Our 2021 Mid-Year Payroll Taxes and Associated Legislation Virtual Seminar had a good online turnout with many questions raised.
There were a couple of interesting questions that emanated from the sessions, some of which we have covered during our Q & A session. If you did not attend the Q & A session or you’ve missed the seminar altogether, here’s a quick summary of what we’ve covered at the seminar including some of the most commonly asked questions raised and our answers addressing the questions.
Here’s a quick summary of what we covered:
We did a review of the various legislative changes announced during the 2021 Budget Speech. Remember that several amendments were made after the 2021 Budget Speech, some of which were not all that apparent and which carry non-compliance risk.
We discussed the recent changes impacting the ETI scheme including changes affecting this year’s tax certificate submissions, not to mention the potential upcoming changes as proposed in this year’s Taxation Laws Amendment Bill (TLAB), and of course, the usual payroll related changes required to keep compliant with various entities in the Labour Department such as the UIF & COIDA.
Questions and Answers covered:
| Question | Answer |
| We have an employee who resigned during their maternity leave. We have a clawback clause whereby the employee must repay an amount equal to 4 months pay. Should this transaction be processed through payroll? Or, does it have no effect on the IRP5? I.e. do we reverse her earnings, or do we leave the IRP5 as is, and just allocate the clawback income to an income cost centre? | That person’s earnings would have included an appropriate tax calc. If that person’s earnings are now being reduced (i.e. they are paying back earnings already received) then the tax needs to be adjusted accordingly. The safest way to do this would be to process through the payroll – i.e. reduce the earnings and let the system recalculate the tax that needs to be “paid back”. Remember that reducing the person’s earnings by 4 months could result in the employee falling back into a lower tax bracket – hence a bit of a different tax implication. If you only adjust the GL then the payroll and the GL for the period will probably not balance. This could cause issues/queries later in the year. |
| Question | Answer |
| Is SARS thinking about ending ETI yet? | No end is in sight just yet regarding the ETI as, despite the issues, there have been a number of successes with this initiative. Only the special changes/rebates regarding the DMA will have an end date. SARS is however tightening up on the validation of various rules etc. to combat the misuse of the scheme. ETI has officially extended to 28 Feb 2029. |
| Question | Answer |
| Is a freelancer the same as an independent contractor? | Freelancers typically operate as their own business. Quite often, the term gets used interchangeably with “independent contractor”, but there can be some differences. A freelancer is considered a self-employed person who: – Pays their own self-employment taxes; – Doesn’t have any employees; – Sets their own rates; – Works remotely at their own location, wherever they choose; – Chooses which projects they want to work on; – Works with multiple clients or just one. Freelancers generally work on a project with expected outcomes for an agreed fee. The freelancer retains control over how to get the work done, working when and where they choose. Of course, the project is subject to agreed deadlines and outcomes. Freelancers may even subcontract the work to others, should they choose. The original organization does not control the work process. An independent contractor often functions as a freelancer, but typically will work with one client for a longer time frame. In many cases, independent contractors work for an hourly rate. Furthermore, they might work through a third party or agency but can also work on their own. If an independent contractor works on their own, they are responsible for taxes, insurance, etc. If they work for an agency, that agency may be responsible for paying their taxes. It depends on the relationship between that individual and the organization. Consultants may be freelancers, too. They could be independent contractors or employees. They come in to provide expertise on a specific project. But how they are classified depends on many different factors. |
| Question | Answer |
| How is the freelancer deemed to be compliant? What ”proof” is required? | The safest “proof” is a tax clearance certificate/or a SARS directive. |
| Also, under which source code is the income to be declared for the freelancer? Salaries (3601) or is there a different source code? | 3601 – salary – SARS won’t allow certain business-related deductions against this 3616 – contractor – SARS will allow deductions. Be careful- if you use code 3601 (salary) then SARS won’t allow the deductions/expenses. Use code 3616 – i.e. remuneration paid to an independent contractor. If you use the wrong code the individual will be not be allowed the permissible deductions and the individual will then need to get you to reissue the certificate, which in itself will cause a whole lot of issues. |
| What is the requirement for a freelancer to be deemed compliant? What “proof” is required? Also, how do you determine that the employee can be taxed on a lower tax bracket, are there requirements for this? | SARS looks at all the info/the scenario and does their own determination re the tax amount or % tax to be deducted. You cannot determine the tax bracket – it’s either as per directive or 25%. Also see: INTERPRETATION NOTE 17 (Issue 5) DATE: 5 March 2019 ACT: INCOME TAX ACT 58 OF 1962 SECTION: THE FOURTH SCHEDULE SUBJECT: EMPLOYEES’ TAX: INDEPENDENT CONTRACTORS |
| Question | Answer |
| How do you pay over the 25% PAYE deducted from a freelancer? Do you add it to your payroll reports when doing the EMP201? How do you then do an IRP5 if it is outside your payroll system? Do you do it manually on e@syFile? | If handled in the payroll the amount will be deducted and paid over to SARS monthly with the normal EMP201. It will then be reported through the annual EMP501/IRP5 process. You can also set up to create an IT3 rather than an IRP5 (depends on the circumstances and what your system allows). If you do this completely outside of the payroll then: A) it could be paid as a creditor (i.e. a normal invoice from a supplier). Just be careful that you check all the requirements re control, supervision, no of employees etc; B) if an individual invoice is supplied then make sure the correct tax is deducted. In this case a manual (probably!) IT3 will need to be produced; C) you can process a manual IT3/IRP5 through the e@syFile system. |
Important Note on Freelancers and Independent Contractors:
In all cases – don’t forget to do “the test”:
1 – control;
2 – supervision;
3 – no. of employees.
Always seek the advice of a professional when dealing with “out of the ordinary” tax scenarios. We have many professionals that can assist you with this. Click here to contact one of our trusted Associates.