We receive many questions to our Helpdesk from taxpayers who are faced with the following scenario:
They work for two employers during the year, perhaps even at the same time and earn income from both. Each employer deducts employee’s tax (PAYE) from the taxpayer’s salary every month and issue them with an IRP5 after year end. They submit these to SARS in their Tax Return, however they receive a nasty surprise when they receive their Tax Assessment which indicates that they have not paid enough tax during the year and have a big bill to settle. How on earth could this be possible, if their employers have been deducting tax from them every month and diligently paying this over to SARS?
Remember that individuals are taxed on their total income earned during the tax year. If they work for two employers, their salaries should be added together, and the tax table should be applied to their total earnings. Bear in mind too, that the rate of tax levied on an individual is based on a “sliding scale” which results in the tax increasing as taxable income increases. “The more you earn, the more you pay”
Therefore, what happens in the scenario we described is that each of the two employers deducts the correct tax from the salary they have paid. However, they do not take their employee’s entire income into consideration when applying the tax rates based on the tax tables. When the two salaries are added together, this pushes the individual into a higher tax bracket, which results in additional tax being owed to SARS.
Let’s look at an example to make this clearer.
John works half day as a bookkeeper for Company A, and earns R15, 000 per month. In order to supplement his income, he works three hours every afternoon for Company B, who pays him a salary of R8,000 per month.
He is regarded as an employee for tax purposes by both Company A and B. Consequently, they both deduct PAYE every month from his salary and issue him with an IRP5 at year end.
Assuming he worked for both companies for the full 12 months of the 2020 tax year, the tax he paid would have been as follows:
Company A would apply the tax tables to John’s salary of R15,000 per month. He would therefore be taxed in the lowest bracket at 18%. Company A is probably unaware of the salary amount that John earns from Company B. Even if they knew these details, it is unlikely they would perform a calculation to work out his total income (i.e. both salaries added together) and apply the applicable tax rate.
Company B would apply the tax tables to John’s salary of R8,000 per month. Again, he would be taxed in the lowest bracket at 18%. Company B is probably unaware of the salary amount that John earns from Company A. Even if they knew these details, it is unlikely they would perform a calculation to work out his total income (i.e. both salaries added together) and apply the applicable tax rate.
Assuming John earns no other income, the total employee’s tax he paid for the year equals R22,410 (R18,180 + R3,060).
When he submits his IRP5 information in his 2020 Tax Return, SARS will perform his tax calculation as follows:
Company A + Company B
Total salary: (R15,000 + R8,000) X 12 = R276,000
Tax per tables: R35,253 + 26% X (R276,000 – R195,851) = R56,092.
SARS will apply the tax tables to John’s total income of R23,000 per month. At this earnings level, the amount earned above R195,851 is taxed at 26% (and not 18% as levied by both employers).
John will receive an unpleasant surprise when he receives his 2020 Tax Assessment (ITA34) which will reflect that he has underpaid tax of R20,632 (R41,872 – R21,240).
The underpayment can be broken down as follows:
Tax actually paid at 18% on amount above R195,851:
18% X (R276,000-R195,851) = R14,427
Tax that should have been paid at 26% on amount above R195,851:
26% X (R276,000-R195,851) = R20,839
Underpayment: R 6,412 (R20,839-R14,427)
Primary Rebate applied twice: R14,220
Total tax still due by John for 2020: R20,632
Besides applying the incorrect tax rate (i.e. correct for his individual salary but incorrect in relation to his combined salaries), each company applied the primary rebate to their tax calculation, which has resulted in him receiving it twice.
Unfortunately, John has no option but to pay the additional tax. The Income Tax Act prescribes that the onus is on the taxpayer to ensure their tax is paid in full.
In this scenario, John could supply his complete salary information to each of his employers and request them to calculate his tax based on his overall income level.
Alternatively, he could simply perform the calculation of his tax underpayment himself, and keep aside some of his earnings each month to settle the tax bill that will be due on assessment.