We are all aware that South Africa has a huge unemployment problem. Stats SA estimates that unemployment is at 31,9%—that’s almost a third of South Africans. Even worse, according to Stats SA, unemployment among the youth (between the ages of 15 and 34) is at a staggering 46,5%. Some reports suggest that real unemployment among the youth could be closer to 60%. These are depressing figures to read. Addressing the unemployment problem is a tremendous challenge that deserves urgent attention, especially given the tough economic climate in our country at the moment.

In light of this, there are a number of employment schemes and programs that train young people to be more employable. Government is doing its best to turn things around. One of the established mechanisms to improve levels of youth-employment (specifically those aged 18 to 29 years) is the Employee Tax Incentive (ETI) scheme. Although the ETI has had mixed reviews from employers, this scheme serves a purpose and employers need to understand it to make the most of it. It is specifically aimed at getting unskilled, unemployed young people employed.

What is ETI?

ETI is a tax mechanism that is aimed at enabling (and encouraging) companies to employ young jobseekers. The program involves cost-sharing, and partners with government to do this. It does not affect the wage of the employee at the end of each week( or month). With ETI, a reduced level of PAYE (Pay As You Earn) tax is payable for all qualifying employees, thereby benefiting the employer in the long run. The ETI scheme was introduced in January 2014.

The ETI scheme-who qualifies for it?

Who qualifies for ETI?

There are many employers who might be missing out on the benefits of the ETI scheme, simply because they are unaware who qualifies. The criteria for ETI qualification is straightforward:

Employers

For employers to qualify for ETI they must be registered with the South African Revenue Services (SARS) for PAYE. Non-compliant companies may conditionally qualify (with restrictions) until they are fully tax-compliant.

Employees

For employees to qualify for ETI the guidelines are just as straightforward. SARS defines qualifying employees as follows:

  • Employees should earn at least a minimum wage in terms of the national minimum wage.
  • Employees must have a valid South African ID.
  • Employees must be between 18 and 29 years old.
  • Employees must not be domestic workers.
  • Employees must not be related or “connected” to the employer.
  • Employees should earn less than R6 500 per month in total remuneration (basic salary plus all other benefits).
    • If there is no prescribed wage regulating measure or not subject to or exempt from the requirements of the National Minimum Wage Act, a wage of at least R2 000 (where the qualifying employee was employed for 160 hours in a month) must be paid.

Claiming ETI

Claiming ETI is simple. Firstly, there is no limit on the number of ETI employees that can be hired. But no refunds may be claimed if the employer is unable to produce a valid South African ID for the employee that the employment tax incentive is being claimed for.

To claim the employment tax incentive, the employer will simply decrease the amount of PAYE payable for each qualifying employee. This is done by completing the ETI fields on the EMP201 document that is submitted to SARS each month.

The ETI scheme- Claiming and calculating it

Calculating ETI

When using the Paymaster Payroll system, calculating ETI is easy. The standard process of calculation is as follows: in order to calculate ETI amounts, there are 5 straightforward steps that need to be followed for all qualifying employees in a company. They are as follows:

  1. All qualifying employees for the month must be identified ( uncomplicated when using the Paymaster Payroll system).
  2. The employment period of each employer (1st twelve months or 2nd twelve months) must be determined (tools within the Paymaster Payroll system can automatically identify this).
  3. Calculate and determine the monthly remuneration for each employee.
  4. Work out the amount of the employment tax incentive for each employee being claimed for.
  5. Aggregate the amount.

The following table outlines the ETI calculation (effective from 1 March 2023):

Monthly Remuneration Formula First 12 Months Formula Second 12 Months
R0 to R1 999,99 75% of Monthly Remuneration 37,5% of Monthly Remuneration
R2 000 to R4 499,99 R1 500,00 R750
R4 500 to R6 499,99 R1 500 – (75% x (monthly remuneration – R4500)) R750 – (37.5% x (monthly remuneration – R4 500)

Penalties surrounding ETI

As with many tax incentives there is a penalty clause within the ETI scheme. There is one reason where a penalty will apply: an employer will be liable for a penalty of R30,000 when deemed to have displaced a current employee in order to employ an eligible young person in their place. Here is a cautionary warning: ETI is about job creation, not moving people around to save on tax.

The ETI scheme-we here to help

The ETI scheme is a simple tax incentive scheme that is easy to understand. It is also easy to calculate. However, if you have any concerns or questions surrounding the ETI scheme, please contact your nearest SARS branch. Or, contact Paymaster and allow Paymaster’s payroll specialists to advise you on the best way to make use of this tool that will benefit your business, and make a dent in our unemployment statistics. We can all make a difference, no matter how small.

Still have uncertainties or questions?

For those who remain unclear on anything related to the ETI, you are invited to email Ian Hurst or our Helpdesk at Paymaster Business Solutions.