Why is there an Employment Tax Incentive (ETI)?
Government introduced the ETI scheme to encourage youth employment. The ETI scheme offers an incentive to employers for all qualifying employees they hire. The scheme allows employers to reduce their PAYE bill each month, but does come with a number of risks employers should be aware of.
How can HRTorQue assist you?
There is significant benefit associated with ETI, but as we discuss below, there is also lots that can go wrong if not managed correctly. HRTorQue can assist you as an employer in a number of ways:
- Running your payroll (incl ETI) for you.
- Performing an ETI audit to check you are managing your ETI effectively.
- Setting up your ETI programme on your payroll software.
- Training your staff on the challenges of ETI.
- Running monthly calculations to check your ETI claims.
- Assisting with EMP501 and other reporting to make sure your ETI records are reflected correctly.
What are the benefits for employers?
The benefits of the ETI are:
- It will reduce the employers cost of hiring young people through a cost-sharing mechanism with government, by allowing you to reduce the amount of Pay-As-You-Earn (PAYE) you pay while leaving the wage received by the employee unaffected.
- For example, employers who are registered for PAYE, and who employ a person for a full month of and earns R4,500, will get R1 000 off their monthly PAYE liability (provided that the employee is a qualifying employee based on all the other remaining requirements).
- Employers will be able to claim the incentive for a 24 qualifying month period for all employees who qualify.
- The incentive amount differs based on the salary paid to each qualifying employee and whether the qualifying employee was employed after the inception of the ETI programme on 1 October 2013. ETI may only be claimed for a total of 24 qualifying months.
- This incentive will complement existing government programmes with similar objectives e.g. learnership agreements.
- The aim of the ETI is to facilitate the increased employment of young work seekers.
- The employer is eligible to claim the ETI if the employer–
- Is registered for Employees’ Tax (PAYE), or must be eligible to register for PAYE (e.g. the employer can’t register just to claim ETI, other registration requirements must be met)
- Is not in the national, provincial or local sphere of government
- Is not 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 the displacement of an employee or by not meeting the conditions as may be prescribed by the Minister by regulation.
How do I determine who is a qualifying employee?
An individual is a qualifying employee if he or she–
- Has a valid South African ID, Asylum Seeker permit or an ID issued in terms of the Refugee Act
- Is 18 to 29 years old (please note that the age limit is not applicable if the employee renders services mainly inside a special economic zone (SEZ) to an employer that is operating inside the SEZ.
- 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 paid the minimum wage applicable to that employer or if a minimum wage doesn’t apply, is paid the amount contemplated in the Minimum Wage Act and not more than R6 500 remuneration. If there is no prescribed wage regulating measure or not subject to or exempt from the requirements of the National Minimum Wage Act, a wage of at least R2 500 (where the qualifying employee was employed for 160 hours in a month) must be paid.
Important: The value of the ETI the employer may claim depends on the value of the monthly remuneration paid to the qualifying employee. If the employee has worked less than 160 hours in the month, the remuneration amount must be ‘grossed up’ to 160 hours per month to calculate the value of the ETI. The amount can then be calculated and be ‘grossed down’ in the same ratio.
Will penalties apply?
Yes, penalties will apply when:
- An employer claims the ETI for an employee who qualifies and earns less than the minimum wage (or less than R2 000 where a minimum wage is not applicable). A penalty equal to 100% of the ETI claimed for that employee will be imposed. This will lead to an under-payment of employee’s tax and possible interest and penalties in terms of the Tax Administration Act.
- An employer is believed to have displaced an employee in order to employ an employee who qualifies. A penalty of R30 000 will be levied, for each employee displaced.
How long will it be available?
The ETI came into effect on 1 January 2014 and it will end on 28 February 2029.
What can go wrong?
While ETI has a strong benefit, there are multiple risks and the impact of getting it wrong could be penalties and/or interest, the loss of your good standing with SARS until things are resolved, expensive management time to resolve issues and a cash flow impact when previously claimed ETI has to be repaid in full (often for all employees even though an error may only be for one employee, until SARS has resolved the issue).
We have written many articles about the challenges of ETI (search for ETI in our Articles), but some of the risks (not a complete list) are as follows:
- When onboarding no proper check is done of whether an employee is a proper qualifying employee
- When changing payroll systems or providers take on ETI months and other key data points are not reviewed (example with a new system the employer claims for 24 months without realising they have already claimed for 12 months).
- Hours entered into the system for work done are incorrect resulting in the ETI claim being incorrect (could be under or overstated).
- The payroll system does not capture correctly all critical data for ETI resulting in incorrect claims being made.
- SARS validation checks when submitting the EMP501 kick out the ETI claim.
- The payroll system is not set up correctly to include all relevant remuneration resulting in remuneration being understated and over claims being made.
- The employer makes a mistake, but doesn’t correct it in the right period leading to a loss of the claim or penalties and interest by SARS (SARS is strict about when a claim can be corrected)
- During the disaster management period payroll systems were not compliant (mainly because the legislation was retrospective) which means ETI calcs were incorrect and wrong claims and submissions were made.