With the recent rise in minimum wage and the new tax season starting, the conversation naturally flows to compliance. However, compliance is an umbrella term that means that a business “abides by the law”. Yet many subdivisions focus on specific areas of the business, such as tax and accounting compliance.
Common Misconceptions about Tax and Payroll
What many small business owners misunderstand about tax and payroll compliance is that they treat it like an annual event, not a monthly discipline. So says Ania Strydom, Payroll Compliance Research Manager at Deel Local Payroll.
“In South Africa, payroll compliance is a cadence: calculate correctly every pay run, pay over on time, and submit reconciliations accurately (and be able to prove it later),” she shares, because record-keeping is an ongoing process, not a once-off task. “Entrepreneurs assume ‘my accountant will sort it out’ without clean payroll data. Yet, SARS is increasingly data-led, and payroll is one of the richest data sources, so gaps between payroll, bank payments, and SARS submissions show up quickly in verifications and audits.” Without correct and accurate information, the accountant doesn’t have information to sort through.
Strydom notes that many business owners confuse ‘paying people’ with ‘running a compliant payroll.’ “Compliance includes correct employee classification (employee versus contractor), correct taxability (bonuses, allowances, fringe benefits), and correct treatment of deductions and statutory items,” she explains. “They underestimate how fast rules change, and how quickly those changes bite. Even when changes are only inflation adjustments, tax tables and thresholds still need to be applied from the effective date (typically aligned to the tax year starting 1 March).”
Additionally, Strydom says that SMMEs think that because they are small, they can fly under the radar – not true for all SMMEs, but some small or micro businesses do believe this. “We saw the 2026 Budget messaging strongly reinforce that administration and enforcement are becoming more automated; small businesses benefit from being audit-ready early.”
Another point that often confuses entrepreneurs is pay before and after deductions. “There is also widespread confusion between gross employment cost and take-home pay, specifically, a misunderstanding of what constitutes remuneration for the purpose of calculating PAYE, UIF, SDL, and ETI eligibility. Allowances, fringe benefits, and variable pay are frequently miscategorised, leading to compliance exposure.
“Finally, many small business owners believe that using a basic spreadsheet or generic accounting software equates to payroll compliance. What it actually equates to is payroll processing. Compliance requires staying current with legislative changes, something that requires a dedicated compliance function or a purpose-built payroll solution.
“Compliance isn’t paperwork – it’s operational hygiene. If payroll is wrong, your tax position is wrong.”
Fixing What’s Broken
“The first and most important step is to stop treating payroll as an administrative afterthought and recognise it as a core compliance function with real financial and legal consequences,” she says.
Strydom emphasises that business owners need to understand the full cost of employment. “Entrepreneurs should work with a payroll professional or tax practitioner to understand the difference between an employee’s gross salary, the total cost to the company (CTC), and the actual PAYE and statutory deductions applicable, including UIF at 1% (employer and employee), SDL at 1%, and any applicable ETI offsets.”
She continues to recommend the following areas receive attention:
- Register correctly and timeously. Many small businesses delay PAYE registration because they believe there is a headcount or earnings threshold that triggers the obligation. As soon as any employee is remunerated above the tax threshold, PAYE registration and withholding obligations apply.
- Conduct a ‘Compliance Health Check’. Review all worker contracts to ensure correct classification. Reconcile payroll reports to (a) bank payments, and (b) what was declared/paid to SARS.
- Keep a clean master data like employee IDs, tax numbers, start/end dates, payment details, benefits, etc. This also drives accurate statutory reporting
- Stick to a Compliance Calendar: Data acquisition deadline, data processing/capturing deadline, monthly submissions/payments deadlines, periodic reconciliations deadlines, year-end certificates deadlines, done on time, every time.
- Automate the “Statutory Trio”: Implement a cloud-based payroll system that automatically calculates the PAYE, UIF, and SDL (and ETI where applicable). Use software that keeps an audit trail. This eliminates human error in the payroll compliance application.
Payment Management Systems are Your Friend
Advice that Strydom shares includes that the use of payment management systems helps with implementing real-time changes and makes reporting easy.
A good payroll management system helps in these practical ways:
- Automatic updates to tax tables/ tax thresholds and statutory payroll rates: When the government adjusts any statutory payroll rates, limits, threshold and values, payroll software can apply the correct values from the effective date in real time, reducing manual errors.
- Accurate PAYE recalculation after increases, bonuses, backpay, and one-off payments: PAYE is sensitive to timing and annualisation/cumulative methods. Software can recalculate correctly per pay period and prevent under- or over-withholding.
- Built-in controls and reporting: Exceptions (big variances, negative net pay risks, unusual allowances, directive-required payments) can be flagged early, and reporting supports month-end and year-end reconciliation.
- Compliance reporting: Payroll systems generate the EMP201 and EMP501 data directly from processed payslips, ensuring that what is submitted to SARS reconciles accurately with what employees have received.
The Effect of Incentives on Taxable Income
Another point that often confuses business owners is the impact that incentives have on payroll calculations.
“Job incentives usually show up in two different ways, and it’s important not to mix them up,” she says. “These are incentives paid to the employee, and incentives paid to the employer.”
She clearly lists them as follows:
A) Incentives Paid to the Employee (Bonuses, Commissions, Allowances, Benefits)
Most incentives increase the employee’s taxable remuneration, which increases PAYE. Some items can be fully or partially exempt depending on how they’re structured (e.g., certain reimbursements with supporting documents), but if you treat an allowance like a reimbursement (or vice versa), you can trigger non-compliance and penalties.
How to manage it via software:
- Classify each incentive correctly (bonus, allowance, reimbursement or fringe benefit) so that taxability is consistent and automated
- Require documentation where the law expects it (e.g., business travel substantiation).
B) Incentives Paid to the Employer (e.g., Employment Tax Incentive; ETI)
ETI generally reduces the employer’s PAYE liability to reduce youth unemployment (when eligibility rules are met) rather than reducing an employee’s taxable income directly.
How to manage it via software:
- Validation: The system should automatically flag which employees qualify based on age, ID number, wage, etc., where possible.
- Calculation: It should automatically apply the ETI formulas (which change based on whether the employee is in their first or second 12-month cycle of the incentive).
- Reporting: It ensures the ETI claim is correctly reflected on the monthly EMP201 to reconcile ETI claims and SARS submissions.
- Keep an audit record.
Prioritising payroll and tax compliance shouldn’t be a headache. Set time aside to ensure your records are in order and transactions are accurately recorded every month. It is also worth considering a payroll management system that makes real-time adjustments easy to deploy and track.
