Hopefully you are reading this article before 28 February 2013. If not then at least you will be prepared for 2014, because I wanted to discuss a few points regarding tax that may be applicable to you and your staff members.
Calculation of tax for commission earners
The first point I want to discuss is the term tax annualisation.
In a normal environment you will be paying your staff members a salary each month and deducting tax from their salaries. Either you are doing this yourself using the SARS manual tax tables or payroll software. Alternatively your accountant or an H.R company is doing it for you each month.
The issue I want to raise is the slight complication that occurs because hair stylists earn commission and as a result their salaries vary from month to month.
If you are using the SARS tax tables each month to determine what tax to deduct from each stylist then you will probably find that they are falling into different tax brackets each month as their commission varies. This seems relatively simple and straight forward, however, this will probably leave the stylist slightly over taxed by the time the tax year is complete.
The reason for this is that when you take a stylists salary for one month and then select the tax bracket they fall into there is an assumption that this is the stylists salary every month and it is therefore multiplied by twelve to determine which annual tax bracket they fall into and then the annual tax is then calculated and divided by twelve to get the tax for the month in question.
This is not a problem if the salary is the same each month because by the time you get to the end of twelve months their annual salary will actually be one month’s salary multiplied by twelve and therefore the tax calculated each month, when added up, will actually equal their tax for the year.
Example of the problem
Let’s use a simple example to illustrate what the problem is. Let’s say that you have a stylist who miraculously earned R15000 every month of the year except one month, where they earned R20 000. Then, if you used the standard SARS tax tables you would calculate their monthly tax on R15000 at R1865 for each month and then for the month where they earned R20 000 you would calculate their tax at R3113. By the end of the year the tax they would have paid would be (11 months x R1865) + (1 month x R3113), giving you a grand total of R23 628. However, when you take their total salary for the year and work out what their tax should have been you will see that they should only have been taxed R23 362. They have therefore been over taxed by R266 for the year.
The reason for this is because when it came to the month where they earned R20 000 the assumption when using the SARS tax tables is that they earn R20000 every month and therefore they are put into a higher tax bracket and taxed at the higher rate when what should have happened is that their salary should have been averaged over one year to determine which bracket they fall into.
Implications of over taxing
In example above the stylist would need to claim the over payment back from SARS at their next annual tax return. In this instance the variance was not too much but could be higher dependent on the fluctuations in their salary each month.
What is meant to happen is that you are always annualizing their salary in order to determine the tax to deduct.
There are two steps to this process. Firstly average their salary over twelve months. This is a simple calculation. Add all their taxable salary amounts for the year so far, divide by the number of pay periods so far. This will give you their average salary. The reason for this is so that you get as accurate an estimation as possible of what their annual salary is going to be by the time you reach the end of the year.
Now that you have their average monthly salary take the tax for that salary bracket and multiply it by the number of pay periods so far in order to determine how much tax should have been paid so far by the stylist for the year to date. Then you simply subtract what they have actually paid in the previous months and the difference is their tax for the current month.
Summary of steps
1: Add up taxable salaries for the year so far. 2: Divide by number of pay periods so far. 3: Obtain tax using Tax Tables. 4: Multiply tax by number of pay periods so far. 5: Subtract tax actually paid so far. 6: The difference is the tax payable for the current month.
By the end of the tax year the actual tax deducted each month should add up to their calculated tax for the entire year.
Note on salary periods
Generally the tax year starts in March each year and ends in February the following year. Therefore there are twelve salary periods in a year. March would be the first and February the last. If you are busy calculating December’s salary then including December there will have been ten salary periods so far in the year.
Final recons in February
More often than not February is used to reconcile a staff member’s tax for the year as it is the last salary period in the tax year and therefore the last opportunity to do so as well as the most logical time to do so.
Therefore if you have not been annualizing your salary tax calculations and would like to do so before year end then the time is now. Please consult your accountant for further advice and assistance in doing this.
Other points to consider
Generally it is better to over tax your staff then to under tax them because when it comes to their annual tax return they would rather get money back from SARS than have to pay in as a result of being under taxed.
If a stylist earns income outside of your salon, ie weddings, photo shoots and other private work then they should register as provisional tax payers in order to do a provisional return every 6 months. In these instances it is probably in their favor to be overtaxed by you as they may owe tax at the end of the year due to the extra income they have earned, which would not have been taxed yet and therefore the over taxation on your behalf would probably reduce that liability owing to SARS.
Remember that just because they are paid privately or paid cash does not mean they are exempt from taxation on these earnings.
Be aware that generally tax is calculated over a year and therefore the more accurate you are each month the less the variance will be by the time you reach the end of the year.
Remember that it is safer to over tax your staff as you generally won’t get any complaints from SARS for paying too much tax but you generally will get complaints from your staff members (and maybe SARS) if they have to pay in extra at their next tax return.
Always consult your accountant, this article does not constitute legal advice but rather illustrates the “big ideas” when it comes to calculating tax as well as bring to your attention a little more detail of how tax is calculated if you were not already aware of this.