How does the new ‘Employment Tax Incentive’ (ETI) work?

How does the new ‘Employment Tax Incentive’ (ETI) work?

Legislation, Tax

What is ETI?
ETI is a tax concession made to encourage employers to hire young people with no work experience. The employer may claim the ETI from the South African Revenue Service (SARS) by reducing the amount to be paid over in terms of PAYE by the total ETI calculated on the basis of qualifying employees. This tax concession came into effect on 1 January 2014.

Who qualifies for ETI?
Employers who are registered for PAYE purposes and whose tax affairs are in order, are permitted to claim ETI. If an employer’s tax affairs are not in order ETI may still be claimed, subject to certain restrictions, as soon as the tax requirements are complied with.

Who does not qualify for ETI?
Employers who have been disqualified by the Minister of Finance due to their replacing existing workers or who do not comply with the regulations prescribed by the Minister.
Instances where the employee’s monthly remuneration:
Is less than the regulated remuneration, or R2 000 where remuneration is not regulated.
Would be less than R2 000 if the employee worked for only a portion of the month.

When may ETI be claimed?
Employers may claim ETI if they have workers in their employ who comply with the following requirements:

  • They must be in possession of a South African identity document.
  • They must be between 18 and 29 years old. (This age limit is not applicable if the employer’s fixed business address falls within a special economic zone, or if the employer operates in an industry designated by the Minister of Finance.)
  • They must not be domestic workers.
  • They may not be family of the employer or be in any way connected to the employer.
  • They must earn at least the minimum wage or, should there be no required minimum wage, R2 000 per month.
  • Their earnings must be less than R6 000 per month (fringe benefits included).

Note: ETI may be claimed for a maximum of 24 months per qualifying employee.

How is ETI claimed?
An employer can claim by reducing the PAYE payable monthly, by the total ETI as calculated for each qualifying employee. This can be done by completing the ETI field on the monthly EMP201. There is no limit on the number of qualifying employees that may be hired.

Note: Employers must be able to produce the identity documents of the employees that ETI is claimed for, if requested to do so by SARS.

How is ETI calculated?
Employers must carry out the following steps each month:
Identify all the qualifying employees for the month.
Determine the relevant claim period – first 12 months or second 12 months.
Determine each qualifying employee’s monthly remuneration.
Determine the amount of ETI for each qualifying employee.
Calculate the total ETI for the month.

The ETI is calculated as follows:

Monthly Remuneration Year 1 – First 12 months ETI

for Qualifying Employees

Year 2 – Second 12 months

ETI for Qualifying Employees

R0 – R2 000 50% of monthly remuneration 25% of monthly remuneration
R2 001 – R4 000 R1 000 R500
R4 001 – <R6 000 Formula: R1000 – [0.5 x

(monthly remuneration –

R4 000)]

Formula: R500 – [0.25 x

(monthly remuneration –

R4 000)]

If a worker was employed for only part of the month, calculations must be adjusted accordingly.

Note: If the value of the ETI is more than the PAYE liability of the entity for a specific month or if the employer is not able to claim for a specific month, the ETI is carried over to the next month.

What fines are applicable?
Fines will be imposed should, inter alia:

  • An employer claim ETI for an employee who does not qualify. The penalty will be equal to 100% of the ETI claimed and the employer will consequently face PAYE underpayment and penalties and interest.
  • An employer replaces an employee with a qualifying employee. In such a case the employer could be fined R30 000.

The foregoing is only a limited summary for information. Consult [email protected] for more information.