Employer Loans
SimplePay has a built-in item to accommodate the special tax and reporting requirements related to employer loans. There are two steps you need to follow:
Setting Up the Loan Instalment¶
To add an employer loan:
- Go to Employees, and select the relevant employee.
- Click on Add next to Regular Inputs, and then Employer Loan.
- Enter the relevant information, as illustrated in the screenshot below.
- Click Save.
If you are going to charge the employee interest, enter the Interest rate. Please be aware that interest-free or low-interest loans might have tax implications, as discussed below.
Regular repayment is the total amount that will be deducted from the employee's pay each period. If you are charging the employee interest, the interest is never deducted directly from the payslip, but is rather added to the outstanding balance.
Click on Calculate Interest Benefit if the granting of the loan will give rise to a taxable benefit. Such a benefit will arise where an employer grants an employee a loan on which no interest, or interest at a rate lower than the official rate of interest, is charged. The value of the benefit is the difference between the amount of interest that would have been paid on the loan during the tax year at the official rate, and the amount of interest (if any) actually incurred by the employee.
The official interest rate and historic rates can be found on this South African Revenue Service (SARS) page.
A taxable benefit will not arise in the case of the granting of:
- A casual loan or loans if the aggregate of such loans does not exceed the sum of R3 000 at any time.
- This applies to short-term loans granted at irregular intervals to employees – and not all loans merely because they are less than R3 000. A taxable benefit would still arise if the loans were granted on a regular basis to all employees or a certain category of employees, irrespective of whether they exceed R3 000.
- A loan for the purpose of enabling the employee to further their own studies.
Removal of Employer Loan item
You will not be able to remove this item until the Closing balance on the previous finalised payslip is zero. If this item was added in error, and you wish to remove it from the employee's profile completely, it must be removed from the first payslip on which it was added.
More information can be found in the following article:
Editing the Loan Balance¶
Adding a loan to an employee's profile tells SimplePay that the employee has a loan, but the loan will not yet have a balance, so no repayments will take place. To set a balance, click on Employer Loan under Payslip Inputs, and enter the amount next to Balance Increase.
By default (i.e. if the two boxes mentioned below aren't checked), an increase in the loan balance is paid out on the current payslip, and repayments start only on the next payslip.
If you don't want to pay out the amount on the payslip, check the Don't pay out balance increase box. You will then also have the option to check the Balance increase is at beginning of period box, which means repayment will start on the current payslip instead of the next.
Entering a closing balance
If the balance you're entering is the closing balance from the previous period, both checkboxes mentioned above should be checked.
Entering a Once-off Repayment will override any regular repayment defined for this loan – on the current payslip only. You can also tick the Cash/EFT repayment (no effect on payroll) box if the repayment was made off payroll and is being recorded on SimplePay to decrease the loan balance.
More information can be found in the following article:
Understanding the Interest Calculation for Employer Loans¶
Compound interest is used for employer loans. The formula is noted below:
A = P × (1 + r ÷ n)ᵗ
Where:
- A = the total amount accumulated after interest (including principal)
- P = the principal amount (initial loan)
- r = the annual interest rate (in decimal form, so 9.25% becomes 0.0925)
- n = the number of times the interest is compounded per year. For monthly, this would be 12.
- t = the number of time periods elapsed. To calculate the value of the loan after one month, this value would be 1. At the end of one year, this value would be 12.
Interest rate
The annual interest rate should be divided according to your pay frequency. For example, if you pay your employees weekly, divide the annual interest rate by 52, or if you pay them every 2 weeks, divide by 26.
Example – Monthly pay frequency
Let's assume the information below:
In March:
- An employee borrowed R1 000. (The Don't pay out balance increase and Balance increase is at beginning of period boxes were checked.)
- The interest rate is 9.25% per year.
- The employee is monthly paid (12 pay periods in a year).
- The employee repays R100 a month.
Let's calculate the loan balance at the end of March and April.
Step 1: Convert the annual interest rate (9.25%) to a decimal: r = 9.25 ÷ 100 = 0.0925.
Step 2: Divide the annual interest rate by 12 (because you are calculating the monthly interest rate): r ÷ n = 0.0925 ÷ 12 = 0.0077083
Step 3: Add 1 to the monthly rate, and let t = 1, as we are calculating the value of the loan after 1 month: (1 + r ÷ n)ᵗ = (1 + 0.0077083)¹ = 1.0077083.
Step 4: Multiply your opening balance (R1 000) by this number: P × (1 + r ÷ n)ᵗ = R1 000 × 1.0077083 = R1 007.71.
Therefore, at the end of the first month (March), your closing balance according to the formula would be R1 007.71. However, we still need to account for the employee's repayment.
Step 5: Deduct the repayment: R1 007.71 - R100 = R907.71. This will be the closing balance for the March payslip.
If we wanted to calculate the closing balance for the April payslip, it would be:
R907.71 × (1 + 0.0077083)¹ = R914.71.
Then, we subtract the payment (R914.71 - R100) to get the closing balance of R814.71, which will appear on the April payslip in this example. In this step, t = 1 again, as we are looking at the end of April, one (1) month after we calculated our value of R907.71 at the end of March.