(c) South Africa Institute of Chartered Accountants. Contact SAICA for permission to reproduce this article.

Multiple employers and the PAYE conundrum

Taxpayers must be aware that if they receive income from multiple employers or funds, it is likely that they have underpaid tax during the year.

By Nicci Courtney-Clarke CA(SA)

Taxpayers working two or more jobs at a time may receive a nasty surprise when they receive their annual tax assessment. How could a sizeable tax bill be due if their employers have been deducting tax from them every month and diligently paying this over to SARS?

The concept of working for two employers is not uncommon in these challenging economic times. An example would be where a taxpayer takes on some additional work to supplement their daytime income. Assuming they are treated as an employee for tax purposes, each employer will deduct PAYE from their salary every month and issue them with an IRP5 after year end. Consequently, they will receive two IRP5s for the year, which they will need to submit to SARS.

Pensioners are another example of taxpayers who may end up having to submit multiple IRP5s to SARS for the tax year. This is because pensioners often receive several annuities, pensions or some other form of monthly income from their previous employer or a fund each month.

The PAYE shortfall

Let’s have a recap of the basics. Individuals are taxed on their total income earned during the tax year. This means that if a person works for two employers, the two salaries received should be added together, and the tax table should be applied to the individual’s 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. That is, the more you earn, the more tax you pay.

In the case of the taxpayer who works two jobs, each employer will calculate their respective PAYE deductions under the incorrect assumption that their salary is the only salary that the taxpayer has received. When the two salaries are added together, however, the individual is pushed into a higher tax bracket, which results in additional tax being owed to SARS. Often this is a substantial amount, which comes as a surprise to the taxpayer.

Let’s look at an example to illustrate how significant the tax underpayment can be.

Refilwe works half day as a financial manager for Company A and earns R35 000 per month. In addition, she works 15 hours per week for Company B, which pays her a salary of R22 000 per month.

She is regarded as an employee for tax purposes by both Company A and B. Consequently, they both deduct PAYE every month from her salary and issue her with an IRP5 at year end.

Assuming she worked for both companies for the full twelve months of the 2020 tax year, the tax she paid would have been as follows (rounded to the nearest rand):

Company A
Total salary:                             R35 000 X 12 = R420 000
Tax per tables:                         R63 853 + 31% (R420 000 − R305 850)
After primary rebate:                R99 239,50 − R14 220 = R85 019,50

Company A would apply the tax tables to Refilwe’s salary of R35 000 per month, which results in her earnings above R305 850 being taxed at 31%.  Company A is probably unaware of the salary that she earns from Company B. Even if they knew these details, it is unlikely they would perform a calculation to work out her total income and apply the applicable tax rate to the sum of both her salaries.

Company B
Total salary:                            R22 000 X 12 = R264 000
Tax per tables:                         R35 253 + 26% (R264 000 − R195 850)
After primary rebate:                R52 972 − R14 220 = R38 752

Company B would apply the tax tables to Refilwe’s salary of R22 000 per month, which results in her earnings above R195 850 being taxed at 26%. Just like Company A, Company B is probably unaware of the salary that Refilewe earns from Company A.  

Assuming Refilwe earns no other income, the total employee’s tax she paid for the year equals R123 771,50 (R85 019,50 + R38 752).

When she submits her IRP5 information in her 2020 tax return, SARS will perform her tax calculation as follows:

Company A + Company B 
Total salary:                           (R420 000 + R264 000) = R684 000
Tax per tables:                       R147 891 + 39% (R684 000 – R555 600)
After primary rebate:               R197 967 − R14 220 = R183 747

SARS will apply the tax tables to Refilwe’s combined income of R57 000 per month. At this earnings level, the amount earned above R555 600 is taxed at 39%, which results in a significant shortfall in the PAYE that she has paid.

When Refilwe receives her 2020 ITA34 (assessment) she will see she owes SARS a whopping R59 976(R183 747 – R123 771).

The underpayment can be broken down as follows:

Actual tax calculation for salary B
Tax per tables:                         R35 253 + 26% (R264 000 − R195 850)
Tax paid (before rebate)       R52 972

Correct tax treatment for salary B
R3 300          X 31% =     R1 023
R132 299      X 36% =     R47 627,64
R128 401     X 39% =     R50 076,39
R264 000                      R98 727,03

Underpayment:                             R45 755,03 (R98 727, 03 − R52 972)
Primary rebate applied twice:   R14 220
Total tax still due by Refilwe for 2020:       R59 975

Besides applying the incorrect tax rate (that is, correct for her individual salary but incorrect in relation to her combined salaries), each company applied the primary rebate to their tax calculation, which has resulted in her receiving it twice. If Refilwe had done some consulting work for a third company which had issued an IRP5 as well, the primary rebate would have been deducted for her three times contributing to an even greater PAYE shortfall.

Unfortunately, Refilwe has no option but to pay the additional tax since the Income Tax Act prescribes that the onus is on the taxpayer to ensure their tax is paid in full.

The pensioner predicament

As mentioned earlier, pensioners often receive several IRP5s/IT3s due to annuities received from different sources in the year. In most instances, each amount received (when looked at individually) falls below the tax threshold, especially if the taxpayer is older than 65 years, which means no tax is withheld at all. However, when all the amounts are added together, taxpayers actually find themselves having earned more than the tax-free threshold, which results in tax being owed to SARS. This often comes as a shock to the pensioner who has invariably not budgeted for the unexpected tax liability.

Takeaway

Taxpayers must be aware that if they receive income from multiple employers or funds, it is likely that they have underpaid tax during the year.

Below are three methods which can be used to avoid facing a nasty tax bill at the end of the financial year:

1 Advise one or more of the funds (in the case of a pension) that you receive other income and ask them to withhold a portion for tax before making the monthly payment. Similarly, in the case of receiving more than one salary, advise one of the companies to withhold more tax before payment.

2 Calculate your correct tax liability based on your total income and keep aside a monthly amount to cover the shortfall that will be due on assessment.

3 Register as a provisional taxpayer and settle an amount with SARS every six months based on the eventual tax owed.

By following any of the above methods, taxpayers will not be caught off guard when it comes to settling their tax bill on assessment.

This article was originally published in ASA.