Bootstrapping is the term used to describe the process of starting a business with no outside funding. Many famous entrepreneurs bootstrapped their now well known businesses when they were first launched including Bill Gates (Microsoft), Michael Dell (Dell Computers), Pierre Omidyar (eBay), Paul Simon (YDE) and Richard Branson (Virgin) to name just a few. These entrepreneurs used a combination of different tactics to get their businesses off the ground without outside capital.
Here are some of the tactics you can use to get your new business off the ground with little or no outside funding.
1. Break the Golden Handcuffs
Many talented individuals who have a desire to start a business are scared of not meeting the car repayments on the BMW, not paying into the pension fund and not meeting the repayments on the holiday house. The reality is that starting a business takes sacrifice. Unless you are willing to make a sacrifice, entrepreneurship is not for you. If you do want to launch a business in the future, set a deadline for when you wish to start and begin cutting back now. Learn to live on less and put money aside so that you have some of your own funds when you do break away.
2. Back Yourself
The greatest believer in your business idea is you. If you are not willing to put a large chunk of your own money into the business and make the necessary financial sacrifices to get the business off the ground then no one else will be willing to back you. Once you have put your own resources into the business, your most likely source of support is the people closest to you. They know you, trust you and want to see you succeed. Paul Simon, in launching the first YDE store in a back alley shop in the centre of Cape Town, borrowed R10 000 from his mother’s retirement policy to get the concept off the ground. He never borrowed money again nor did he take on any outside investors until he sold the store 10 years later to Truworths for an undisclosed sum in excess of R200 million.
True entrepreneurs become jacks-of-all-trades in the start-up phase of their businesses. There have been accountants who became designers, engineers, copywriters, marketers, programmers and salespeople. There is no such thing as sticking to your specialty and only doing what you are trained for if you are launching your own venture. The more you do, the less you need to pay someone else to do so teach yourself to engage with new activities and tasks so that you can get your business off the ground. When you are making millions, then you can hire an accountant, outsource the design, engage a PR firm and get a freelance copywriter in but until then you and your management team will need to train yourselves to fill many of these roles.
4. Work in Parallel
Selling your time or delivering a service usually costs very little and translates into quick cash. Therefore, it is sensible in the early stages of a business to do some sort of consulting work while you are building the business and its products. Selling time means that you can have income in month one and you can use that income to acquire what is required to get the rest of the business off the ground.
5. Keep the End in Mind
Consulting is a good way to generate cash flow in the start-up phase of a business. The risk is that the entrepreneurs become too dependant on consulting or too greedy. They sell more consulting time without ever developing the product that can be sold independently of the consulting work. They then get caught in the cycle of just doing more and more consulting work and the business becomes totally dependant on them selling time. Selling time means hard work for the entrepreneur and fewer opportunities to sell the business in the long-term. If you do opt to consult to generate cash flow, always try to work towards productising your offering so that you don’t need to be present to deliver your offering. This means that you can be on holiday and still earning money or your business will be far more attractive to a buyer because they get a viable product that they can take over and sell.
6. Get Going
Too many entrepreneurs want to raise hundreds of thousands of rands before they have done anything. While your business is still a concept that only exists on paper it is unlikely that anyone will take notice. The reason that Facebook was able to raise $25 million in venture capital was that Mark Zuckerberg had already built his first version of the Facebook platform and had already attracted users. It worked the same way for Sergy Brin and Larry Page of Google. They put up a test site on Stanford University computers and asked their friends to try it out before they had any investor interest in their multibillion dollar search algorithm. If you want to get people interested in what you are doing, start doing it, build something tangible that they can see, try and experience in order to get them to buy in.
Be careful of analysis paralysis. Many people spend so much time planning that they never actually get into business. MBAs and CAs are notorious for overanalysing an opportunity. Often they build so many models, do so many excel spreadsheets and engage in so much discussion that they never actually get to the market. This leads to nothing. There comes a time in the process of building a business when one needs to draw a line in the sand, decide it is worth doing and just start building the product or delivering the service.
