LU8 – EMPLOYEES TAX AND PROVISIONAL TAX
A person’s taxable income is only assessed by SARS after the end of the tax year of assessment. If it was only at this time that a
taxpayer could pay his/her tax then he/she could potentially have a significant cash flow problem at this point. SARS therefore
has two mechanisms which allow a taxpayer to prepay his/her taxes:
Employees’ tax system
Provisional tax system
The Fourth Schedule to the Income Tax Act deals with employees’ tax and provisional tax. Employees’ tax is tax which is
withheld from remuneration paid to an employee by his/her employer. The employer pays this tax over to SARS on the
employees’ behalf and this payment represents a prepayment of the employees’ normal tax. Provisional tax is paid on a six-
monthly basis by companies, trusts and individuals who earn income other than employment income. The payment of
provisional tax represents an advance payment of normal tax. Prepaid tax is not an additional tax, it is a means of collecting
normal tax over the course of the year so that the tax burden does not become an annual hurdle.
EMPLOYEES’ TAX
Employees’ tax is a withholding tax and refers to the tax that the employer deducts from employees’ remuneration at the end of
every wage/salary cycle (i.e. weekly, fortnightly, monthly, annually). The tax is based on the taxable remuneration received from
the employer for the wage/salary cycle converted to an annual equivalent. The annual equivalent amount is then used to
calculate an annual tax deduction according to the sliding scale schedule. To determine the tax deduction for the payroll cycle,
the annual tax amount must be converted to a monthly or weekly amount.
SARS conveniently publishes deduction tables. The tables show incremental remuneration amounts and the associated
employees’ tax deduction. These are published as weekly, fortnightly, monthly and annual deduction tables. They allow the
determination of, say, a monthly deduction without having to first calculate an annual equivalent.
Employees’ tax is also known as PAYE (pay as you earn). Previously, employees’ tax on the first R 60 000 earned by an employee
was known as SITE (Standard Income Tax on Employees). Since the tax threshold is now greater than R 60 000, SITE no longer
exists
DEFINITIONS
REMUNERATION
'Remuneration' means any amount of income which is paid or is payable to any person by way of any salary, leave pay, wage,
overtime pay, bonus, gratuity, commission, fee, emolument pension, superannuation allowance, retiring allowance or stipend,
whether in cash or otherwise and whether or not in respect of services rendered, including:
Amounts referred to in paragraph (a), (c), (cA), (d), (e), (eA) or (f) of the gross income definition – i.e. annuities,
payments in respect of services rendered, restraint of trade payments, lump sum benefits, pension/provident and
retirement lump sum benefits, transfers from state pension funds and any amounts received or accrued in
commutation of amounts due under a contract of employment or service.
Fringe benefits.
Allowances and advances (excluding travel and allowable subsistence allowances).
80% / 20% of travel allowances received.
50% of an allowance granted to a holder of a public office.
Any gains determined in respect of S8B and S8C (share options).
Remuneration does not include the following:
Fees paid to any person in respect of a trade carried on independently by him e.g. doctors, attorneys, auditors.
Disability pensions in respect of certain Acts.
Amounts paid to an employee to reimburse him for expenditure incurred during the course of his employment.
Annuities under an order of divorce or similar settlement.
, EMPLOYER
Employer is defined as a person who pays or is liable to pay remuneration to someone else. This definition includes:
A trustee in an insolvent estate.
An executor or administrator of a benefit fund, retirement fund or any other fund.
Anyone acting in a fiduciary capacity such as a trustee of a trust.
A person responsible for paying remuneration out of public funds.
EMPLOYEE
Employee is defined as:
A person (other than a company) who receives remuneration or to whom remuneration accrues.
A natural person who is a labour broker.
A person who works for a labour broker.
A personal service provider (company or trust).
Anybody who or which the minister of finance declares to be an employee.
Any director of a private company.
EMPLOYMENT VS. INDEPENDENT TRADE
Since remuneration, for the purposes of the Fourth Schedule, excludes payments made to individuals carrying on an
independent trade, it is necessary for us to look at the factors that will determine whether an engagement will be treated as
employment or as an independent trade.
Most importantly, a person will not be deemed to be carrying on a trade independently where the services he is required to
perform are performed mainly at the premises of the person who will pay for the services and the person who renders the
services will be subject to the control or supervision of any other person as to the manner in which his duties are to be
performed or as to his hours of work.
It is further provided that where such a person employs three or more unconnected full-time employees throughout the year of
assessment he will be deemed to be carrying on a trade independently – regardless of where his services are performed and the
supervision and control that he is subjected to.
Where a person is deemed to be carrying on an independent trade, payments made to him will not qualify as remuneration, and
therefore will not be subject to employees’ tax. Where, however, a person is deemed not to be carrying on an independent
trade, he will be treated as an employee (a person who is receiving remuneration) and employees’ tax must be withheld from
any payments made to him in terms of the Fourth Schedule.
LABOUR BROKERS AND PERSONAL SERVICE PROVIDERS
LABOUR BROKERS
A labour broker is a natural person who provides a client with other persons to render a service for the client, or who procures
other persons for the client. The client pays the labour broker and the labour broker pays his employee, who performs the work
for the client.
A labour broker who is not in possession of an exemption certificate will be subject to PAYE by the client on payments made to
him at rates applicable to individual taxpayers. In calculating his taxable income the labour broker will only be able to deduct
remuneration paid to employees from his fees received.
