Avoiding Penalties: Payroll Essentials for NPOs
Many nonprofit organisations (NPOs) in South Africa are Public Benefit Organisations (PBOs) and therefore exempted from paying taxes. This tax exemption, however, does not apply when it comes to employee taxes and unemployment insurance.
All NPOs that employ staff must register with the South African Revenue Service (SARS) and comply with payroll tax obligations such as PAYE (Pay As You Earn), UIF (Unemployment Insurance Fund), and other payroll-related taxes. While PBOs may be exempt from income tax on certain conditions, this exemption does not apply to payroll taxes.
How to ensure compliance
All NPOs with employees must register with the following organisations:
South African Revenue Service (SARS) for PAYE, UIF, and SDL (Skills Development Levy)
Employees Tax Requirements
NPOs must deduct this PAYE from employees' salaries based on the tax tables provided by SARS. The deducted funds should be declared monthly and paid over to SARS. NPOs should keep detailed records of all payroll transactions, tax deductions, and employee details to support all filings and facilitate potential audits.
Reporting Requirements
Payroll requirements can get complex. NPOS must get expert advice and understand all the requirements applicable to them. Below is an overview of some of these requirements.
1. Monthly Reporting to SARS – EMP 201
Monthly PAYE, UIF, and SDL contributions must be submitted via the EMP201 form. The completed forms should be submitted, and payment made before the 7th of the following month or the closest working day before the 7th if it falls on a weekend.
2. EMP501 reconciliations
EMP501 reconciliations are required bi-annually confirming the accuracy of payments made throughout the financial year. The reconciliation is between the amount of tax deducted by the employer over a period and the totals on the employee tax certificates. The three elements that must be reconciled for a successful submission:
Monthly Employer Declarations (EMP201s) submitted [Pay-As-You-Earn (PAYE) and/or Skills Development Levy (SDL), Unemployment Insurance Contributions (UIC) amounts due and Employment Tax Incentive (ETI), if applicable]
Payments made (excluding penalty and interest payments)
IRP5/IT3(a)s generated – PAYE, SDL and UIC values.
The periods covered and dates for these reconciliations are:
Bi-annual reconciliation covering the period of 1 March to 31 August to be submitted by 31 October
Annual reconciliation covering the full year from 1 March to 28 February to be submitted by 31 May.
3. UIF Reporting and Payments
UIF provides short-term relief to workers when they become unemployed or unable to work due to maternity or adoption leave, or illness.
Report and contribute to UIF monthly using the information declared in the EMP201 form. Contributions are calculated as 2% of the remuneration paid to employees, 1% is paid by the employer and 1% is deducted from the employee. Refer to the uFiling System User Guide for more detail on the processes to register and to submit declarations. The uFiling system is also used to keep all employees information up to date.
4. SDL Reporting and Payments
All employers operating within South Africa with a total annual payroll exceeding R500,000 are required to register for SDL. Once registered, employers must contribute 1% of their total payroll to the SDL. This contribution is paid to the South African Revenue Service (SARS) along with other payroll taxes, such as PAYE and UIF, using the EMP201 form. The funds collected are then allocated to Sector Education and Training Authorities (SETAs) to support various training and development programs that benefit the employer’s respective industry. Failure to register and contribute to the SDL can result in penalties and interest charges, emphasizing the importance of compliance for all qualifying employers.
5. Employment Equity Reports
If your nonprofit employs more than 50 people or has a turnover above a certain threshold, an annual employment equity report must be submitted to the Department of Labour detailing workforce demographics and equity plans. The turnover threshold is determined per sector in Schedule 4 of the Employment Equity Amendment Act No. 47 of 2013.
Affected NPOs can register and submit reports on the DOL Systems Portal.
6. Annual Returns for the Compensation Fund
NPOs that employ one or more workers must register with the Compensation Fund. The Fund compensates employees who suffer occupational injuries or diseases, covering medical expenses, disability, and death benefits. NPOs must register online and provide necessary organisational details, including the NPO type, number of employees, and the estimated annual earnings of employees. Refer to the ROE Manual available for download under the user menu on the Online Submission Portal.
Accounting for Payroll
In year-end accounting for accrued expenses, it's essential to recognize costs incurred during the fiscal year but not yet paid. This is particularly relevant for payroll taxes such as PAYE (Pay As You Earn), UIF (Unemployment Insurance Fund), and SDL (Skills Development Levy) in South Africa, which are often paid after the fiscal year ends.
For example, suppose a nonprofit organization in South Africa calculates that in the month of February (the end of its fiscal year), it owes R10,000 in PAYE, R2,000 in UIF, and R1,000 in SDL. These taxes relate to February's payroll but are due by the 7th of March. At the year-end of February 28th, the NPO would need to recognise these obligations in its financial statements to accurately reflect the expenses and liabilities of that fiscal year.
The journal entries would be as follows:
Debit: Payroll Expense (PAYE) R10,000
Payroll Expense (UIF) R1,000
Payroll Expense (SDL) R2,000
Credit: Accrued Payroll Taxes Payable (R13,000)
Description: Provision for payroll expenses for SARS payment made after year-end.
This entry ensures that the expenses are recorded in the period in which the employees earned their respective wages, aligning with the accrual basis of accounting. The liability remains on the balance sheet until it is settled in March, maintaining the integrity of the financial reporting. This journal will be reversed in the following year.
