The Employment Tax Incentive

What is the Employment Tax Incentive?

Through a cost-sharing mechanism with the government, the employer’s cost of hiring is reduced by allowing the employer to reduce the amount of Pay-As-You-Earn (PAYE).

The increase in the unemployment rate and the youth being economically marginalized seems to be a complex cycle to break. Most private entities are disinclined towards hiring youth due to a lack of skills and experience, considering the cost it may carry for further training. In this year’s State of the Nation Address (SONA), President Cyril Ramaphosa stated that the government had taken measures that give way to the growth of private businesses since the private sector in South Africa creates 80% of the jobs.

Considering such job creation percentages and the increase in ETI values announced by the Minister of Finance, most companies would be rewarded if this percentage were youth or hired younger candidates instead. Unfortunately, not all companies are knowledgeable about the ETI, so they never take advantage of this tax benefit.

A good payroll package is a starting point for benefiting from this tax break. Part of the reason why so many companies do not take advantage of ETI may be the amount of administration, i.e., calculations and paperwork of each employee it demands.

While making the contributions, the employee wages will be left unaffected. Bearing in mind the 160 hours in the month the employee works, the actual remuneration amount paid will be less than 160 hours.

The remuneration amount must be ‘grossed up’ to 160 hours per month to calculate the value of the ETI. The amount can then be calculated and be ‘grossed down’ in the same ratio.

For instance, If the qualifying employee was employed for 80 hours in the month and is paid R1 500, the remuneration must be ‘grossed up’ to 160 hours to check whether the amount falls within the wage requirements. Employers and employees must comply with specific requirements to take advantage of this benefit.

Employer

• The employers must comply with tax regulations and register with the South African Revenue Services for the Pay-As-You-Earn.

Employee

• The employee must first render their services on pay to a company that is not of a public entity or belong to any sphere of the government listed in Schedule 2 or 3 of the Public Finance Management Act (other than those public entities designated by the Minister of Finance by notice in the Gazette)
• The employee must be between 18 and 29 and have a valid South African ID, Asylum Seeker permit, or an ID issued in the Refugee Act. The employee will qualify if they are not a domestic worker or connected to the employer.

Apart from the ETI being an excellent strategic way for job creation, there may be significant upheavals if not followed as it should be. This trouble includes penalties if an employer is believed to have displaced an employee to employ an employee who qualifies. A fine of R30 000 will be levied for each employee displaced.

For more information on ETI, visit www.sars.gov.za

Article by Zanele Zulu