7. Ship then Test
Many people want their product or service to be absolutely perfect before they ship. Microsoft has never done this. They ship their software before it is perfect and adjust and update along the way. Certain products or services don’t need to be perfect before you ship. Quality assurance processes are critical for other products. If MSN messenger does not work absolutely perfectly, it can quickly and easily be fixed and no one will die. If Boeing ship a product before it has been perfectly refined and tested, the ramifications may be far more serious. Ask yourself: “Would I let my mother or father use the product or service in its current state?” If the answer is yes, ship it.
8. Sell (upfront)
If the product or offering that you are creating in your new business is appealing enough, you may be able to make some sales before the product is produced. The money that comes from these sales can be used as a form of capital in the development of the product. Anyone with a compelling enough product and some innovative selling skills can sell their product or service – even before it is developed – and use that cash to develop the product or service.
Dell computers allow users to create their own PC via their website; they then get customers to pay for their PC before they even start building it. After receiving the payment they begin building the computer and ship it to the customers 10 days later. This gives the company massive cash flow advantages and enables them to hold minimum or no finished goods inventory. How could you sell your goods or services and collect the cash before you have even begun to build the product or deliver the service?
In launching a new business, you will almost always make use of suppliers. Your suppliers are the people giving you a product or a service. If you are retailing coffee, your suppliers are the people giving you coffee beans and mugs. If you are starting a website, they may be providing you with server space. It is very useful to try to negotiate payment terms with suppliers who allow you to pay them 30 or 60 days after they have delivered the product or service to you. This is not always easy but you may be able to convince them by being a tough negotiator or by offering them something in return for favourable payment terms.
As you grow as a business and your negotiating power with suppliers increases, this becomes a more realistic option. Pick n Pay is brilliant at it. They get suppliers to supply stock, they then sell that stock to customers four to six days later (on average), customers pay in cash as they buy the goods and Pick n Pay pays the supplier 90 to 100 days later. This means that they have the suppliers’ money for 90 days before paying it over.
As a smaller business you may need to incentivise suppliers to give you extended credit terms. Such incentivisation can come in many forms: One online marketing company gave their client a free monthly campaign in return for favourable credit terms while other companies sometimes select their suppliers on the basis of their credit policy.
Swapping and sharing are two of the most logical yet overlooked tactics for bootstrapping. It makes no sense for a start-up business to buy its own printer or delivery vehicle or rent its own boardroom or manufacturing facility. Clever bootstrappers will link up with other small businesses and share resources, thereby minimising the outlay and maintenance cost for those resources.
Bartering is the oldest way of doing business. People have bartered for years, swapping their wares and services for the wares and services of others. This is one of the most powerful tools for anyone looking to launch a business on a really small budget. Offering your product or service to another business in exchange for something that you need creates a real win-win relationship for both parties. You land up getting what you need to start your business at a lower ‘cost’ than normal and more importantly for a zero cash outlay and the other party gets something they need for much lower than the market price.
Craft a verbal proposal for suppliers, offering them something of value in exchange for something they have that you require to manage or launch your business.
The most critical thing that you can do in bootstrapping your business is to manage for cash flow and not for profits. Over 70% of the start-up businesses that fail are profitable. They don’t fail because they are not making profits; they fail because they run out of cash. They don’t have anything left in the bank account to pay suppliers, employees or other creditors and therefore need to file for bankruptcy. Cash is the short-term economic driver of a business, so do everything you can to keep your cash balance in the black.
Starting your business with mounds of capital can make your business fat, lazy and unresponsive. Starting your business with minimal capital will make you lean, responsive and focused on meeting the needs of customers. To unleash your true creativity in starting a business, launch the business without outside capital. This will force you to put the foundations in place for a business that can last long into the future.
Tips For Successful Bootstrapping
Here are a few tips to help you launch a successful business through bootstrapping.