PERSONAL SERVICE PROVIDERS
A personal service provider is a company, close corporation or trust where any services rendered on behalf of the entity to its
client is rendered personally by any person who is a connected person in relation to such entity, and one of the following
applies:
A person’s taxable income is only assessed by SARS after the end of the tax year of assessment. If it was only at this time that a
taxpayer could pay his/her tax then he/she could potentially have a significant cash flow problem at this point. SARS therefore
has two mechanisms which allow a taxpayer to prepay his/her taxes:
Employees’ tax system
Provisional tax system
The Fourth Schedule to the Income Tax Act deals with employees’ tax and provisional tax. Employees’ tax is tax which is
withheld from remuneration paid to an employee by his/her employer. The employer pays this tax over to SARS on the
employees’ behalf and this payment represents a prepayment of the employees’ normal tax. Provisional tax is paid on a six-
monthly basis by companies, trusts and individuals who earn income other than employment income. The payment of
provisional tax represents an advance payment of normal tax. Prepaid tax is not an additional tax, it is a means of collecting
normal tax over the course of the year so that the tax burden does not become an annual hurdle.
EMPLOYEES’ TAX
Employees’ tax is a withholding tax and refers to the tax that the employer deducts from employees’ remuneration at the end of
every wage/salary cycle (i.e. weekly, fortnightly, monthly, annually). The tax is based on the taxable remuneration received from
the employer for the wage/salary cycle converted to an annual equivalent. The annual equivalent amount is then used to
calculate an annual tax deduction according to the sliding scale schedule. To determine the tax deduction for the payroll cycle,
the annual tax amount must be converted to a monthly or weekly amount.
SARS conveniently publishes deduction tables. The tables show incremental remuneration amounts and the associated
employees’ tax deduction. These are published as weekly, fortnightly, monthly and annual deduction tables. They allow the
determination of, say, a monthly deduction without having to first calculate an annual equivalent.
Employees’ tax is also known as PAYE (pay as you earn). Previously, employees’ tax on the first R 60 000 earned by an employee
was known as SITE (Standard Income Tax on Employees). Since the tax threshold is now greater than R 60 000, SITE no longer
exists
DEFINITIONS
REMUNERATION
'Remuneration' means any amount of income which is paid or is payable to any person by way of any salary, leave pay, wage,
overtime pay, bonus, gratuity, commission, fee, emolument pension, superannuation allowance, retiring allowance or stipend,
whether in cash or otherwise and whether or not in respect of services rendered, including:
Amounts referred to in paragraph (a), (c), (cA), (d), (e), (eA) or (f) of the gross income definition – i.e. annuities,
payments in respect of services rendered, restraint of trade payments, lump sum benefits, pension/provident and
retirement lump sum benefits, transfers from state pension funds and any amounts received or accrued in
commutation of amounts due under a contract of employment or service.
Fringe benefits.
Allowances and advances (excluding travel and allowable subsistence allowances).
80% / 20% of travel allowances received.
50% of an allowance granted to a holder of a public office.
Any gains determined in respect of S8B and S8C (share options).
Remuneration does not include the following:
Fees paid to any person in respect of a trade carried on independently by him e.g. doctors, attorneys, auditors.
Disability pensions in respect of certain Acts.
Amounts paid to an employee to reimburse him for expenditure incurred during the course of his employment.
Annuities under an order of divorce or similar settlement.
, EMPLOYER
Employer is defined as a person who pays or is liable to pay remuneration to someone else. This definition includes:
A trustee in an insolvent estate.
An executor or administrator of a benefit fund, retirement fund or any other fund.
Anyone acting in a fiduciary capacity such as a trustee of a trust.
A person responsible for paying remuneration out of public funds.
EMPLOYEE
Employee is defined as:
A person (other than a company) who receives remuneration or to whom remuneration accrues.
A natural person who is a labour broker.
A person who works for a labour broker.
A personal service provider (company or trust).
Anybody who or which the minister of finance declares to be an employee.
Any director of a private company.
EMPLOYMENT VS. INDEPENDENT TRADE
Since remuneration, for the purposes of the Fourth Schedule, excludes payments made to individuals carrying on an
independent trade, it is necessary for us to look at the factors that will determine whether an engagement will be treated as
employment or as an independent trade.
Most importantly, a person will not be deemed to be carrying on a trade independently where the services he is required to
perform are performed mainly at the premises of the person who will pay for the services and the person who renders the
services will be subject to the control or supervision of any other person as to the manner in which his duties are to be
performed or as to his hours of work.
It is further provided that where such a person employs three or more unconnected full-time employees throughout the year of
assessment he will be deemed to be carrying on a trade independently – regardless of where his services are performed and the
supervision and control that he is subjected to.
Where a person is deemed to be carrying on an independent trade, payments made to him will not qualify as remuneration, and
therefore will not be subject to employees’ tax. Where, however, a person is deemed not to be carrying on an independent
trade, he will be treated as an employee (a person who is receiving remuneration) and employees’ tax must be withheld from
any payments made to him in terms of the Fourth Schedule.
LABOUR BROKERS AND PERSONAL SERVICE PROVIDERS
LABOUR BROKERS
A labour broker is a natural person who provides a client with other persons to render a service for the client, or who procures
other persons for the client. The client pays the labour broker and the labour broker pays his employee, who performs the work
for the client.
A labour broker who is not in possession of an exemption certificate will be subject to PAYE by the client on payments made to
him at rates applicable to individual taxpayers. In calculating his taxable income the labour broker will only be able to deduct
remuneration paid to employees from his fees received.
PERSONAL SERVICE PROVIDERS
A personal service provider is a company, close corporation or trust where any services rendered on behalf of the entity to its
client is rendered personally by any person who is a connected person in relation to such entity, and one of the following
applies:
