Should the deduction of notice pay from an employee who left the company without serving the contractual notice period be treated as an after tax deduction from the final salary, or should it be a negative earnings that will result in a reduction of the taxable income?
The value of the notice pay should be administered as negative earnings and reported against the SARS source code used for salary (code 3601) so as to reduce the taxable income of the employee. The correct amount of (net) taxable income actually received by the employee will then be reflected on the IRP5. The value of the notice pay should not be processed as a deduction because this does not reflect the substance of what has happened.
The employee owes the employer the notice pay because he or she did not fulfil their contractual obligation and work the full period for which he was paid a salary. Therefore the salary amount for the year is reduced to compensate for the period of time that was not worked.