1. Forecast from the bottom up
Most entrepreneurs forecast top-down: “If 1% of South African car owners install our satellite radio systems, that’s 94 000 systems.” The bottom-up forecast: “We can open 10 facilities that each install 10 systems a day.” Guess which forecast is more likely to happen?
2. Forget the “proven” team
They’re overrated. Hire young, inexpensive, hungry people with fast chips, but not necessarily a fully functional instruction set.
3. Focus on function, not form
Bootstrappers focus on function: computing, getting from Point A to Point B and knowing the time of day. All the chair has to do is hold your butt. It doesn’t have to look like it belongs in the Museum of Modern Art.
4. Under staff
Many entrepreneurs staff up for what could happen, best case. Bootstrappers under staff, knowing that all hell might break loose.
5. Go direct
The optimal number of mouths between a bootstrapper and her customer is zero. Sure, stores provide great customer reach and wholesalers provide distribution. But e-commerce was invented so you could sell direct and reap greater margins.
6. Position against the leader
Toyota introduced Lexus, claiming it’s as good as a Mercedes-Benz but half the price – Toyota didn’t have to explain what “good as a Mercedes-Benz” meant. How much do you think they saved? Find out how deep the rabbit-hole really is. The equation is simple: amount of cash divided by cash burned per month.
- Guy Kawasaki – How to Change the World: http://blog.guykawasaki.com
- Bootstrapping Blog: http://www.bootstrappingblog.com
- Bootstrap Austin Blog: http://blog.bootstrapaustin.org/
- Bootstrapping 101 Blog: http://bootstrapping101.wordpress.com/
- Bootstrapping Without Boots: http://blog.bootstrappingwithoutboots.com/
What You Should Include In The Partnership Agreement
How to create a formal written partnership agreement.
When taking on a business partner, it is critical to have a formal, written partnership agreement. While this is not a legal requirement, it does provide a framework for the partnership in terms of everyone’s obligations, settling conflicts, disagreements and other issues that could occur. The agreement is needed for the wellbeing of the business.
Create your written partnership agreement with the assumption that anything that can go wrong with your partnership will. Friction between partners over things such as money, power or ego frequently undoes business relationships.
Your partnership agreement should prepare you for all possible “what-if” situations, and set methods for resolving them.
You can save money by drafting your own version of the key parts of your agreement, then taking it to your firm’s attorney to be reviewed, clarified, modified and finalised. It is important to have an attorney review the contract.
These are some of the key areas you should include in your written partnership agreement:
1Partnership Agreement Basics
- What is the name of the partnership?
- What is the purpose of the partnership?
- What is the duration of the partnership?
2Responsibilities, performance and remuneration
- What is each partner’s role?
- What are each partner’s responsibilities within the company, and what level of performance is expected?
- Are partners expected to make a full-time commitment to the venture, or are business activities permitted?
- What will be the income of each partner, and how will profits or losses be distributed?
- What will each partner be contributing to the partnership in terms of cash, assets, loans, investments, and/or labor?
- If a partner loans the company money, what will be the terms or repayment?
- Will the business partners be expected to make additional contributions to the partnership, and if so, how will that be handled?
- Withdrawal of partners/admission of new partners
- What guidelines should be followed if one partner wants to leave the partnership?
- Will partners be allowed to sell their interests in the business to outsiders?
- On what grounds can a partner be expelled from the partnership (misconduct, non-performance of duties)?
- How will new partners be admitted to the partnership?
- What guidelines should be followed if one partner wants to retire or leave the business partnership?
- What happens if a partner is incapacitated or dies?
- Will the partnership take out “key man” life insurance to ensure the surviving partner is able to buy the deceased partner’s shares from his/her heirs?
- Will partners who leave have to sign a non-compete agreement?
- What methods will be used to settle disputes that can’t be otherwise resolved?
- What procedures should be used in the event of a tie vote between partners on crucial partnership decisions?
- Will you use mediation or binding arbitration?
- If disputes can’t be resolved, is there a mechanism in place for dissolving the business partnership?
- What banking arrangements will be made for the partnership?
- Which partners will have check signing privileges?
- Who will be authorised to draw on the partnership’s accounts?
- How will the books be kept?
7Method for dissolving the partnership
- When can the partnership be dissolved?
- What happens to the partnership if the partners decide they can’t work together?
- What methods will be used to determine the value of the business in the event of a sale, dissolution, death, disability or withdrawal of a partner?
- FreeLegalDocs: www.freelegaldocs.co.za
- LegalWise: http://www.legalwise.co.za/index.php/downloads/free-contracts.html
Do You Speak Start-up?
The start-up dictionary for every budding entrepreneur.
Venture capital in South Africa is starting to take hold. With a host of venture funds, section 12J companies, incubators and start-up clubs being launched, start-ups are becoming more popular and investors are encouraged to consider these new opportunities.
Chris Ball, an investment analyst at AlphaWealth and a co-founder of Fincheck.co.za, a financial comparison fintech start-up, explains the colloquial jargon of venture investors and start-up entrepreneurs.
Chris wrote this ‘dictionary’ initially to educate AlphaWealth’s high net worth clients about the start up world so that they could consider becoming investors.
An angel investor is generally someone who provides seed capital to a start-up in its infancy. In South Africa, there are a few well known angel investors. However, most entrepreneur’s first funds are generally received from family and friends who believe in the idea.
B2B, B2C, P2P
Business to business – This describes a business that is targeting another business with its product or services. This type of service is also known as enterprise technology. Salesforce would be a great example of this technology.
Business to consumer – describes a start-up that sells directly to consumer.
Peer to peer – is a platform concept, where the technology matches buyers and sellers. One of the earlier peer to peer technologies was Ebay. Today, the peer to peer platform has evolved to incorporate finance institutions such as Lendico.
This is a concept where founders pool their own capital resources to get the start up as far as possible before looking for external funding.
The term comes from “pulling oneself up by one’s bootstraps”. This mindset links directly into the lean start up methodology.
Related: 6 Tips For Bootstrapping
Both technology and business models can be disruptive and is defined when a start-up disrupts the current market place by displacing old businesses and winning market share. Outsurance and Uber have disrupted the insurance and personal transport businesses.
This is someone who starts a business or venture, assuming all potential risk and reward for his or herself.
This is the start of a venture where a founding team have enough to illustrate the concept but are yet to execute the initial steps of their plan.
Lean start-up methodology
The lean start-up methodology, is a business thesis that was founded by Eric Reis. The business methodology is based on the practice of testing multiple small iterations in an effort to find the product, design or user experience or even business model that is best adopted by the end consumer.
Read more on the Lean start-up methodology here.
An organisation that helps develop early stage companies. Generally this help is offered in exchange for equity. The Israeli start-up ecosystem has some of the best incubators where they offer workspace, networks and guidance.
‘Go big or go home’ – this is the impossible idea that a team wants to accomplish. The term was originally coined when John F Kennedy challenged American scientists to get a human to the moon.
A company that changes its business direction as a result of a dead end or the ability to use their technology in a more significant way. Instagram was originally a location check in service before pivoting to become a photo sharing application.
Pre-money and post-money
Post-money = Pre-money valuation + new funding.
Valuing a start-up has become a bit of an art, but more and more funds are starting to adopt a common methodology as the industry matures. In essence, the pre-money value is the monetary value of the company before a new investment is made.
Proof of concept
After the idea comes the execution. One of the first hurdles entrepreneurs need to clear is the proof of concept. This is a point where the start-up proves that the business model is feasible.
Software as a service. These businesses are hosted in the cloud and the software can be rented out as a service.
