Non-compliance with employee taxes negatively impacts individuals

There is talk of rights for employees to compel their employers to comply.
Sars views the non-payment of employee tax as fraud. Image: AdobeStock

One of the most frustrating tax issues for an individual to deal with is not getting credit for the employee’s tax that has been withheld from their salaries because of non-compliance by their employers.

They are generally caught between their employer, who thinks the South African Revenue Service (Sars) should fix the problem, and Sars, which thinks the employer should fix it. So says Carmen Westermeyer, who facilitated The Tax Faculty’s recent virtual discussion on persistent tax issues.

Administratively, one of three main reasons may be the problem:

  • Employers who do not submit the reconciliation of all employees’ earnings (EMP501);
  • Sars not getting proof of payment; or
  • The electronic filing system causing hiccups.

It is the employer’s obligation to deduct and declare the correct amount of pay-as-you-earn (PAYE) tax from each employee’s remuneration and pay this over to Sars on a monthly basis.

Read:

When employers submit the annual reconciliation documents accurately and timeously, they not only meet their own liability – they ensure that their employees are tax compliant, Sars says on its website.

The reconciliations are used to prepopulate auto-assessments and personal income tax returns.

Non-compliance includes the wilful or negligent failure to submit an EMP201 return (monthly), an EMP501 return or IRP5/IT3(a) certificates to Sars; the wilful or negligent failure to deliver an income tax certificate (IRP5) to an employee or former employee, or deducting or withholding employees’ tax from employees, while wilfully using the money for purposes other than paying it to Sars.

First prize

Westermeyer says when an employee does not get credit for tax that was withheld, the first prize is to get the employer to submit a correct reconciliation.

Second prize will be to show some documentary proof to Sars that the taxpayer has made an effort to get the employer to fix the problem in order to have their tax return processed.

The sluggish economy, the Covid-19 pandemic, unrest and floods have severely impacted business in SA, and many have deducted employee’s tax but used it to keep the company afloat for as long as possible.

Read: Should companies defer their PAYE obligations?

“If an individual finds [themself] in a situation where [their] employer is bankrupt or insolvent, they should request Sars to issue a bad debt adjustment in their return for the portion of PAYE that was not paid,” says Westermeyer.

However, this still leaves the employee in the unpleasant situation where they thought all their taxes were paid but they now have to ‘pony up’ the sum.

Options for employees

Westermeyer says if the employer claims to have withheld the tax, but it was never paid to Sars, the individual should consider entering into a compromise with Sars for the short payment of income tax.

There have been calls for amendments to be made to the Tax Administration Act – for a heavier stick to punish employers who do not meet obligations with respect to their employees.

“There should be some recourse available to the employee to ensure that the employer complies with their obligations,” says Westermeyer.

Administrative penalties

Currently, Sars may levy an administrative penalty if the employer fails to submit a complete reconciliation on time. Depending on the number of months outstanding, the penalty is up to 10% of the total employees’ tax liability.

If the employee’s tax is not paid on or before the due date, employers will be penalised by an amount equal to 10% of the outstanding employee tax amount. In addition, interest will be charged for the period  the amount remains unpaid.

Westermeyer says Sars views the non-payment of employee’s tax as fraud.

“The employer is effectively doing the collection on behalf of Sars, but by not paying Sars the employer is effectively stealing from the employee.”

The view that it is not Sars’s loss to take is legally correct, but procedurally it remains problematic, she adds.

Taxpayer rights

There is a broader conversation between the Office of the Tax Ombud, National Treasury, Sars and recognised controlling bodies about the need for employees to have certain rights that will compel the employer to submit the annual reconciliation, she adds.

One school of thought is that employees must be able to sue their employer if they do not meet their obligations and cause hardship for the employee.

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