How Payroll Works for Small Business Owners in South Africa

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Managing a business involves a lot of responsibilities, with payroll management being one of the most critical.

Understanding the intricacies of the payroll system in South Africa is essential for compliance and smooth operations, whether you're a startup or a seasoned business operator.

Here's a simplified breakdown of the payroll process.

Step 1: Hiring Employees

First, ensure your human resources (HR) basics are in order, such as employment contracts. While our accounting firm doesn't handle HR directly, we can recommend outstanding professionals for assistance.

We will need these contracts to ensure the payroll is set-up accurately so please send this to us if we prepare your businesses payroll.

It is also advisable to send an employee take-on form to your employee to record details like banking details, ID numbers etc., because this information is needed to set up an employee on the payroll.

Step 2: Registering for PAYE

Businesses that employ staff or pay directors as employees must implement a payroll system and register for Pay as You Earn (PAYE) with the South African Revenue Service (SARS).

PAYE is the system through which employers deduct income tax and contributions for Unemployment Insurance Fund (UIF) and Skills Development Levy (SDL) from employees' wages.

The registration process can take 20 working days to go through so we suggest that you register before you need to pay your staff and give yourself enough time to ensure the registration goes through.

Step 3: Monthly PAYE Submissions

After registering, you're required to submit monthly declarations (EMP201) to SARS.

This declaration details the amounts paid to employees, taxes deducted, and UIF and SDL contributions. Our firm assists in preparing and submitting these declarations on your behalf and can answer any questions you may have.

Please remember to send us all employee information including medical aid contributions and retirement annuity contributions that they pay monthly, to ensure the employees get the best tax benefits they can.

Grizelda’s thought: It is always wise to use an employee take on form and include questions like

  • Do you have medical aid and what are your monthly contributions?

  • Do you have a retirement annuity and what are your monthly contributions?

Make sure that you get the payroll information over to us as soon as possible to ensure staff members get paid on time and without mistakes.

Step 4: Understanding PAYE, UIF, and SDL

Taxes and contributions are calculated on the monthly amounts paid to employees. These include:

  • PAYE: The income tax deducted from employees' salaries.

  • UIF: A contribution that provides short-term relief to workers when they become unemployed or are unable to work.

  • SDL: A levy to fund learning and development in South Africa.

Tax Incentives

In South Africa, the government offers several incentives and benefits to employers who are registered for Pay As You Earn (PAYE) with the South African Revenue Service (SARS).

These incentives are designed to encourage employment, skills development, and compliance with tax laws. Here are some of the key incentives and benefits available:

1) Employment Tax Incentive (ETI):

The ETI is aimed at encouraging employers to hire young job seekers by providing a cost-sharing mechanism through the tax system.

It allows employers to reduce the amount of PAYE owed to SARS, based on the number of qualifying employees hired.

The incentive is available for employees aged 18 to 29, who earn below a certain threshold, and is calculated based on a sliding scale depending on the employee's salary.

2) Skills Development Levy (SDL) Rebates:

Employers who pay the Skills Development Levy (1% of the total payroll) are eligible to claim back a portion of the levy paid, through Mandatory Grants and Discretionary Grants.

This is done by submitting a Workplace Skills Plan (WSP) and an Annual Training Report (ATR) to their respective Sector Education and Training Authority (SETA).

This system is designed to encourage employers to invest in the training and development of their workforce.

3) Learnership Tax Incentives:

Employers who enter learnership agreements with employees can qualify for tax deductions.

This incentive is available for both existing employees and new hires who undertake a registered learnership program.

Employers can claim a deduction at the commencement and completion of the learnership, encouraging skills development and job creation.

4) Youth Employment Service (YES) Initiative:

The YES initiative aims to combat youth unemployment by providing 12-month work experiences to young South Africans.

Participating employers can enhance their B-BBEE (Broad-Based Black Economic Empowerment) scorecard levels upon meeting specific targets and criteria.

This program not only benefits the youth by providing them with valuable work experience but also rewards employers for their participation.

Step 5: Implementing a Payroll System

Manual payroll management can be daunting and time-consuming - trust us!

Many businesses opt for payroll software, such as Sage or SimplePay, which simplifies the process and ensures accuracy.

These systems can integrate with accounting software, streamlining financial management and reducing manual reconciliation work.

We use SimplePay for our retainer clients, and this allows us to send payslips electronically as well as give access to our clients to view their own businesses payroll system.

This allows them to pull reports and make valuable business decisions on their companies most important resource – their staff.

Step 6: Tax Calculation and Submission

Payroll software calculates the tax and contributions based on tax rates provided by SARS.