Seed, A Round, B Round…
Start-ups raise capital in several tranches because raising it all at once would dilute the founder’s share before they have even had a chance to build the business. The seed round is done to prove proof of concept. The A round is raised once proof of concept has taken place. There can be several rounds before an exit or IPO is achieved. Some of these companies have grown so large through several rounds of investment that they are termed a unicorn business.
Understanding Your Responsibility As An Employer
Now that you have your own employees, here is what you should know about your new responsibilities.
Hiring employees requires more work from you as the employer than simply placing a job ad, hiring the right person and training them on their role.
You need to be aware of the Labour Law requirements in terms of the various funds and other stipulated registrations. The law does not differentiate between different size organisations, and therefore it is imperative that SME’s fully understand the implications of all aspects of Labour legislation.
Related: 5 Factors That Make a Great Boss
Employers may only deduct money from a worker’s salary if the worker agrees or if they are required to do so. The provisions for deductions do not apply to workers who work less than 24 hours a month.
Employers may not deduct money from a worker’s pay unless –
- the worker agrees in writing to the deduction of a debt, or
- the deduction is made in terms of a collective agreement, law (e.g. UIF contributions), court order or arbitration award.
Deductions for damage or loss caused by the worker may only be made if –
- the employer has followed a fair procedure and given the worker a chance to show why the deduction should not be made,
- the worker agrees in writing, and
- the total deduction is not more than 25% of the worker’s net pay.
Employers must pay deductions and employer contributions to benefit funds (pension, provident, retirement, medical aid, etc.) to the fund within 7 days.
What is UIF
UIF stands for Unemployment Insurance Fund and you need to register for it, whether or not you employ staff. It applies to all employers and workers (except those working less than 24 hours a month), learners, public servants, foreigners working on contract, workers who get a monthly State (old age) pension and workers who only earn commission. The fund makes short-term provision for individuals who become unemployed, or are unable to work because of illness, maternity or adoption leave. It also provides financial relief to the dependants of deceased contributors.
As an employer it is your responsibility to register with UIF and make the monthly payments. These include a 1% payment from you (based on your employees’ individual salaries).
Each individual employee needs to make a further 1% payment, but it is your duty to deduct this amount from their salary and pay it to UIF, together with your contribution, on a monthly basis to SARS if you are registered for PAYE or directly to the UIF if you are not.
You can register your business by completing a UF8 form and each new employee needs to be registered using a UI-19 form. These can be obtained from the Department of Labour.
What is COIDA
COIDA stands for the Compensation for Occupational Injuries and Diseases Act and being registered for it works in your favour. It is based on a no-fault system which means employees are entitled to compensation regardless of who caused the injury or illness.
But it also exempts you from liability for injuries or diseases contracted by your employees in the course of their work. In other words, employees can’t claim damages from you in those events. Instead, COIDA allows them to claim compensation for total or permanent disablement and death as well as reasonable medical expenses arising out of injury for two years.
You are required to pay the employee 75% of their normal salary for three months during the time that they are injured or ill but the fund pays you back this entire amount and covers all the relevant medical expenses.
If you are not registered, however, you are not indemnified. Getting registered involves submitting a WAs2 form, together with a copy of the registration certificate from the Registrar of Companies, or your ID document, if you are a sole proprietor. Every year before 31 March you will need to submit a statement of earnings paid to your employees. You will also be required to pay an assessment tariff, which is fixed according to your class of industry.
If an employee gets injured during the course of their work or falls ill as a result of their work, they can claim from the Worker’s Compensation fund. Dependants of employees can claim if a family member dies from an accident or disease. Employees wishing to claim will need to be furnished with one of the WG30, WAs2 or WAc1(E) forms, which they need to submit to the Compensation Commissioner for compensation.
How Does Maternity Leave Work?
The law protects women against unfair discrimination arising from any form of prejudice. An employer may not ask a candidate who applies for a job if she is pregnant, nor if she is planning to start a family at any stage.
