Want to save on your employment costs and income tax at the same time?

An Employment Tax Incentive (ETI) was introduced by SARS on 1 January 2014. It encourages employers to hire young and less experienced work seekers by reducing the costs payable to SARS on a monthly basis provided certain criteria are met.

Employers that can qualify must:

– be registered for employees’ tax (PAYE);
– not be in the national, provincial or local sphere of government;
– not be a public entity 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);
– not be a municipal entity;
– not be disqualified by the Minister of Finance due to displacement of an employee or by not meeting such conditions as may be prescribed by the Minister by regulation.

Qualifying employee must:

– have a valid South African ID;
– be 18 to 29 years old (certain exceptions apply to Special Economic Zones yet to be announced);
– not be a domestic worker or an independent contractor;
– not be a “connected person” to the employer;
– be employed by the employer or an associated person to the employer on or after 1
October 2013
; and
– be an employee in respect of whom an employer is qualified for ETI purposes (i.e. the employee is paid at least the minimum wage per specified wage regulations OR paid a wage of at least
R2 000 per month (if a minimum wage is not applicable);
– not earn above R6 000 per month.

How does it work?

The employer will calculate and claim the incentive on a monthly basis and apply the sliding scale (see schedule here) for the respective monthly remuneration. The ETI incentive then reduces the normal employee’s tax (PAYE) which an employer would be liable to pay to SARS in a specific month.  Certain limitations and carry-forward of claims would apply if the employer is not tax compliant with SARS.

Example:

Mr X (age 20) is employed by Employer ABC at a salary of R3 000 per month on 1 June 2014.  ETI cost saving for Employer ABC in first 12 months of Mr X’s employment is R1 000 x 12 = R12 000.

In the following 12 months, this reduces from R1 000 to R500 per month x 12 = R6 000.

Provided Employer ABC remains tax compliant, they can save 25% of Mr X’s salary cost totalling R18 000 for the first 24 months of his employment! 

Furthermore, SARS will regard the ETI benefit amount as exempt from Income Tax as opposed to being a recoupment of staff related expenses. 

Actual cashflow example to Employer ABC for Mr X in the first 12 months of employment:

Salary Cost => R3 000 x 12

R36 000

Tax deduction (Salary expense = R36 000 x 28%)

(R10 008)

ETI Incentive received tax free in 1st year (R1 000 x 12)

(R12 000)

CASH COST TO EMPLOY MR X

R13 992

Please contact our offices on 021 683 4834, should you wish to take advantage of this exciting tax saving or have any additional queries in this regard!

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