Salaries and Wages (Grade 10 NSC Matric Accounting): Revision Notes
Deductions
Understanding salary deductions is an essential part of accounting for wages and salaries. When employees work for a business, they don't receive their full gross salary. Instead, certain amounts must be deducted before they receive their net pay. This note explains the main types of deductions that employers must make.
What are deductions?
Deductions are amounts that must be subtracted from an employee's gross salary or gross wages before they receive their net salary or net wages. Think of gross salary as the total amount earned, and net salary as the "take-home" pay.
Compulsory vs Voluntary Deductions
Some deductions are compulsory, meaning they must be made by law. Others are voluntary, meaning the employee can choose whether to have them deducted. For example, an employee might request that bond repayments be deducted directly from their salary each month.
The main deductions we'll explore are:
- Pension fund contributions
- Income tax (PAYE)
- Medical aid fund contributions
- Unemployment Insurance Fund (UIF)
- Skills Development Levy (SDL)
Pension fund contributions
A pension fund is a savings scheme that helps employees prepare for retirement. In most South African businesses, contributing to a pension fund is compulsory for all employees.
How pension contributions work
Employees contribute to their pension fund by having a percentage of their gross salary deducted each month. This money is set aside for when they retire and no longer earn a salary. The employer often makes an additional contribution, called the employer contribution. Both the employee's contribution and the employer's contribution are paid to the pension fund every month.
Worked Example: Calculating Pension Contributions
If an employee earns R10 000 per month and contributes 7% to their pension fund, then R700 will be deducted from their salary each month.
Calculation:
- Monthly salary: R10 000
- Pension contribution rate: 7%
- Employee contribution: R10 000 × 7% = R700
The employer might also contribute R700 or a different amount, depending on company policy.
Exam tip: Remember that both employee and employer contributions are paid to the pension fund, but only the employee contribution is deducted from the employee's salary.
Income tax (PAYE)
Every South African citizen who earns income must pay income tax to the government. The amount of tax depends on how much the person earns. This tax system helps fund government services like education, healthcare, and infrastructure.
Calculating taxable income
Before calculating the income tax, we first need to determine the employee's taxable income. This is calculated using the following formula:
The pension contribution reduces the amount of income that is taxable, which means the employee pays less tax.
The PAYE system
PAYE stands for Pay-as-you-earn. This system requires employers to deduct income tax from employees' salaries each month and pay it to SARS (the South African Revenue Service). Rather than employees paying a large tax bill once a year, they pay smaller amounts throughout the year.
The amount of tax is determined by tables provided by SARS. These tax tables change regularly because they are updated by the Minister of Finance during the annual budget speech.
SARS administration
When the employer deducts income tax, they create an account called SARS (PAYE) or SARS (Pay-as-you-earn system). At the end of each month, the business must:
- Complete an EMP 201 form showing how much tax was deducted
- Submit this form to SARS
- Pay the total income tax collected to SARS
Annual tax returns and IRP 5 forms
At the end of the financial year (28 February), every employee receives an IRP 5 form. This important document shows:
- The employee's total gross salary for the year
- The total amounts deducted for PAYE
- The total amounts deducted for SITE (see below)
Each employee must then complete an income tax return. SARS will check whether the employee paid the correct amount of tax during the year:
- If too much tax was paid (overpayment), SARS will refund the difference to the taxpayer
- If too little tax was paid (underpayment), the taxpayer must pay the outstanding amount to SARS
What is SITE?
SITE stands for Standard Income Tax on Employees. This system was introduced on 1 March 1988.
Under SITE, income tax is deducted on all income that employees receive. However, SITE is not a different type of tax - it's simply income tax calculated at the end of the financial year rather than monthly. While PAYE is calculated and paid monthly, SITE calculations are done annually.
Medical aid fund contributions
In most South African businesses, membership in a medical aid fund is compulsory for all employees. Medical aid funds help employees pay for medical expenses when they are sick or injured.