If you do, she could argue that you are discriminating against her. Equally, she is in no way obliged to disclose her pregnancy when applying for a position. The bottom line is that it has nothing to do with the candidate’s ability to meet the requirements of the position. And nothing stops her from resigning once she has returned to work after taking maternity leave. She has rights regardless.
The Basic Conditions of Employment Act stipulates that an employee is entitled to four months unpaid maternity leave. All that is required is a notification by the employee that she is pregnant, accompanied by a doctor’s certificate. This leave should start four weeks before the expected date of birth, or when a doctor or midwife certifies that leave is necessary for the health of the mother or child. An employee must notify her employer in writing of the date on which she wants to start maternity leave. She may not work for six weeks after delivery, unless she is declared fit to do so.
An employee who has a miscarriage during the last three months of pregnancy or who bears a stillborn child is also entitled to six weeks maternity leave, whether or not she has started maternity leave at the time. Companies in South Africa are not obliged by law to provide paid maternity leave. A female employee who works for a company that does not offer maternity benefits can claim from the Maternity Benefit Fund if she has been contributing to the Unemployment Insurance Fund (UIF).
An employer who pays maternity leave does have some rights, however. Paid maternity leave is a benefit, and the company is within its rights to conclude a contract with the employee stating that if she does not return to work for at least one year following her confinement, she will be obliged to return the salary she earned during her maternity leave.
South Africa has no paternity leave provisions in place, but workers who have been employed at a company for longer than four months may take three days’ paid family responsibility leave during each year of employment.
Family Responsibility Leave
Workers may take up to three days of paid leave a year to attend to certain family responsibilities. The provisions for family responsibility leave do not apply to workers who work less than:
- Four months for their employer
- Four days a week for one employer
- 24 hours a month.
Family responsibility leave expires at the end of the annual cycle. Employees may take family responsibility leave:
- when their child is born
- when their child is sick
- in the event of the death of a:
- spouse or life partner
- parent or adoptive parent
- child or adopted child
Employers may require reasonable proof of the birth, illness or death for which a worker requests leave.
Related: What Young People Want From Work
The amount of overtime a worker may work is limited. Workers must get 1,5 times their normal hourly pay or paid time off in exchange for overtime. Alternatively, a worker may agree to receive paid time off or a combination of pay and time off.
The section of the Basic Conditions of Employment Act that regulate working hours does not apply to:
- workers in senior management
- sales staff who travel and regulate their own working hours
- workers who work less than 24 hours in a month
- workers who earn more than R115 572 per year
- workers engaged in emergency work are excluded from certain provisions.
Workers may not work:
- overtime, unless by agreement
- more than 10 hours’ overtime a week (collective agreement may increase this to 15 hours per week for up to two months a year)
- more than 12 hours on any day.
Employee Pay Slips
Each time workers are paid, employers must give them a pay slip containing certain details. Employers must give workers the following information in writing when they are paid:
- Employer’s name and address
- Worker’s name and occupation
- Period for which payment is made
- Total salary or wages
- Any deductions
- The actual amount paid
- If relevant to the calculation of pay:
- Employee’s pay and overtime rates
- Number of ordinary and overtime hours worked
- Number of hours worked on a Sunday or public holiday
The total number of ordinary and overtime hours worked in the period of averaging, if a collective agreement to average working time has been concluded
Workers must get paid time off for public holidays, but if they agree to work, they must be paid double their normal daily wage. The provisions for public holidays do not apply to –
- senior management
- sales staff who travel
- workers who work less than 24 hours a month
Workers must get paid time off for any public holiday that falls on a working day. Working on a public holiday is by agreement only. A public holiday can be exchanged with another day by agreement. A public holiday cannot be counted as annual leave.
Employee Sick Leave
Workers may take the number of days they would normally work in a six-week period for sick leave on full pay in a three-year period. Employers may insist on proof of illness before paying a worker for sick leave. The provisions for sick leave do not apply to:
- workers who work less than 24 hours a month
- workers who receive compensation for an occupational injury or disease
- leave over and above that provided for by the Act.
