Employees Tax

Employees' tax represents tax withheld by an employer from remuneration paid to an employee. Remuneration includes salary, wages, commission, bonuses, the taxable value of fringe benefits and 60% of a travel allowance, as well as annuities and pensions paid to annuitants and pensioners. Employees' tax is then classified as:

Standard income tax on employees (SITE)

Special provisions were introduced during 2010 to phase-out the Standard Income Tax on Employees (SITE) system over a three year period and will be effective from the 2012 year of assessment. This process does not affect employers and SITE calculations should be done and reflected on IRP5 tax certificates as in the past.

Fringe benefits: Employer

Implications:

  • The employer's SITE deduction will constitute a final tax liability for the year for those employees subject to SITE only.
  • Employees subject to SITE only are released from the obligation to submit annual tax returns.
  • For other taxpayers, any deductions made during the year in respect of SITE and/or PAYE will be a minimum tax liability and will constitute a credit towards the final tax liability.

"Remuneration" means earnings from employment (including annuities from pension, provident or benefit funds), but does not include income from investments, voluntary purchase annuities or annuities from a retirement annuity fund.

Pay as you earn (PAYE)

PAYE is the tax applicable to any portion of net remuneration in excess of R70 700 and to remuneration which is not remuneration (e.g. lump sum benefits, travel allowances, and any remuneration paid to a director of a company or earned by a person who has an assessed loss).

PAYE is calculated on:

  • The balance of remuneration remaining after the deduction of contributions to a pension fund or retirement annuity fund (RA fund).
  • At the option of the employer, the balance of remuneration remaining after the deduction of contributions to an RA fund by an employee and in respect of which proof of payment has been furnished to the employer.
  • At the option of the employer, any premium paid by the employee in respect of which proof of payment has been furnished to the employer, in terms of an insurance policy:
    • To the extent that it covers that employee against the loss of income as a result of illness, injury, disability or unemployment; and
    • In respect of which all amounts payable in terms of that policy constitute income as defined, but limited to the deduction to which the employee is entitled under section 11 (a); and
  • At the option of the employer, any contribution by the employee to a medical scheme as contemplated in section 18 (1) (a) in respect of which proof of payment has been furnished to the employer, if the employee is entitled to a rebate under section 6 (2) (b).

Retirement Funding:

From T-day (still to be confirmed), employer contributions to retirement funds will become a fringe benefit in the hands of employees for tax purposes. Individuals will be able to receive an annual tax deduction on employer and employee contributions to a pension fund, provident fund or retirement annuity fund up to 27.5% of the greater of remuneration and taxable income (excluding retirement annuity or lump sum income). A ceiling of R350 000 will apply.

PAYE and labour brokers:

With effect from 27 July 2004, a labour broker who receives or is likely to receive more than 80% of his or her income from one client or any associated institution, is able to apply for a certificate of exemption from withholding PAYE from the remuneration of his or her employees, provided that he or she employs more than three full-time employees:

  • Who are on a full-time basis engaged in the business of that labour broker of providing or procuring persons for clients of that labour broker; and
  • Who is not connected persons in relation to that labour broker.

As from 1 March 2009 a company, close corporation and trust is no longer defined as a labour broker and is therefore no longer eligible for an exemption certificate.  Instead the definition of "Personal service provider" in paragraph 1 of the Fourth Schedule must be considered in respect of companies, close corporations and trusts which provide a service (including the provision of labour).  This does not necessarily imply that PAYE is deductible.  The client to whom a company, close corporation or trust render services will have to determine whether or not a company, close corporation or trust meets the definition of "Personal service company" before it makes a payment.  The reason for that is because if a company, close corporation or trust is a personal service provider as defined, the client must deduct employees' tax from payments made to the company, close corporation or trust (the client will be held responsible by SARS if the client has an obligation to deduct employees' tax and the client did not do so).