Although it has created some political controversy, the ‘youth wage subsidy’ has now been put in place through the Employment Tax Incentive Act No 26 of 2013 (‘the Act’), which came into effect on 1 January 2014.
This Act gives employers, including nonprofit organisations (NPOs) (subject to them being registered as an employer for pay as you earn (PAYE) purposes and to having their tax affairs up to date) the opportunity to benefit from an incentive amount (the ‘youth wage subsidy’) if they employ one or more young persons from 1 October 2013 onwards. If they do, they will help to tackle youth unemployment in the country and provide work skills and experience to young people.
In a nutshell, the Act allows the employer of a newly recruited young person (South African citizen or permanent resident - aged 18-29 years old) to claim the relevant incentive amount (of up to R1 000 per month per qualifying employee in their first year of employment and up to R500 per month in their second). There is no incentive beyond the end of the second year of employment.
The total incentive amount due to the employer is claimed by deducting it from the PAYE that the employer must pay over to the South African Revenue Services on its total salary bill in each relevant month. The effect is to reduce the cost of employment each month by the total amount of the incentive. In these times of funding uncertainty, having additional new young staff members at a subsidised cost could really help.
The mechanics and effect of the subsidy can largely be illustrated by way of some examples – let us say that an NPO decides to recruit a receptionist on 1 March 2014. The successful candidate is a South African citizen of 25 years old and will be paid R3 500 per month. For the first 12 months of her employment, the NPO will be able to claim an incentive amount (subsidy) of R1 000 per month by deducting the R1 000 of the incentive from the total PAYE due to be paid over to SARS on its total payroll of, say, R5 700. The NPO will therefore pay over to SARS only R4 700 and will keep the R1 000, making the true cost of employing the receptionist only R2 500 per month for the first 12 months of her employment.
The incentive (subsidy) can be claimed in the employee’s second 12 months of employment too, but at a lower amount; if the receptionist gets a pay increase (up to R4 000 per month), the incentive becomes R500 per month. If she also takes on extra duties as an administrator, and her salary increases to R4 500, the subsidy still applies, but reduces to R375 per month.
If the NPO also recruits a new 28-year old programme officer on 1 March 2014 at a salary of R7 000, no incentive (subsidy) can be claimed (as no incentive amount (subsidy) can be claimed if the employee has a salary of R6 000 or more per month). Similarly, if the NPO recruits a 20-year old general assistant and pays her R1 800 per month, no incentive (subsidy) can be claimed – to qualify, the salary payable to the employee must be above the sector-determined minimum wage (or R2 000 if there is no wage determination).
This might therefore be the time for NPOs to benefit while also giving employment (rather than just volunteering) opportunities to young people. Is this the time to:
- Increase internal capacity by employing young people in newly created positions at a subsidised cost of employment?
- Offer, in the process, skills training and experience to young people?
- Review your systems to ensure that you have the necessary documentation in place (signed employment contracts, copies of the employees’ identity books or valid permits etc.)?
If you would like to learn more about how the subsidy works or the required supporting systems, please see below for more details or contact us at CMDS for advice.
Overview of the Employment Tax Incentive Act
An employer is eligible to receive the employment tax incentive if that employer:
- is registered for employees’ tax (PAYE);
- is not in the national, provincial or local sphere of government or 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);
- is not a municipal entity;
- is not disqualified by the Minister of Finance due to ‘displacement’ of an employee or to not meeting such conditions as may be prescribed by the Minister by regulation. [Displacement relates to the unfair dismissal of an existing employee and her/his replacement by a person who qualifies for the employment tax incentive.]
An individual is a qualifying employee if she or he:
- has a valid South African ID or an asylum seeker permit and
- is 18 to 29 years old; or
- is of any working age but renders services:
- inside a special economic zone (‘SEZ’) to an employer that is operating inside the SEZ; or
- to an employer that operates in an industry designated by the Minister of Finance.
- is not a domestic worker;
- is not a ‘connected person’ to the employer;
- was employed by the employer or an associated person to the employer on or after 1 October 2013; and
- is not an employee for whom the employment tax incentive is applicable (i.e. the employee is paid R6 000 per month or more; or is paid less than the minimum wage applicable through a collective agreement, sectoral determination or binding bargaining council agreement [or below R2 000 per month when a minimum wage is not applicable).
Calculating and claiming the incentive on a monthly basis:
Qualifying employers should calculate and claim the incentive on a monthly basis by following these steps:
- Identifying all qualifying employees for that month (there is no limit to the number of qualifying employees);
- Determining the applicable employment period for each qualifying employee;
- Determining each employee’s ‘monthly remuneration’; and
- Calculating the amount of the incentive per qualifying employee as per the table below:
|Monthly remuneration||Employment tax incentive per month (during the first 12 months of employment of the qualifying employee*)||Employment tax incentive per month (during the next 12 months of employment of the qualifying employee*)|
|R 0 - R2 000||50 percent of monthly remuneration||25 percent of monthly remuneration|
|R 2 001 - R4 000||R1 000||R500|
|R 4 001 - R6 000||Formula:
R1 000 – (0.5 x [monthly remuneration – R4 000])
(e.g. if a qualifying employee receives a salary of R4 500 per month, the tax incentive will be R750 [being R1 000 less 0.5 x (R4 500 – R4 000) – being R250])
R500 – (0.25 x [monthly remuneration – R4 000])
(e.g. if a qualifying employee receives a salary of R5,500 per month, the tax incentive will be R125 [being R500 less 0.25 x (R5 500 – R4 000) – being R375])
*In determining the first or the second 12-month period, only the months in which the employee was a qualifying employee are taken into account. For example, the employee may be a qualifying employee in the first three months but not a qualifying employee in the fourth and the fifth months. If the employee is a qualifying employee in the sixth month, the sixth month is taken as month number four when computing the relevant 12-month period.
The incentive is claimed by deducting the amount of the incentive from the PAYE that is payable by the employer for that month. However, the incentive will be unavailable to the employer in a particular month if that employer:
- has failed to submit any return;
- has any tax debt outstanding (excluding those circumstances where an agreement has been concluded for a deferral payment or for compromise of a tax debt, where a tax debt has been suspended pending an objection or appeal, or where the tax debt is less than R100);
- If the incentive amount due to an employer in any month exceeds the PAYE payable by that employer, the balance of incentive amount may be carried forward to the next month. The employer can also carry forward the incentive amount to claim in a subsequent month when she or he does fails to reduce the PAYE by the employment tax incentive in any month, despite the employment tax incentive being available; and
- If the employment tax incentive was not available to the employer due to non-compliance, the employment tax incentive is deducted in the month in which the employer corrects the non-compliance.
With regard to any roll-over of the employment tax incentive, please note that, on the first day of the month following the end of any six-month period covered by the PAYE reconciliation (i.e. 1 September or 1 March each year), the rolled-over amounts may not exceed R6 000 in respect of each qualifying employee who is in the employment of that employer on that date.
Penalties for non-compliance:
Where the employer claims an employment tax incentive in respect of an employee who was paid less than the minimum wage (or less than R2 000 where a minimum wage was not applicable), the employer is liable for a penalty equal to 100 percent of the employment tax incentive received in respect of that employee (in addition to paying back the incentive to SARS). Further, where the employer is deemed to have displaced an employee, the employer is liable to pay a penalty of R30 000 in respect of that employee.
Impact on the bi-annual reconciliation process:
The EMP501 and IRP5 forms will be updated with fields relevant to the employment tax incentive.
- This article first appeared on the CMDS website.