Employment Tax Incentive: A Win-Win for Business and Youth Employment

With South Africa’s unemployment rate at an all-time high—especially among young people—businesses are in a position to make a meaningful difference. The Employment Tax Incentive (ETI) offers a way for employers to reduce payroll costs while helping young South Africans, particularly those from historically excluded communities, gain valuable work experience. But, while it’s a win-win for both businesses and youth, there are a few things you need to know to avoid the common pitfalls and make sure you're getting the full benefit.

What Exactly is the ETI?

The Employment Tax Incentive (ETI) was introduced in 2014 to encourage businesses to hire young, inexperienced individuals—especially those between the ages of 18 and 29. Put simply, it’s a tax rebate for employers who hire qualifying young people. But it’s not just about saving money on taxes; it’s about giving young people an opportunity to gain the work experience they need to improve their chances of long-term employment.

How Does the ETI Work?

The ETI is calculated based on the employee's age, their monthly wage, and how many hours they work. If the employee is between 18 and 29 years old, earns less than R6,500 a month, and works full-time (at least 160 hours per month), you can claim up to R1,000 a month for that employee. The rebate directly reduces your PAYE tax liability, making your payroll costs more manageable. And this isn't just a one-time deal—you can claim the ETI for up to 24 months for each employee. So, it can offer some nice savings in the long run.

Who Qualifies for the ETI?

Employees:

• Aged between 18 and 29
• Earning less than R6,500 a month
• Working full-time (at least 160 hours a month)
• A South African citizen, permanent resident, or refugee
• Not a domestic worker or connected to the employer

Employers:

• Registered with SARS for PAYE
• Fully compliant with tax and reporting obligations

Just to be clear, “full-time” means at least 160 hours per month. Be sure to track that carefully to avoid mistakes!

Why Does the ETI Matter for Your Business?

For small businesses, the ETI can make a real difference. It helps reduce payroll expenses, making it easier to bring in entry-level staff without stretching your budget too thin. Larger businesses can also use the ETI to diversify their workforce, support youth employment, and get some relief on their tax bills.

Most importantly, though, this initiative is part of a bigger picture—helping tackle South Africa’s unemployment problem. By offering young people work opportunities, you’re contributing to the economy in a meaningful way.

Watch Out for Misuse

While the ETI is a great incentive, it’s important to use it responsibly. There have been cases where businesses have signed employees up for the ETI just to get the rebate without offering real work or training. That’s not the intention of the incentive.

The government has cracked down on this and tightened the rules to ensure the ETI is used properly. So, if you're planning to claim the ETI, make sure that the young employees you're hiring are genuinely getting the opportunity to learn and grow. They need meaningful work, not just a quick way to get a tax break.

Compliance Risks: How to Avoid Penalties

To make the most of the ETI, it’s important to stick to the rules. Here are some things to keep in mind to avoid penalties:

• Track Your Employees: Keep accurate records of who’s eligible for the ETI—make sure you’re on top of their age, salary, and hours worked.
• Double-Check Calculations: Mistakes in your claims could lead to penalties, so it’s important to get your numbers right.
• Be Transparent: If an employee no longer meets the criteria, stop claiming the ETI for them. Being honest will save you from headaches later on.

Penalties for Misuse

If you're found to be making false claims or trying to game the system, you could face some stiff penalties, including:

• Incorrect Claims: If you claim for employees who aren’t eligible, you’ll be penalised 100% of the amount you claimed.
• Displacement of Employees: If you let go of an existing employee to make space for an ETI-eligible worker, you’ll be fined R30,000 per displaced employee.
• Incorrect Remuneration Claims: Miscalculating or incorrectly claiming for an employee’s wages will also lead to penalties.

In short, stick to the rules, keep things above board, and you won’t have any problems.

ETI vs. Learnership Tax Incentives

You might also be considering the Section 12H Learnership Tax Incentive, which offers tax deductions for businesses that upskill employees through formal learnerships. While both the ETI and Section 12H offer tax relief, the key difference is that the ETI focuses on hiring young employees, while Section 12H is about formal skills development through structured learning.

Both are beneficial, but it’s important to know which one fits your situation.

The Role of Skills Development Providers

If you're working with a skills development provider, make sure they’re doing more than just helping you tick the boxes for ETI claims. The goal should be to give your employees real skills and experience that they can carry with them in their careers. If you’re using the ETI to enrol employees in learnerships or training programs, make sure those programs lead to something that benefits both your employees and your business.

How to Claim the ETI

To claim the ETI, you’ll need to include it in your PAYE submissions to SARS (specifically on the EMP201 form). The rebate is applied directly to your PAYE liability, reducing the amount you owe in taxes. You can claim the incentive for up to 24 months, but it doesn't need to be consecutive—only the months when the employee is eligible count towards the 24 months.

Next Steps to Get Started

• Review Your Employees: Take a look at your workforce and see who qualifies for the ETI (18-29 years old, earning less than R6,500, and meeting other criteria).
• Keep Accurate Records: Track the details for each employee’s eligibility—this is essential for smooth ETI claims.
• Submit Your Claim Correctly: Fill in the EMP201 form accurately and make sure your calculations are correct.
• Consult a Professional: If you're unsure about anything, it’s a good idea to consult a tax professional or HR consultant to avoid mistakes.

The ETI is a great tool for any business looking to reduce payroll costs while offering young South Africans meaningful work opportunities. But it’s not just a quick fix—it’s essential to follow the rules to avoid penalties and to ensure you're using the incentive properly.

If you're eligible, don’t let this opportunity pass you by. It’s a win-win for your business, the youth, and the country. All it takes is some effort to ensure your claims are accurate and above board.