COVID-19 TERS (Temporary Employee Relief Scheme) is a fund administrated by the Department of Labour (DoL) to provide relief to employers and employees in South Africa. A clearly set-out application process can be followed on the UIF website.
Upon successful application, funds will be paid to either the employer or employee, dependent on the selected preference.
The question now is how to account for the funds received and what should be declared in payroll?
Funds received from the DoL in terms of TERS do not belong to the employer. The employer merely assumes the role of intermediary between the employee and the DoL. Following receipt by the employer of the TERS benefit, the employer is obligated to pay the amount received to the employee and provide the DoL with proof of such payment.
TERS benefits are regarded as payable in terms of the Unemployment Insurance Act and as such receipt thereof is exempt from tax in terms of section 10(1)(mB) of the Income Tax Act.
Accounting for the receipt and payment of the TERS benefit by the employer should not impact its profit or loss in any way.
Dealing with the TERS benefit through payroll is another matter altogether.
Pay-as-you-earn (PAYE) is calculated on the employee’s earnings which include basic salaries, bonuses, fringe benefits and other allowances.
A successful TERS application will result in the employee receiving payment from two sources, the employer and the DoL. The DoL payment is normally made via the employer. The employee is only subject to PAYE on remuneration received from the employer. The amount received as a TERS benefit is not taxable.
UIF contributions are only payable on remuneration received from the employer and not on the receipt of any TERS benefit.
Illustrative Example: TERS benefit received
Employee’s normal basic salary of R20,000 has been reduced to R10,000 as a result of a temporary shut-down of the business. The employer makes a TERS application and DoL pays the benefit of say R5,000 that same month.
PAYE and UIF are calculated on the R10,000 and the R5,000 is non-taxable income. The payslip should reflect a separate line item for the R5,000 TERS benefit.
In an effort to assist desperate employees, the employer might pay the TERS benefit to the employee in advance of receiving the funds from the DoL. In this case, I would suggest that PAYE be calculated on taxable remuneration from the employer for that month plus the advance of the TERS benefit. In the subsequent month when the TERS benefit is received from the DoL by the employer, an adjustment should be made to PAYE to ensure that the employee is not subject to PAYE on the amount of the TERS benefit received. In effect this adjustment will be a reduction in the normal PAYE for that month to compensate the employee for being overtaxed in the month that the advance was paid. This is best illustrated by an example.
Illustrative example: Advance payment of the TERS benefit received in the following month
Employee’s normal basic salary of R20,000 has been reduced to R10,000 as a result of a temporary shut-down of the business. The employer makes a TERS application and on pay day the application is still in progress. The employer has run the calculations and estimates that a TERS benefit payment of R5,000. In addition to the salary of R10,000 the employer advances the estimated TERS benefit of R5,000 to the employee.
The payslip should reflect a separate line item for the advance of the TERS benefit.
I suggest that PAYE and UIF be calculated on R15 000.
In the following month when the TERS benefit of R5 000 is received by the employer, both PAYE and UIF for that month must be reduced by the amount overpaid in the previous month relating to the advance of the TERS benefit.
As demonstrated above TERS benefits do create challenges from an accounting and payroll perspective and if in doubt professional help should be sought to ensure proper compliance.
Bookkeeper: Outsourced Accounting & Payroll, Cape Town