How medical aid works
The employee contributes to the medical aid fund through a monthly deduction from their salary. The employer may also make a contribution to the fund on behalf of the employee. Both the employee contribution and the employer contribution are paid to the medical aid fund at the end of each month.
Worked Example: Employer Medical Aid Contributions
If TAT Stores contributes R1,50 for every R1 that the employee contributes, and an employee contributes R200, then the employer will contribute:
Calculation:
- Employee contribution: R200
- Employer contribution rate: R1,50 per R1
- Employer contribution: R200 × 1,5 = R300
The impact of HIV/AIDS on businesses
The HIV/AIDS pandemic has significantly affected South African businesses. When employees become ill, businesses face several challenges:
Business Challenges Include:
- Absenteeism: Employees are absent from work for long periods due to illness
- Reduced productivity: Ill employees work at a slower pace and lack energy
- Staff mortality: When employees pass away, businesses lose skilled workers
- Increased costs: Medical aid funds become depleted, and pension fund costs increase
- Training expenses: New employees must be trained to replace those who are absent or have passed away
- Lower profitability: All these factors combine to reduce the business's profitability
Medical Aid Implications
Although medical aid funds typically pay small amounts for AIDS treatment directly, the weakened immune system of people with AIDS means they develop other serious illnesses like pneumonia. Medical aid funds must then pay large amounts for treating these secondary illnesses.
Employment rights and HIV/AIDS
It's important to understand that workers have rights, even when they are HIV-positive.
Can an employee be dismissed for being HIV-positive?
No. An employee may not be dismissed simply because they are HIV-positive or have AIDS. However, if the employee's health has deteriorated so much that they can no longer perform their work duties, then dismissal may be considered - but the reason would be incapacity (inability to work), not their HIV status.
Legal Requirements Under the Labour Relations Act
The Labour Relations Act 66 of 1995 (LRA) sets out strict procedures that must be followed:
- The employer must first investigate the extent and seriousness of the disability
- The employer must request a medical certificate from the employee
- An independent doctor (chosen by the employer) must investigate to confirm the diagnosis
- The employer must request the employee's doctor to suggest that the employee has an HIV test
- Therapy before and after the HIV test is important
- HIV testing must be voluntary - the employer cannot force the employee to be tested
- Test results must be kept confidential
- If the employee is absent for a long period, a temporary worker may be hired
- The employee must be given alternative or lighter work duties where possible
- The employee may only be dismissed when they can no longer perform any work duties
- After a hearing and serious attempts to adapt the work to the employee's abilities, dismissal may occur if the employee cannot do the work
Important principle: HIV-positive workers must be allowed to work under normal circumstances as long as they are medically fit to do their work. They may never be discriminated against.
Employers should refer employees to available health, welfare, and psycho-social services to support them.
Unemployment Insurance Fund (UIF)
The Unemployment Insurance Fund (UIF) provides financial support to workers who become unemployed. All employees must pay into this fund, and employers must also contribute.
How UIF contributions work
Both the employer and the employee contribute to UIF. The contributions from both parties are paid to SARS at the end of each month. Just like with income tax, the business must complete an EMP 201 form and submit it to SARS together with the UIF payment.
The UIF contribution rate is typically 1% of ordinary time for employees. The employer also contributes an equal amount.
Worked Example: Calculating UIF Contributions
If a wage earner works 40 ordinary hours at R25 per hour:
Step 1: Calculate ordinary time earnings
- Ordinary time earnings: 40 hours × R25 = R1 000
Step 2: Calculate UIF deduction
- UIF rate: 1%
- UIF deduction: R1 000 × 1% = R10
Step 3: Calculate employer contribution
- Employer also contributes: R10
Total UIF payment to SARS: R10 + R10 = R20
Skills Development Levy (SDL)
The Skills Development Levy (SDL) is a government initiative to improve skills development in South Africa. The government finances skills training through this levy, encouraging employers to invest in developing their employees' skills.
How SDL works
Employers must pay 1% of their gross salaries and wages to SARS as the Skills Development Levy. This means if a business pays R100 000 in total salaries for a month, they must pay R1 000 (1%) to SARS as SDL.
