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Introduction to Salaries and Wages
Entrepreneurs may initially manage all business aspects themselves due to limited
working capital.
As businesses grow, hiring employees may become necessary for specialized tasks or
increased workload.
The cost to the company is a key consideration when employing staff, including salaries,
taxes, and UIF.
Employers must account for compulsory deductions to determine the net salary or wage
received by employees.
This learning unit will cover the theory and practical aspects of salaries and wages, divided
into theoretical considerations and accounting transactions.
Key Terms and Definitions
Deductions: Compulsory or voluntary reductions from an employee's salary before net pay
is determined.
Employment Tax Incentive (ETI): A mechanism to reduce the cost of hiring young
employees by allowing employers to decrease PAYE while keeping net remuneration
unchanged.
Fringe Benefits: Additional employment benefits beyond basic salary, such as pension
contributions and medical aid.
Gross Salary/Wage: Total earnings before deductions; gross salary is typically monthly,
while gross wage is usually weekly.
Net Salary/Wage: Earnings after all deductions have been made.
Essential Facts About Salaries and Wages
Employers have ethical and legal responsibilities concerning employee contracts, including
basic conditions of employment.
Fair remuneration must consider working hours, responsibilities, qualifications, and
industry standards, as well as minimum wage laws.
Trade unions play a role in negotiating salaries and protecting employees from unfair
practices.
Various factors affect remuneration packages, including:
Working hours (normal vs. overtime)
Specialised skills and training
Experience level
Additional benefits such as remote work options
Previous remuneration packages
Risk associated with job locations
Employers must maintain a cooperative relationship with employees, ensuring that they
feel valued to enhance job satisfaction and productivity.
Components of Remuneration
Cost to Company: Total expense for employing an employee, which includes various
components beyond the basic salary.
Basic Salary/Wage: The foundational pay that forms the basis for gross salary or wage.
Overtime: Additional pay for hours worked beyond the normal work schedule, contributing
to gross remuneration.
Bonuses: Yearly or performance-related bonuses that increase gross remuneration.
Fringe Benefits: Additional employer contributions such as pension funds, medical aid,
travel and car allowances, housing allowances, and performance bonuses.
Gross Earnings and Deductions
Gross earnings for salaried employees consist of basic salary plus overtime, bonuses, and
fringe benefits.
Wage earners' gross earnings are calculated based on hours worked, with overtime rates
applied as necessary.
Example: John Maphu worked 47 hours at R 250/hour with an overtime rate of R 375. His
gross earnings amounted to R 12,625 for the week.
Gross earnings are not the same as net pay; deductions like PAYE and UIF must be taken
into account to calculate take-home pay.
Taxation Principles for Employees
The Income Tax Act mandates the deduction of tax from employee remuneration,
including various forms of earnings.
Employees are taxed on gross earnings, including all forms of remuneration, not solely on
basic salaries.
Tax rates are progressive, with higher earners paying more tax.
SARS provides tax deduction tables to simplify payroll tax administration, which can be
accessed online or at SARS offices.
Tax rebates are available based on age, ensuring that lower-income individuals are not
unduly burdened by taxes.
Salaries and Wages
PAYE tax is not covered in this course, and rebates change annually. Previous calculations
for employees should include applicable rebates.
Part-time and contract workers have different tax deductions, typically requiring 25% of
earnings or a fixed percentage based on a tax directive from SARS.
Various software packages simplify the process of completing payslips and calculating
monthly PAYE, integrating with SARS's eFiling system to ease annual IRP501
reconciliation.
Statutory and Voluntary Deductions
Deductions from an employee's gross remuneration include both compulsory (like UIF) and
voluntary (like pension funds or medical aid) contributions.
The Unemployment Insurance Fund (UIF) provides relief to workers who are unemployed,
on maternity or adoption leave, or ill. Employers must register employees working over 24
hours per month and deduct 1% of remuneration for UIF while contributing another 1%.
UIF contributions are capped at R 177.12 per month. For example, if Marlo's UIF
remuneration is R 10,000, his contribution would be R 100. If he earns R 20,000, his
contribution remains capped at R 177.12.
Skills Development Levy (SDL)
The SDL encourages employee learning and development, applicable when total salaries
exceed R 500,000 annually. Employers must pay 1% of total taxable salaries to SARS
monthly.
Unlike UIF, there is no cap on the SDL contribution, and it is solely an employer obligation.
Retirement Funds
Different types of retirement funds include pension funds, provident funds, and retirement
annuity funds, all aimed at securing financial stability for employees upon retirement.
Employers can set up pension funds for employees, making contributions that are tax-
deductible, while employees may also contribute. Benefits can be taken as a lump sum or
regular payments upon retirement.
Provident funds have undergone changes to align with pension funds, requiring
contributions to be tax-deductible and subject to annuitisation rules for benefits taken
after March 2021.
Retirement annuities, managed by administrators or insurers, serve as savings vehicles for
individuals, offering regular income upon retirement or lump sum payments to their
beneficiaries.
Accounting for Salaries
Recording salaries involves a detailed process, including completing a salaries journal,
posting to the general ledger, making payments, and submitting the EMP201 return.
The Salaries journal layout captures essential details such as gross salary, travel
allowances, deductions for PAYE, UIF, medical aid, and pension funds, ultimately leading to
a calculated net salary.
For example, Peter Jones's gross salary of R 37,510.00 results in a net salary of R
23,666.00 after accounting for various deductions.
Accounting for Wages
Wages are typically paid weekly and have a different recording process compared to
monthly salaries. The Wages journal must reflect normal and overtime worked, along with
applicable deductions.
The process of recording wages includes completing the Wages journal weekly, posting to
the general ledger, and managing net wage payments.
An example with John shows a calculation of gross wages, PAYE deductions, pension
contributions, and ultimately a net wage, following a similar structure to that of salaries.
