Business Basics: Paying others working for you (Employees or Freelancers)

You’ve started up a new business and hired your first employees, or your one-person band has grown to a stage where you need some extra hands to help you. Suddenly, you’ve got a lot more administration to do if you’re to remain compliant with various tax and labour laws and regulations.

How to pay an employee

As soon as you bring employees on board, you must register yourself as an employer with the South African Revenue Service (SARS). This registration must be done within 21 working day.

You must deduct tax from employees’ wages or salaries as well as their bonuses, commissions, additional earnings and benefits according to the annual SARS tax tables. This tax deducted must be paid over to SARS by the seventh of each month accompanied by a completed EMP201 return.

SDL

The Skills Development Levy is a one per cent levy that government imposes on the total company payroll to encourage learning and development in South Africa.

If the estimated total remuneration subject to SDL (levy-able amount) that you pay to all employees over the next 12 month period won’t exceed R500, 000, you will be exempt from SDL and won’t need to register.

The levy payment is due every month by the seventh as part of your EMP201 payment to SARS.

Unemployment Insurance Fund

The Unemployment Insurance Fund (UIF) provides short-term payments to cover workers who are temporarily unemployed, or cannot work because they are on maternity leave, are ill and so on. You must register for UIF with the Department of Labour by completing the UI-8 form.

The UIF will provide you with a registration number. You must also register with SARS. The employee and the company each contribute an amount equal to one per cent of the employee’s monthly remuneration which will be paid by the seventh of each month. You must pay the UIF as part of your monthly EMP201 payment to SARS if you are registered as an employer with them, otherwise pay UIF directly.

In addition to the monthly UIF payments, you need to declare your contributions to the UIF.

On a good, fully localised payroll solution, you can submit this declaration electronically rather than completing the UI-19 paper form. This declaration gives the UIF all the information it needs about new and existing employees as well as employees leaving your employment.

Issue tax certificates at the end of each tax year

Tax certificates (IT3a/IRP5) must be issued to employees at the end of February each year, or when they leave your employment during the tax year, which runs from March to February each year. You must also complete an EMP501 reconciliation, which reconciles your monthly PAYE, SDL and UIF payments, EMP201 declarations and tax certificate information and submit it with the tax certificate information to SARS at the end of each tax year.

A mid-year EMP501 reconciliation must also be submitted to SARS, reconciling the first six months of the tax year (March to August). No tax certificates are handed to employees as part of this submission. To avoid penalties, you must meet the submission deadlines, which are usually end of May and end of October.

How to pay a freelancer

Freelancers are self-employed and so will invoice you on a weekly / monthly basis for the work done at the agreed rate - you then pay this invoice per the terms agreed.

SHOULD I EMPLOY SOMEONE OR USE A FREELANCER?

Knowing whether you should take on an employee or a freelancer is difficult decision.

If the work is going to be ad-hoc and can be completed at a timescale that works for you (i.e. social media management, admin support etc) then a freelancer may be best.

If you need someone to be on-site for set hours and set days then chances are they ought to be an employee.

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