Registration Requirements:
- Employers not registered for PAYE whose salary expenses do not exceed R5 000 000 per year are not eligible for SDL payment
- However, they must still register for the levy with SARS
- Employers who are registered for PAYE must pay SDL regardless of their salary expenses
The SDL is paid to SARS monthly, along with PAYE and UIF contributions, using the EMP 201 form.
Worked example: TAT Stores
Let's work through a practical example to see how all these deductions work together. This example is from TAT Stores for October 2009.
Worked Example: Complete Salary Calculations for TAT Stores
Given Information
Cash Payments Journal totals (27 October 2009):
- Bank: R38 290
- Creditors for wages: R6 690
- Trading stock: R10 310
- Sundry accounts: R21 290
General Ledger balances:
- Creditors for wages: R6 690
- SARS - PAYE: R1 848
- SARS - SDL: R92,40
- Medical aid fund: R1 125
- SARS - UIF: R504
- Wages: R9 240
- Medical aid fund contribution: R675
- Unemployment Insurance Fund contributions: R252
- Skills Development Levy: R92,40
Additional notes:
- Last cheque issued: 946
- TAT Stores is a member of the New Pension Fund and Health Medical Aid Fund
- SDL = 1% of gross salaries/wages
- Medical aid: employer contributes R1,50 for each R1 employee contributes
- UIF: employer contributes 1% of ordinary time
- Pension: employer contribution is rand-for-rand
Wage Earners' Information
| Employee | Ordinary hours | Rate per hour | Overtime hours | Overtime rate |
|---|---|---|---|---|
| G. Brutus | 40 | R25 | 6 | R37,50 |
| R. Johnson | 40 | R27 | 4 | R40,50 |
| M. le Roux | 40 | R18 | 8 | R27,00 |
Wage earners' deductions:
- PAYE: 20% for all employees
- Medical aid: R50 for all employees
- UIF: 1% of ordinary time for all employees
Salaried Employees' Information
| Employee | Annual salary |
|---|---|
| M. Groenewaldt | R129 600 |
| R. Fouche | R99 600 |
| M. Rossouw | R150 000 |
Salaried employees' deductions:
| Employee | PAYE | Medical | Pension |
|---|---|---|---|
| M. Groenewaldt | R2 700 | R200 | 7% |
| R. Fouche | R1 494 | R240 | 7% |
| M. Rossouw | R3 500 | R280 | 7% |
Step 1: Calculate Wage Earners' Gross Wages
G. Brutus:
R. Johnson:
M. le Roux:
Total wage earners' gross wages:
Step 2: Calculate Wage Earners' Deductions
PAYE (20% of gross wages):
Medical aid (R50 each):
UIF (1% of ordinary time):
Step 3: Calculate Salaried Employees' Amounts
Monthly salaries (annual ÷ 12):
Pension contributions (7% of monthly salary):
Step 4: Calculate Employer Contributions
SDL (1% of total gross wages and salaries):
Medical aid (R1,50 per R1 employee contributes):
UIF employer contribution (1% of ordinary time):
Pension employer contribution (rand-for-rand):
This worked example shows how complex salary calculations can be, with multiple deductions and employer contributions to track carefully.
Key Points to Remember:
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Deductions reduce gross salary to net salary. Employees don't receive their full gross salary because various amounts must be deducted first.
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The main compulsory deductions are: pension fund contributions, PAYE (income tax), medical aid, UIF, and SDL. These protect employees and fund government services.
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Taxable income formula: The pension contribution reduces the amount of tax you pay.
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PAYE is paid monthly to SARS using an EMP 201 form. Employers deduct tax from salaries and pay it to SARS each month, rather than employees paying once a year.
-
Both employees and employers contribute to pension funds, medical aid, and UIF. The employer's contributions are an additional cost to the business.
-
SDL is 1% of gross salaries and wages. This levy helps fund skills development programmes in South Africa.
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HIV-positive workers cannot be discriminated against. They have the right to work as long as they are medically fit to perform their duties, and strict procedures must be followed before any dismissal due to incapacity.