It is important to make sure that all the information is correctly processed on the payroll software otherwise it will miscalculate the PAYE due. The employer can be penalised if they deduct too little PAYE from their employees.

Step 7: Payment Deadlines

Taxes and contributions calculated through payroll must be paid to SARS by the 7th of the following month. Late payments can incur penalties, so it's vital to adhere to these deadlines.

Fringe Benefits

Fringe benefits refer to the extra benefits provided to employees or directors on top of their salaries or wages, such as company cars, housing, or health insurance.

These perks are considered part of an employee's compensation package but are not given in the form of cash.

In South Africa, these benefits are taxable under the term "fringe benefits" and require employers to calculate their cash equivalent value for tax reporting purposes.

Taxing and Reporting Fringe Benefits:

  • Taxable Value: Employers need to determine the taxable value of each fringe benefit provided. This involves calculating how much each benefit is worth in monetary terms.

  • Tax Implications: Once the value is determined, it must be reported to the South African Revenue Service (SARS) through the payroll software and is subject to income tax.
    This means that the value of these benefits will be added to the employee's taxable income, affecting the amount of tax they owe.

  • Complexity: The rules surrounding the taxation of fringe benefits can be intricate, with different types of benefits having specific valuation methods as outlined by SARS, so please ask us if you would like assistance in calculating the value of the fringe benefit.

  • Compliance: Accurate reporting is crucial to remain compliant with South African tax laws.
    Misreporting or failing to report fringe benefits can lead to penalties and interest charges. It's important for employers to keep detailed records of all benefits provided and their respective valuations.

Midyear reconciliations and end of Year Obligations

EMP501 reconciliations in South Africa are essentially a way for employers to report to the South African Revenue Service (SARS) how much money they've paid their employees, and how much tax they've deducted from these payments, over a specific period.

This process is crucial for tax compliance and helps ensure that the right amount of tax is collected from employee salaries. Here's a breakdown of the process in very basic terms:

  • What is an EMP501? An EMP501 is a document that employers must fill out and submit to SARS.
    This document contains summary information about the total salaries paid to employees, the tax that was deducted from these salaries (PAYE), and any other contributions like Unemployment Insurance Fund (UIF) and Skills Development Levy (SDL) for a specific six-month period.

  • Why do employers need to do this? It's a legal requirement. This process helps SARS ensure that the correct amount of tax is being paid on behalf of employees.
    It also allows for the verification of the amounts declared by employees in their personal income tax returns.

  • How often is it done? Twice a year. Employers need to submit their EMP501 reconciliations twice during the financial year – at the midpoint (interim period) and at the end of the financial year (final period).

  • What's involved in the reconciliation process? Collecting Information: The employer gathers all payroll information, including salaries or wages paid, tax deducted, and contributions to UIF and SDL.

  • Filling out the EMP501: This involves entering the summarised payroll data into the EMP501 form.
    This data must match the monthly EMP201 submissions (where you declare monthly tax deductions) and the employee's IRP5/IT3(a) certificates (which show an employee's annual earnings and deductions).
    If we use a reputable payroll software, the majority of the work is done through the payroll software and very little intervention is required. That is why we suggest using Simplepay (Anlo uses this program).

  • Submitting to SARS: Once the EMP501 is correctly filled out and double-checked, it needs to be submitted to SARS, either online through eFiling or in some cases, directly at a SARS branch.

  • What happens if you don't do it or do it wrong? There could be penalties. If the information is incorrect, late, or not submitted at all, SARS may impose penalties on the employer.
    It's important to be accurate and timely with this submission to avoid any unnecessary fines or complications.

  • What are the benefits for employees? Accuracy in Tax Returns. This process ensures that the information on the employee's IRP5 certificate is accurate, which is essential for the employee to complete their own tax return accurately.
    It helps employees see that the correct amount of tax has been deducted throughout the year and assists them in claiming any tax refunds they might be entitled to.

The EMP501 reconciliation is a critical checkpoint in the tax process, serving as a way to ensure both employers and employees are up to date and compliant with their tax obligations in South Africa.

In Summary

Managing payroll in South Africa involves several important steps, from ensuring proper HR documentation and registering for PAYE, to submitting monthly EMP201 declarations and understanding the complexities of taxes and benefits.

To navigate these responsibilities effectively, it's crucial to use a reliable payroll software program, like SimplePay, which simplifies the process, ensures accuracy, and helps avoid penalties due to errors or late submissions.

As your accountant, we're here to assist you with these tasks, but we rely on you to provide all the necessary employee details and information in a timely manner.

By working together and utilising the right tools, we can ensure that your payroll is managed efficiently, allowing you to focus on growing your business while remaining compliant with South African tax laws.