The Cost of Non-Compliance for NPOs
Financial Penalties and Fines
SARS Penalties: Nonprofits failing to comply with PAYE regulations may face penalties of up to 10% on the amount unpaid, in addition to interest on late payments. Continuous non-compliance can lead to additional administrative penalties depending on the severity and frequency of offences.
Compensation Fund Penalties: Failure to register or submit annual returns to the Compensation Fund can result in penalties. These penalties include fines up to the full amount of compensation payable for any claim arising during the period of non-compliance, effectively doubling the financial impact on the organization.
Legal and Operational Repercussions
Legal Action: Persistent non-compliance can trigger legal actions from both SARS and the Department of Labour, potentially leading to criminal charges against responsible parties.
Operational Disruptions: Addressing legal challenges and rectifying compliance issues can significantly disrupt nonprofit operations, diverting resources away from core activities.
Reputational Damage
Non-compliance can damage a nonprofit's reputation, impacting donor trust and funding opportunities, which are critical for sustained operation.
Impact on Employees
Inadequate contributions to UIF or the Compensation Fund can leave employees without necessary financial support during unemployment or after workplace injuries, creating personal hardships and potential legal claims against the nonprofit.
Recommended Actions to Ensure Compliance
To ensure compliance with payroll regulations, accountants in nonprofit organizations (NPOs) can adopt the following recommended actions:
Timely and Accurate Payroll Processing: Adhere strictly to payroll schedules and ensure all payroll transactions are processed accurately. NPO Accountants should ensure that the payroll is confirmed to be correct and approved before it is finalised.
Regular Training and Updates: Stay informed about the latest payroll regulations and statutory changes by attending workshops, seminars, or online courses.
Implement Robust Internal Controls: Set up strong internal procedures for payroll processing to prevent errors and ensure all data is securely handled.
Periodic Reviews: Conduct regular internal or external audits to verify compliance with payroll regulations and identify any areas needing improvement.
Utilise Payroll Software: Invest in reliable payroll software that automates calculations, tax deductions, and compliance reporting.
Outsource Payroll Functions: Consider outsourcing payroll management to experienced providers to leverage their expertise in compliance and reduce the administrative burden.
Maintain Detailed Records: Keep comprehensive and organized records of all payroll activities to support filings and facilitate audits.
Outsourcing the Payroll function
Due to the specialised nature of payroll management, it is often more cost-effective to outsource this function instead of doing it in-house. The following considerations assist in making the decision to outsource payroll:
Cost effectiveness: Outsourcing cuts down on the need for your payroll staff and technology, saving money.
Keeps up with rules: Payroll companies know all the latest tax rules, helping you avoid fines.
Let’s You Focus: It frees up time to concentrate on what the NPO does best.
Better Technology: Uses the latest payroll systems, which are accurate and easy to use.
Safer Data: These services use strong security measures to keep employee information safe.
Flexible to Your Needs: They can handle changes in staff numbers easily, whether growing or downsizing.
Expert Help: You get professional help for complex payroll tasks and support during audits.
When selecting a provider, consider their experience with nonprofits, service range, security standards, and customer support quality. Evaluating reviews and references can also help ensure reliability and service excellence. SAGE Accounting and Payroll is a proudly CIBA partner that can revolutionise your practice. Learn more on the CIBA website here.
Assist NPOs better by becoming a licensed NPO Treasurer or enrolling for CIBA’s Nonprofit Accountant License!
By becoming a licensed NPO Treasurer you will:
Understand the context of the Non-profit Organisation (NPO) in the NPO sector
Understand the different legal forms of an NPO
Identify the role of an NPO treasurer including the record keeping requirements
Understand the fundamentals of governance and ethics
Learn about the registration process and registration requirements for a NPO
Understand the compliance and reporting requirements
Receive an introduction to accounting
Understand the chart of accounts and classify accounts correctly
Implement the accounting cycle for revenue and receipts
Implement the accounting cycle for purchases and payments
Understand fixed assets
Understand payroll
Obtain an overview of non-profit taxation
Obtain an overview of Value Added Tax relating to NPOs
Understand the budget process of a NPO
Learn about drafting management accounts and reports for a NPO
Learn about available technology tools
Obtain insights into communication and fundraising.
The objective of this license is to equip Business Accountants with the designations BAP(SA) or similar to:
Be able to compile accounts from incomplete records to assist non-compliant NPOs during the DSD deregistration campaign to become compliant
Understand the basic concepts of effective marketing strategies and familiarise yourself with the latest industry trends and technologies to increase your income potential.
Develop their skills in charity and non-profit organisation accounting, financial management, and financial reporting.
Develop a specialist knowledge of the Non-Profit Organisations Act, 71 of 1997 and Income Tax Act provisions regarding Public Benefit Organisations.
Recognise the financial statement presentation and disclosure requirements that apply to not-for-profit entities.
Identify Department of Social Development and SARS filing requirements of an exempt organisation, recognise the core components of the annual information return, and identify when an NPO may be subject to unrelated business income tax.
Recognise best practices in NPO board governance, risk assessment and internal controls.
Identify steps involved in planning a successful audit, review or accounting officer engagement and identify key considerations and client communications.
