Author: Karl van der Merwe
Recently, we have encountered numerous requests to terminate employees , who have been paid for a full month (for example May 2024), but with a termination date backdated to part way in the month that has already been closed. This presents a challenge as the system is unable to recalculate tax based on new termination records entered.
The tax implications
When an employee is terminated mid-month, retrospectively, it affects the tax calculations. Payroll systems calculate tax based on periods worked. For instance, if an employee worked full periods (three periods from March to May), the tax calculation differs significantly compared to working partial periods. For example, terminating an employee on the 21st May with no future payments reduces the periods worked from 3 to 2.6. This change impacts the averaging and annualisation of taxable income, resulting in a different PAYE total due. Typically, this leads to increased tax due to the same taxable earnings being spread over fewer tax periods.
Consider an employee with a taxable income of R10,000 per month. Comparing full periods worked (March to May) versus 2.6 tax periods worked, there is almost a R600 difference in tax. This discrepancy triggers Employee Tax Validations (ETVs) from SARS when IRP5s are submitted, as SARS recalculates tax based on the reduced tax periods worked.
Lessons learned
We had a similar case in 2023 where an employee was terminated after the main payroll run had closed, effective mid-month (around the 14th), with the last pay interval being the same month. The employee won a CCMA case and received a settlement months later, for which a directive was applied. During processing, the system deducted more tax than indicated on the directive, due to recovering tax from the termination period.
The importance of understanding payroll impacts
It is crucial for both payroll teams and clients to understand these impacts. Incorrect processing leads to ETVs and potential issues with SARS. From recent submissions, several support clients have experienced ETVs due to these discrepancies.
UIF declarations
Additionally, there is an effect on UIF declarations. An employee terminated after the payroll run closure and declarations submission appears as active in the termination month but does not appear in the subsequent month’s declaration, leaving the employee incorrectly listed as active at UIF.
To avoid these issues, careful consideration is needed when terminating employees mid-month. Accurate processing ensures compliance with tax regulations and prevents future complications. For any questions or further assistance, please reach out to our support team today.