During the first 6 months of employment, workers are only entitled to one day of paid sick leave for every 26 days worked. An employer may require a medical certificate before paying workers who are absent for more than two consecutive days, or who are often absent (more than twice in an eight-week period).
Staff Working Hours
Basic Conditions of Employment laws set maximum working hours and minimum rest and break periods for workers. The section of the Act that regulate working hours does not apply to:
- workers in senior management
- sales staff who travel and regulate their own working hours
- workers who work less than 24 hours in a month
- workers who earn more than R115 572 per year
- workers engaged in emergency work are excluded from certain provisions.
The maximum ordinary hours per day for someone who works one to five days per week is nine, the maximum amount of hours per week is 45. For those who work more than five day per week should work a maximum of eight hours per day and 45 hours per week. Workers may agree, in writing, to work up to 12 hours a day without getting overtime pay. However, these workers may not work more than:
- 45 ordinary hours a week
- 10 hours’ overtime a week
- five days a week
Workers must have a meal break of 60 minutes after five hours’ work. A written agreement may:
- reduce meal intervals to 30 minutes
- eliminate meal intervals for workers who work less than 6 hours a day
Workers must have a rest period of 12 hours each day; and 36 consecutive hours each week (must include Sunday, unless otherwise agreed).
Workers working between 18h00 and 06h00 must:
- get an allowance, or
- work reduced hours, and
- have transport available to them.
Skills Development Levies
Employers must pay 1% of their workers’ pay to the skills development levy. The money goes to Sector Education and Training Authorities (SETAs) and the Skills Development Fund to pay for training. The Skills Development Levies Act applies to all employers except–
- the public service;
- religious or charity organisations;
- public entities that get more than 80% of their money from Parliament; and
- whose total pay to all its workers is less than R 250 000 per year; and
- who do not have to register according to the Income Tax Act
Employers who are required to pay the skills development levy must register with the South African Revenue Services (SARS). Employers must pay 1% of all their workers’ pay to the skills development levy every month. Employers must pay the levy to the South African Revenue Services (SARS) by the seventh day of each month. Employers who do not pay will have to pay interest on the money they owe and may also have to pay a penalty.
What is PAYE
All employers are required to deduct Employees’ Tax from their salaries. The amounts deducted must be paid by the employer to SARS on a monthly basis. The process of deducting or withholding tax from remuneration as it is earned by an employee is referred to as Pay-As-You-Earn (PAYE).
Employers are required to:
- Deduct the correct amount of tax from employees’ remuneration.
- Pay this amount to SARS monthly, ensuring SARS receives a Monthly Employer Declaration (EMP201).
- Reconcile these deductions and payments with the completion of the interim and annual Employer Reconciliation Declarations. During the reconciliation periods, employers are required to submit an Employer Reconciliation Declaration (EMP501) confirming or correcting the PAYE, SDL and UIF declarations per EMP201s submitted, the payments made and the tax values of the Employee Tax Certificates [IRP5/IT3(a)].
- Issue tax certificates to employees
- An employer must issue an employee with an IRP5/IT3(a) where remuneration is paid or has become payable and from which Employees’ Tax was deducted. The IRP5/IT3(a) discloses the total employment remuneration earned for the year of assessment and the total deductions. IRP5/IT3(a) certificates must be issued to employees during the annual Employers tax season.
Seek professional advice
There is a lot to keep track of once you become and employer. It is advisable to call in an expert. You can use the services of a suitable experienced and qualified HR consultant who can help to set up the principles and processes of the above, and then work on an ad hoc basis only as and when needed reducing the cost of a full-time HR manager.
- The Department of Labour: www.labour.gov.za
- SARS: www.sars.gov.za
- uFiling: www.ufiling.co.za
- Commission for Conciliation, Mediation and Arbitration (CCMA): www.ccma.org.za
- The South African Labour Guide: www.labourguide.co.za
Related: 10 Ways to Pump Up Your Employees
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