Understanding which employees qualify for the Employment Tax incentive

Before the payroll system can calculate the employment tax incentive, there must be an Eligible Employer who has Qualifying Employees.

March 18, 2014

This is part 2 of an article titled, What the Employment Tax Incentive Means for Your Business

By Rob Cooper, Director of Legislation at Sage VIP Payroll & HR

Before the payroll system can calculate the employment tax incentive, there must be an Eligible Employer who has Qualifying Employees.

Eligible Employers

The concept of an employer is not defined in the Employment Tax Incentive Act. However an ‘eligible employer’ is an entity:

1. That is in the private sector, and
2. That is registered for PAYE.

Before dealing with the concept of a ‘qualifying’ employee, we must first know who the ETI Act defines as employees.

ETI Employees

An employee for the purposes of the ETI Act is a natural person who:

  • Works directly for another person; and
  • Who is paid remuneration by the other person; and
  • Who is not an independent contractor.

Comments on the Definition of an ETI Employee

1. Only natural persons (individuals) can be an ETI employee. Non-natural persons such as Personal Service Providers that are Fourth Schedule* employees cannot be ETI employees.

2. Only individuals that work “directly” for the employer are ETI employees.

The word ‘directly’ can be interpreted to mean that a written or verbal employment contract is in place between the employer and the employee, and that the remuneration for the services rendered is paid directly by the employer to the employee.

This excludes learners in terms of a learnership agreement that are not employees as well as all workers supplied to a company by a labour broker. The labour broker itself is eligible for ETI for its own employees.

Finally ‘casual’ or ‘temporary’ workers are not excluded as ETI employees by the word ‘directly’. There is seldom a written contract of employment in these cases (although we are moving in that direction), but a verbal contract is sufficient for the purposes of the Incentive.

3. Employers may not claim the ETI for independent contractors, even when they’re deemed to be Fourth Schedule employees.

Categories of ETI Employees

The following categories of Fourth Schedule employees are employees in terms of the ETI Act –

1. Permanent employees
2. Non-permanent employees (‘casuals’ or ‘temps’)
3. Seasonal workers
4. Fixed term contractors
5. Learners in terms of a learnership agreement (those that are employees).

Which ETI Employees Qualify for the ETI?

Of the five categories of ETI employees detailed above, only those that qualify in terms of the criteria specified in the ETI Act will generate a tax incentive benefit for the employer. In simple terms, ETI employees must meet the all following criteria to qualify for the incentive:

  • Employed on or after 1 October 2013.
  • No less than 18 and no more than 29 years old in the month the ETI is claimed.
  • Have a South African ID or an Asylum Seeker permit.
  • Paid a wage that that is not less than the minimum wage for that sector (or R2 000 if there is no minimum wage).
  • Paid remuneration that is less than R6 000 per month.

The employee does not qualify for the incentive if he or she a ‘connected person’ to the employer or is a domestic worker. Casuals, as long as they qualify according to the above criteria, are qualifying employees and can generate an employment tax incentive for the employer.

Date of Engagement

Only individuals employed on or after 1 October 2013 can qualify. This rule ensures that the employment tax incentive doesn’t apply to every employee who qualifies in all other respects, but only to new engagements. This underlines the purpose of the incentive – to assist employers financially to employ youngsters over and above their normal hiring requirements.

Note that if an employee was employed before October 2013 by the employer, then left, only to return to work for the same employer after 1 October 2013, then this employee will qualify for the ETI.

Asylum Seekers

At a late stage, an interesting qualifying condition was added to the legislation that opened the door for non-South African citizens who are in possession of an Asylum Seeker Permit to qualify for the ETI. This addition to the criteria for a qualifying employee is difficult to administer and I hope that it is removed at some stage in the future.

Multiple Employment

A single employee who works during the same period of time for more than one employer can generate the tax incentive for all of the employers, just as long as the employers are not ‘associated persons’ to one another.

For example, an employee can have an 8-to-5 day job, and also work for various restaurants in the evenings or over weekends. All of his employers can benefit from the ETI ‘generated’ by the same individual, obviously as long as the qualifying criteria are in place.

Final Comments on Qualifying Employees

The qualifying criteria form the most important and complex section of the ETI Act to understand.

Once there is an eligible employer with at least one qualifying employee, then a good payroll software package should automatically calculate an ETI amount in respect of all the qualifying employees.

It is then up to the employer to ‘claim’ the ETI reduction of PAYE on the EMP201 form each month.

* An employer is defined by the Fourth Schedule of the Income Tax Act as any person who pays or is liable to pay any person (natural or legal) any amount by way of remuneration.