As-You-Earn), it is exactly what it says on the tin—tax needs to be deducted from income as it is earned, and paid over to SARS.
This article provides an overview of PAYE, including the basis of calculation, obligations for employers, and rights and responsibilities of employees. Specific allowances and fringe benefits, and the tax treatment thereof, will be covered in future articles.
How PAYE is calculated
The PAYE for an employee is determined by their total earnings, which include their regular salary, bonuses, commissions, and specific non-cash benefits. As their income increases, they are taxed at higher rates in a progressive system.
The National Treasury sets the tax rates each year. These rates are applied to taxable income once allowable deductions like retirement fund contributions have been considered. Additionally, tax credits for medical expenses and scheme contributions, as well as rebates for primary, over-65, and over-75 age groups, are taken into account based on the employee’s age.
Employers have several obligations related to PAYE, which include:
Registration: Employers must register for employees’ tax with SARS before making any payments to employees that are subject to PAYE.
Calculation and withholding: Employers are responsible for deducting the appropriate amount of PAYE from employees’ earnings based on the tax tables provided by SARS. This deduction is made before paying the employee and is reflected on the employee’s payslip.
Submission and payment: Employers are required to submit monthly EMP201 returns to SARS, accompanied by the payment of the tax withheld from employees. These returns should be submitted by the 7th of the month after the month for which the PAYE is applicable. If the 7th is a Saturday, Sunday, or public holiday, then the payment is due on the last business day before that.
6-monthly reconciliation: Employers are required to complete two EMP501 reconciliations annually. The interim reconciliation covers the first six months of the employee tax year, from March to August, while the final reconciliation addresses the entire employee tax year that ends in February.
Issuing tax certificates: Each employee must be issued with a tax certificate at the end of the tax year, or upon termination of employment if this takes place during the year. The certificate contains all earnings, allowances, deductible expenses, and fringe benefits. If PAYE is deducted, an IRP5 is issued, if not, an IT3(a) is issued.
Record-keeping: Employers are required to maintain accurate records of employees’ earnings, tax deductions, and other relevant information. These records must be kept for a specified period and made available for inspection by SARS if requested.
Responsibilities of employees
Employees also have certain responsibilities when it comes to PAYE:
Income tax number: Employees must obtain an income tax number from SARS. This unique identifier is used to link an employee’s tax records and payments.
Accurate information: Employees are responsible for providing accurate and up-to-date information to their employer—including personal details, tax numbers, and any changes in circumstances that may impact their tax liability.
Proof of age: All taxpayers receive a basic allowance that ensures that earnings below a specific threshold do not incur any income tax liability— known as the primary rebate. However, from the beginning of the tax year in which they turn 65, they receive an additional rebate, with a further rebate granted in the year in which they turn 75.
Reviewing payslips and tax certificates: Employees should review their payslips and annual tax certificates (IRP5/IT3(a) certificates) provided by their employer. These documents outline their earnings, tax deductions, and other relevant information, ensuring transparency and accuracy.
Filing annual tax returns: If required, employees must file their annual income tax returns with SARS, providing additional information on their income, deductions, and tax credits.
It’s important to understand that PAYE is not the final tax. The deductions made throughout the year are essentially provisional payments. After considering both PAYE and any applicable provisional tax, the employee will either have a shortfall and owe money to SARS, a surplus where SARS owes the employee, or the amounts will balance out.
For employees, PAYE ensures a straightforward method of paying income tax. By having the tax deducted directly from their salaries, employees do not need to make individual tax payments to SARS. The employer handles the calculation and remittance process, making it more convenient for employees to comply with their tax obligations.
However, employees should review their payslips regularly to ensure that the correct amount of tax is being deducted from their salaries. In some cases, individuals may be eligible for certain tax deductions, credits, or rebates that can reduce their overall tax liability.
For both employers and employees, they should seek appropriate tax advice to discharge their respective obligations to SARS.
In conclusion, PAYE is a fundamental aspect of the South African tax system. It facilitates the efficient and prompt collection of income tax from employees. Employers play a crucial role in deducting and remitting the tax on behalf of their employees.
WRITTEN BY STEVEN JONES
Steven Jones is a registered SARS tax practitioner, a practising member of the South African Institute of Professional Accountants, and the editor of Personal Finance and Tax Breaks.
This article is a general information sheet and should not be used or relied on 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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).