[FAQ] How to treat finder’s fees in the hands of the employee

[FAQ] How to treat finder’s fees in the hands of the employee

• 12 January 2021
• Individuals Tax
• The Payroll Authors Group of South Africa

Background

A company pays an employee a R10 000 “finder’s fee if the company recruits an individual that was referred by an employee and that specific new recruit stay at least six months at the company. Will the R10 000 be taxable in the hands of the employee?

Answer

The Income Tax Act

It is assumed that it is a policy of the employer to pay an incentive to an employee to recruit candidates.  However, whether or not it is the policy of the employer, the payment is derived from employment and also as a result of the relationship between the employer and employee.

It is clear from the definition of gross income in section 1 of the Income Tax Act that a finder’s fee is included and fully taxable on assessment.  The term gross income is broadly defined in section 1 of the Act as the total amount, in cash or otherwise, received by or accrued to a resident during a year of assessment which is not of a capital nature.  It specifically includes any amount including any voluntary award received in respect of services rendered or to be rendered.

However, it should be determined if it complies with the definition of remuneration relating to the employer-employee relationship.

The definition in paragraph 1 of the Fourth Schedule, specifically includes a voluntary payment for services rendered.  In this case the voluntary payment is awarded by the employer to the employee who renders a service (recruit new employees).

Application of the principles

This finder’s fee may be related to the quality of service, but it is also often awarded because of a business policy.  Therefore, it is critically important to look at the arrangement regarding finder’s fee by determining the role the business (employer) is playing. 

As mentioned previously, due to the fact that the employer is paying the employee this fee for recruiting it can be seen as a fee for services rendered.  The employee’s services to the employer are the very reason or cause for the finder’s fee.  There is no “independent, unconnected and extraneous causative factor or event” which isolates the finder’s fee from services rendered by the employee.

Accordingly, finder’s fees are received in respect of services rendered and falls within the definition of remuneration due to the employer and employee relationship.

Therefore, such “finder’s fee” should be processed through the payroll and recorded as a bonus (incentive) in the payroll.

Webinar Commentary

Further webinar commentary on 360 Degree View of Individual Taxpayers can be accessed here.

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