Strategies for managing payroll complexity

Staying ahead of the payroll game is no easy feat. With the continual changes in legislation and regulations, HR and payroll professionals have their work cut out for them.

To stay compliant, they need to understand the impact of legislative changes on processes and systems such as UIF and PAYE calculations, pension and medical aid fund contributions, and – since the start of the pandemic – how to manage the complexities of a remote or hybrid workforce.

In fact, the Sage HR and payroll in SA: Rising to the challenges of change research found that 77% of respondents struggle with the complexity of payroll taxes.

So, how can businesses stay ahead of payroll complexities? We asked Heinrich Grove, founder of SA Accounting Network and owner of HD Accountants, to share his advice on dealing with payroll complexities.

Salary structures: simple, safe, smart

“It’s no secret that people don’t want to pay a lot of tax. But the reality is that if you’re going to make a lot of money, you’ll be paying a lot of taxes – there’s just no way around that.”

Heinrich says that the complications arise when people try to reduce their tax liability and start fiddling with payroll packages.

“My recommendation is, when it comes to salaries, try and keep things as simple as possible. The more complex you make your salary structure, the more possibilities there are that the Receiver of Revenue (SARS) is going to start asking questions about your payroll system.”

Simplicity is undoubtedly key, as 30% of payroll professionals already find it challenging to keep track of the latest tax- and labour-related legislation, and 50% battle to explain tax calculations to their employees. Keeping packages and structures simple will help employees understand their tax responsibilities while ensuring the business stays compliant.

Avoiding the manual mayhem

Everyone has heard of ‘moving to the cloud’ and ‘cloud-based SaaS’, but until early 2020, it was mostly something that businesses kept on their ‘nice to have’ lists.

When COVID-19 hit, many HR and payroll professionals had to deal with new developments, such as managing remote or hybrid workforces and ensuring the security and integrity of employee data – and it left them completely overwhelmed.

According to Sage research, 83% of HR and payroll professionals spend a substantial chunk of their time on repetitive tasks and payroll admin. In fact, they’re spending up to a third of their day preparing and processing payroll, compensation, and benefits (52%), and maintaining employee records (45%).

This is especially true for users of non-specialist HR and payroll systems, 36% of whom are less confident in navigating COVID-19-related regulations, compared to 20% of cloud-based system users.

The once ‘nice to have’ rapidly became a ‘need to have’ – right now

Heinrich also addressed the complexities that manual payroll systems create: “When paying salaries, you can use a manual system, where you download the tax tables from the SARS website, have a look and see what you’re earning, see what the tax calculation is, and do manual payslips.”

He says this system would be adequate if people earned a fixed salary every month but foresees great complexity and risk of non-compliance when processing variable incomes.

“If you’re a director of a company and your salary fluctuates, or even if you’re paying your staff commission and things like that, you must get onto a payroll system. Otherwise, you’re going to pick up problems with the Receiver of Revenue,” he says.

Respondents to the Sage research believe that technology simplifies payroll through:

• Automated tax calculations (70%)
• Digitised payroll and employee data (56%)
• Integrated payroll, time management, and HR systems (56%)
• Centralised records using cloud-based systems (46%)
• Giving employees ownership of their data (34%)

Tripping up on travel

“What we’re seeing a lot of now,” says Heinrich, “is people sitting with travel allowances on their IRP5s, and, thanks to the various lockdowns and the resulting lack of travel, they are unable to produce their full logbooks.”

Since a portion of a travel allowance isn’t taxed, many people ran into trouble for unduly benefiting from this tax break. Unable to produce completed logbooks, they were liable to pay the tax on the previously excluded portion.

Heinrich suggests that employees who aren’t using their travel allowance ask for it to be removed from the payroll system to simplify their tax requirements.

Employers should look instead at reimbursing employee travel. “It’s a simple system to use,” says Heinrich, “and as long as you reimburse your employees at a rate lower than that of the Receiver, there is no tax payable. If you reimburse them at a higher rate, the amount becomes taxable and, come tax time, they’re going to run into problems again.”

Managing medical contributions

Another area of business that increases payroll complexity – and that is affected by outdated, non-specialist payroll systems – is the management of medical aid contributions.

This is because manual or outdated software cannot keep up with and remotely implement legislative changes to payroll, leaving little time or capacity for HR and payroll professionals to analyse data or respond to changing workforce needs. This results in inconsistent data reporting, poor system integrations, and an inability to adapt to change quickly – all of which will negatively affect variable monthly contributions.

Heinrich says that many people don’t quite understand how the tax system works when it comes to medical aids.

“Most medical aid contributions increase in January, which means that you will need to make those adjustments to your payroll packages then. Come financial year-end, the medical aid will send those tax certificates to SARS. If you haven’t updated your payroll and the amounts are inconsistent, the Receiver is going to ask questions about your accuracy and compliance of your payroll system.”

A cloud-based payroll system ensures that your software automatically updates as and when required, helping you avoid complexities arising from variable contributions.

WFH: Who’s fiddled here?

The pandemic lockdowns showed businesses that they can function as effectively – if not more so – when their employees work remotely. Work from home (WFH) became the new normal for many, and employers and employees alike relished the time and cost savings that came with it. But the payroll complexities? Less so.

“SARS is incredibly strict on home office expenses,” says Heinrich, “so I would recommend that companies find other ways to compensate people for working from home.”

Employees are already saving by not spending hours on the road every day or paying for the fuel and vehicle wear and tear associated with daily travel, so when they do start claiming home office expenses, Heinrich believes it “opens up a whole can of worms” as there are many different things to account for, and numerous records that need to be kept in order to claim. If something is even remotely amiss (pun intended), it will be a red flag for the Receiver.

“Companies that wish to contribute to an employee’s WFH expenses could perhaps look at paying for their internet connection or covering their initial workspace set-up. This way, the employee continues to benefit, without adding further complexities to payroll.”

Keep it simple

The best way to manage payroll complexity is to keep it as simple as the package allows. Everyone wants to pay as little tax as possible, but trying to swindle the Receiver will cost far more in the long run than any legitimate tax return ever could.