The Employment Tax Incentive (ETI) is an incentive that was launched by SARS with the aim of encouraging employers to hire young job seekers. It reduces the cost of hiring young people by reducing the amount of PAYE owed by the employer to SARS without affecting the employees’ wages.
Please note: you are under no obligation to claim ETI. Therefore, you can choose to simply ignore ETI. If, however, you do claim ETI, it will be a tax-free income for your company even though there will be a slightly heavier compliance burden.
This article will cover the various aspects related to ETI:
ETI may only be claimed for qualifying employees. An individual is a qualifying employee if they:
- have a valid South African ID, Asylum Seeker permit or an ID issued in terms of the Refugee Act;
- are 18 to 29 years old*;
- were employed by the employer or an associated person to the employer on or after 1 October 2013; and
- are paid the minimum wage applicable to that employer or if a minimum wage doesn’t apply, are paid a wage of at least R2 000 and not more than R6 000.
- are not a domestic worker;
- are not a connected person to the employer;
*Note: an employee’s age must be determined at the end of each month for which the ETI is being claimed. Therefore, an employee will start qualifying in the month that they turn 18 and will stop qualifying during the month that they turn 30.
- For example, an employee who turns 18 on 24 September won’t qualify yet in August but will qualify in September. Also, an employee who turns 30 on 11 November will still qualify in October but won’t qualify in November.
All of the above requirements must be met before you are eligible to claim ETI for an employee.
The first four aspects are handled automatically by the system based on how your employees are set up. It is, therefore, crucial to ensure that you have captured their birthdates, appointment dates and ID numbers correctly under their Basic Info section.
In order to test for minimum wage compliance, i.e. to determine whether an employee earned either the minimum wage (if there is a wage regulating measure) or the minimum of R2 000, different items will be included in the “wage” for salaried and hourly-paid employees:
- Salaried employees:
- the starting point is their basic salary
- minus: amounts for unpaid leave
- minus: amounts for short pay
- Hourly paid employees
- the starting point is their pay for normal hours
- plus: amounts for paid leave
- plus: amounts paid for public holidays that they didn’t work
In cases where an employee’s actual hours employed are less than 160 hours per month, their wage would be “grossed up” in the same way as their remuneration (discussed below). For example, if an employee earned a “wage” of R1 000, but their actual hours employed (discussed below) were only 80, their “wage” would be grossed up as 1 000 / 80 x 160 = 2 000. This means that they would qualify for ETI, if there is no wage regulating measure indicating a higher minimum wage.
Note: there is a difference between the concept of wage and remuneration for the purposes of calculating ETI. An employee’s wage is the amount they are paid in respect of their ordinary hours of work and is determined by the employment agreement – it is used to determine whether or not they qualify for ETI. Their remuneration is the actual amount that they are paid at the end of the period and is used to calculate the amount of ETI that the employer may claim.
The value of the ETI the employer may claim per qualifying employee depends on the amount of the monthly remuneration paid to each of them. Employees’ remuneration can fall into one of three income brackets, each with its own calculation. Furthermore, different calculations apply in the first and second years of the incentive.
Where an employee is employed for less than 160 hours in the month, the remuneration amount must be “grossed up” to 160 hours per month to calculate the value of the ETI. The ETI amount claimable can then be determined and “grossed down” in the same ratio. The ratio is determined by dividing 160 by the number of actual hours employed (discussed below).
The way in which the number of hours employed is calculated differs for salaried and hourly-paid employees.
- Salaried employees:
- the starting point is their scheduled hours as captured on the Regular Hours screen (which are assumed to be the same as their contracted hours)
- minus: unpaid leave (if captured using the system item)
- minus: short hours
- plus: additional normal hours (overtime at their normal rate)
- Hourly paid employees:
- the starting point is their normal hours captured when clicking Basic Salary under Payslip Inputs – not their scheduled hours
- plus: overtime hours
- plus: Sunday hours
- plus: public holidays worked and public holidays not worked that they were paid for
- plus: paid leave types, including custom leave types
Detailed calculation examples for all of the above scenarios can be found on the SARS website.
The ETI calculated is used to reduce an employer’s PAYE liability for a given month and is reflected on the EMP201 along with any ETI carried forward and the amount of ETI utilised. Where the PAYE amount is lower than the ETI, the employer’s PAYE liability will be 0; any ETI not utilised is carried forward to the following period. Where the PAYE exceeds the ETI, the full ETI may be used to reduce the PAYE liability and nothing will be carried forward. Please see the following article for more information on PAYE:
SARS stipulates that ETI may not be carried forward to March or September; therefore, you will notice that ETI Brought Forward will always be R0.00 on the EMP201s for March and September. Any ETI Carried Forward and, therefore, not utilised at the end of February and August each year will need to be claimed back from SARS.
ETI may be claimed for 24 months per qualifying employee and these 24 months need not be consecutive or correspond to the employee’s months of employment. Where an employee has separate contract periods with a single employer, the ETI month they are in will follow on from the previous contract period. Similarly, if an employee is transferred between companies that are associated persons*, the months must be counted as if they had not moved at all.
