As from financial year 2018-19, compensation or other payments received in connection with the termination of employment, or the modification of the terms and conditions of employment, are taxable as income from other sources under section 56 of the Income-tax Act, 1961.

Do retrenchments need a tax directive?

Your employer will submit a tax directive application to SARS before the lump sum amount is paid to you. You will need to declare this in your annual income tax return.

What is an EMP201 form?

The EMP201 is a payment declaration in which the employer declares the total payment together with the allocations for PAYE, SDL, UIF and/or ETI. A unique Payment reference number (PRN) will be pre-populated on the EMP201, and will be used to link the actual payment with the relevant EMP201 payment declaration.

Which is taxable as compensation?

Gross compensation income is defined as taxable income arising from an employer/employee relationship and includes the following: salaries, wages, compensation, commissions, emoluments, and honoraria.

Why would a tax directive be declined?

If the deceased’s tax affairs are not in order, or up to date, then SARS will refuse to issue this directive. In that case, you should contact SARS, find out what the problem is (eg outstanding tax returns), and do your best to rectify them.

How is ETI calculated?

160 hours in the month, the actual remuneration amount paid must be used. Less than 160 hours in the month, the remuneration amount must be ‘grossed up’ to 160 hours per month to calculate the value of the ETI. The amount can then be calculated and be ‘grossed down’ in the same ratio.

What is EMP501 SARS?

An EMP501 is the report of all your staff earnings, required by SARS. It needs to be submitted twice a year and must be submitted before you can issue IRP5 certificates to your staff. SARS has imposed high administrative penalties for each incorrect line item in an EMP501 reconciliation.

How is compensation income calculated?

To compute this, just get your basic monthly salary and multiply it by 12. For example, if your monthly salary is P42,099.00 then your annual salary is equal to P505,188.00.

Why did SARS decline tax directives?

If the employer submits the tax directive application without the income tax reference number and indicate ‘the reason taxpayer is not registered’ is unknown or any other reason, and the employee has registered for Income Tax and an income tax reference number was issued, the SARS tax directive system will decline the …

How long does a tax directive take?

Although it usually takes SARS two business days to issue a tax directive, there are instances where we have to apply for a tax directive manually. Manual tax directives take a minimum of 21 business days to be issued.

Is severance taxed like a bonus?

Severance pay is taxed by the IRS the same as wages—you’ll have to pay employment (FICA) tax and income tax withholding at your usual rate. The same goes for other taxable income on your final paycheck, including unused vacation time, commissions, bonuses, etc.