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Business owners: Use this formula to calculate your earnings and your PAYE liability, or else...

by , 25 November 2013
Directors or owners of companies are treated a little differently when it comes to PAYE. But whether they know this - and comply with the tax rules - is another matter altogether. If your director wants to avoid tax penalties, then make sure he knows about this.

Directors should be taxed on their deemed monthly earnings, not their total earnings, explain the experts at the Practical Tax Loose Leaf.
 
To illustrate this, they share an example below. Take a look.
 
This is why directors must be taxed on their deemed monthly earnings
 
Let's look at the example of the director of company ABC, Mr Jones.
 
He earns R15 000 per month at present, but earned R14 500 per month in the prior tax year; he also received a bonus of R10 000. This means that Mr Jones had total earnings of R184 000 (i.e.R14 500 x 12 months + R10 000) for the prior tax year.
 
You should tax him on his deemed monthly earnings, and not the total i.e. R184 000/12 months = R15 333.
 
Taxing him on the total figure means Mr Jones is possibly being over-taxed!
 
He can claim a refund from SARS at the end of the tax year. Normal employees' tax will be deducted from the actual earnings, being the R15 000 per month. The employees' tax on the remaining difference of R333 will be paid by the company. But the company will recover it from Mr Jones either now, or from his loan account. Or it'll deduct it from his bonus later in the year.
 
If Mr Jones receives a bonus of R10 000 in the current tax year, then his actual earnings for the year would come to R190 000 (i.e. R15 000 x 12 months + R10 000 bonus). His deemed earnings per month would be R15 833.
 
Then Mr Jones would be under-taxed, and additional employees' tax needs to be deducted from his bonus. Remember, PAYE is calculated on either the 'deemed remuneration' or actual remuneration – whichever amount is bigger. In Mr Jones's case, the actual remuneration (R 190 000) is greater than the deemed remuneration (R 184 000). So he'd be under-taxed if PAYE is calculated on the deemed remuneration.
The company – not Mr Jones – must ensure that the minimum amount of employees' tax is paid to SARS, based on the higher of the actual earnings or the deemed earnings.
 
Remember that most owner/managers don't receive a fixed monthly salary. Instead, they draw money regularly through a loan account. According totax law, their monthly PAYE liability on these drawings  must be calculated by applying a formula to the drawings.
 
 
To calculate the monthly remuneration from the CC, use the formula Y = T/N
This formula uses the owner/manager's previous year's earnings as a basisfor current year estimates for monthly remuneration and PAYE payments.
 
In this formula:
Y: The amount of monthly remuneration .
T: The adjusted balance of remuneration paid or payable (or the balance of remuneration on which employees' tax deduction is usually made) to the owner/manager, in his last tax year prior to the current month. If the prior year's remuneration isn't yet known, use the remuneration of the year prior to that, plus 20%.
N: The number of full months that the owner/manager was employed by the company/CC, during the tax year prior to the current month.
 
If the owner/manager doesn't receive a bonus at the end of the year, he can apply for a directive from SARS, which will give him some tax relief. He must do this by completing an IRP3(d) form, and submitting it to SARS. This form is available on the SARS website.
 


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