*An associated person is any entity in relation to each other which is directly or indirectly managed or controlled by substantially the same person (e.g. two subsidiaries under a holding company). Where an employee moves between companies (who are part of a group) with the same PAYE reference number, for ETI purposes this will be deemed to be continuous service by the employee and the ETI will continue and not start again.
For more information about how ETI is reported to and claimed from SARS, please refer to the following article:
If there is no wage regulating measure / minimum wage for the industry that you operate in, the system will automatically use the prescibed R2 000 (mentioned above) to check whether an employee qualifies for ETI.
If, however, there is a wage regulating measure, you need to input the minimum wage so that the system can check whether an employee qualifies. Go to Settings > ETI (Employment Tax Incentive) and do the following:
- Enter the Minimum wage monthly and / or Minimum wage normal rate (hourly rate) based on the information in the wage regulating measure.
- Enter the date that this wage regulating measure is Effective from.
Note: if you enter both the minimum monthly wage and the minimum normal / hourly rate, the minimum hourly rate will take precedence, i.e. the system will ignore the monthly amount and use the hourly amount to test whether the wage qualifies in terms of the wage regulating measure.
There is certain information which needs to be completed for individual employees in order for the system to correctly calculate the ETI that can be claimed. To enter this, go to an employee’s profile and click on ETI under Actions. Enter the information as follows:
- Existing employees (i.e. added before 5 April 2017): this will automatically default to “Allow” if they were not previously marked as Disqualified from ETI (connected person / domestic worker) on the Classification screen. (Note: this tick box no longer appears on the Classification screen.) Conversely, it will default to “Disqualified” if they were previously disqualified.
- New employees: this field will be blank by default. If you leave it blank, ETI will not be calculated for the employee. Select “Allow” if they meet all of the requirements above (discussed under Qualifying Employees). Select “Disqualified” if the employee is a domestic worker or connected person, or if ETI should not be calculated for any other reason.
If you select “Allow” as the Status, additional input fields will appear:
This field is optional and should contain the original date of employment if it’s earlier than the first service period on the system, i.e. if they started working for the company on an earlier date than the appointment date captured on the system.
Alternatively, it should also be entered if an employee was previously employed by an associated person. This is relevant in determining the number of months to be included in the maximum number of allowed months, i.e. 24 (discussed under Claiming ETI above).
- An example would be if an employee worked for Company A from 2015-09-01 until it merged with Company B on 2016-01-01. If Company B is on the system, the employee’s appointment date will be 2016-01-01. However, under ETI settings, you should then enter 2015-09-01 as the Employment date.
Note: if this field is left blank, the system will use the first service period start date. Therefore, it is important that you enter the original date of employment, if applicable. Remember that an employee will be disqualified from ETI if their original appointment date with the company or an associated person was before 1 October 2013.
In this field you should input the number of months that you didn’t claim ETI for a qualifying employee before you started using SimplePay.
- If a qualifying employee was employed for 12 months prior to the date that you started using SimplePay, but you only claimed ETI for 4 of those months, you should enter 8 as the Months unclaimed before take-on year.
- If a qualifying employee was appointed on 1 March 2016 and you started using SimplePay in March 2017, the system will assume that ETI was claimed for those 12 months (March 2016 to February 2017). If that is not the case; for example, if you didn’t claim ETI for June and July 2016 for this employee, you should enter 2 as the Months unclaimed before take-on year.
If you create custom income and allowance items and select the Input Type as “Hourly * factor * hours” or “Custom rate * quantity”, certain inputs will be required to ensure that ETI is calculated and claimed correctly.
As indicated on the screen, the Hours worked factor should be entered as 1 for most cases. This input basically tells the system how many hours the quantity entered represents.
- For example, if you set up a custom item to record Sunday hours, you’d enter 1 as the Hours worked factor. The system will then see anything input for that item as hours. Therefore, if you entered 7 as the payslip input for this custom item, that would count as 7 hours for ETI purposes.
- However, if the custom item is being used to pay employees a daily rate, for example, the Hours worked factor should equal the number of hours the employee works in a day, e.g. 8. If they entered 3 (days) as the payslip input for this custom item, the system would add 3 x 8 = 24 hours to their ETI hours.
This box should be ticked if the particular income or allowance item should be taken into account when determining the Qualifying Wage (discussed above).
- For example, if you are creating a custom income item for casual wages, you might select “Hourly rate * factor * hours” as the Input Type. If you now also tick the box next to Affects Wage for ETI Purposes, the system will know that it should include these wages as part of the Qualifying Wage.
Note: it is recommended that you do not do hourly calculations off-system, i.e. use one of the first four input types when creating custom income or allowance items. Instead, you should use of the last two input types – “Hourly rate * factor * hours” or “Custom rate * quantity” – so that the amounts can be included in the qualifying wage and the hours can be included in the actual hours employed, if applicable.
More information about custom items can be found in the following article: