Payroll & Taxation - Week 3 PDF

PAYROLL & TAXATION WEEK 3- INCOME TAX & PAYROLL RECORDS WHAT IS INCOME TAX? The Pay As You Earn (PAYE) system of income tax is used in many countries. Each employee over seventeen years must pay income tax to the government. The income tax payment is calculated as a percentage of each dollar of an...

PAYROLL & TAXATION WEEK 3- INCOME TAX & PAYROLL RECORDS WHAT IS INCOME TAX? The Pay As You Earn (PAYE) system of income tax is used in many countries. Each employee over seventeen years must pay income tax to the government. The income tax payment is calculated as a percentage of each dollar of an employees chargeable income. With the PAYE system, the employee's chargeable income is calculated as follows: Gross Salary or Wage less Allowances equals Chargeable Income WHO PAYS INCOME TAX? Individuals pay income tax and health surcharge on their income. In order to pay taxes, all individuals, whether they are self-employed or employed by someone else, must have a BIR file number. Please note that individuals are no longer legally required to file income tax returns unless they are professionals or self-employed. Your employer will deduct taxes from your salary and pay them to the government on your behalf. However, you can choose to file a return if you are unhappy with the amount of tax that has been deducted from your earnings by your employer. If you are self-employed you must file a tax return at the end of the financial year. The filing deadline is set by the Inland Revenue Division, is usually in March or April, and can vary from year to year. Personal income tax rates  The income tax rate for individuals with chargeable income less than TTD 1 million is 25%.  For chargeable income in excess of TTD 1 million, the rate of tax applicable is 30%. Applying for a Board of Inland Revenue (BIR) File Number and Pay as you Earn (PAYE) Number All employees, sole traders, partnerships and companies are legally obligated to register for a Board of Inland Revenue (BIR) file number to be used in payment of taxes and filing of returns. This number must be quoted on all correspondence to the Board of Inland Revenue. A Pay as you Earn (PAYE) number must be obtained by all companies and sole traders who hire employees. The PAYE number is used to remit taxes withheld from employees’ earnings in accordance with the PAYE System. These numbers must be utilized for the duration of the life of the individual or company. What documents do I need? Self-Employed Individuals and Sole Traders:  Original & copy of Certificate of Registration (if applicable).  Original and copy of national identification (ID card, passport or driver’s permit).  Outstanding returns (if applicable). Individual Employees:  Original and copy of national identification (ID card, passport or driver’s permit).  Letter from employer indicating effective date of employment and salary, or TD4 Certificate (this is issued by your employer) for prior years. Individual - Significant developments Finance Act, 2022 has the following amendments; effective 1 January 2023:  The Income Tax Act was amended to increase the annual personal allowance of an individual who is resident in Trinidad and Tobago, as well as an individual who is not resident in Trinidad and Tobago and in receipt of pension income accruing or derived from Trinidad and Tobago, from $84,000 to $90,000 Trinidad and Tobago dollars (TTD). How can I reduce the amount of tax I pay? If you are an employee of a business, the Tax Declaration 1 Form (commonly referred to as the TD1 form) is used to calculate the amount of tax that is withheld by your employer. You must complete and submit a TD1 form to your employer when you begin your employment. You must also ensure that your TD1 form is updated whenever your salary, deductions or tax credits change. Your TD1 form is an important document and it is in your interest to ensure that it is accurate and up to date to avoid paying more tax than you are required. Please note that you are not obligated to file a tax return if you are an employee. However, you can choose to file a return if you disagree with the amount of tax withheld by your employer. If you are self-employed you do not fill out a TD1 form. You pay your taxes quarterly based on the amounts that you have calculated as due, and you file a tax return at the end of the financial year, no later than the date set by the Inland Revenue Division. The filing deadline is in March or April, and can vary from year to year. You should document your deductions on your tax return. Reducing Your Income Tax There are a number of ways you can reduce your personal tax liability. The government allows you to deduct certain payments and expenses from your declared income, which reduces the amount of tax you must pay. These deductions include:  Tertiary education expenses.  First time home ownership.  Approved deferred annuity contributions or premiums.  Alimony or maintenance payments.  Venture Capital Tax credits. How are my tax deductions approved? If you claim tax deductions for tertiary education expenses, first-time home ownership, alimony or maintenance payments, venture capital tax credits, and or private annuities (annuities other than those offered by your employer), you must seek approval from the Inland Revenue Division by submitting the TD1 form to the Taxpayer Section. The Inland Revenue Division will issue a Certificate of Approval for PAYE Tax Deduction form to your employer to guide tax deductions. If you claim deductions for expenses other than those listed above, you do not need to seek approval from the Inland Revenue Division. You must submit supporting documentation to prove that you have incurred legitimate tax-deductible expenses. Examples of supporting documents include:  A pay slip from your employer, showing salary, gross income and taxes withheld.  Evidence of first time home ownership, such as a sworn affidavit stating that you are a first time home owner, a completion certificate from Town and Country Planning(for new home construction), the deed of conveyance showing transfer of ownership of property and date of transfer, and mortgage deed from your financial institution.  Evidence of contributions paid in respect of deferred annuities;  Court order and evidence of alimony/maintenance payment;  Acceptance to tertiary education institution and evidence of expenses incurred. TD1 forms and supporting documents should be taken to a Taxpayer Services Section office between the hours of 8:00 am and 4:00 pm, Monday to Friday, except public holidays. CALCULATING INCOME TAX HOW TO CALCULATE PAYE BASED UPON A GROSS MONTHLY SALARY OF $10,000  Step 1. Calculate the Total Annual Income. Your Total Annual Income is calculated by multiplying your monthly income by the amount of months in the year. Total Annual Income = 10,000.00 x 12 months = 120,000.00  Step 2. Calculate the Total Annual NIS payment. Your Total Annual NIS is calculated by multiplying your weekly NIS payment by the number of weeks in the year. Total Annual NIS = 99.40 x 52 weeks = 5,168.80 CALCULATING INCOME TAX  Step 3. Calculate 70% of the Total Annual NIS payment. 5,168.80 x 70% = 3,618.16 (for those using a business calculator) 5,168.80 x 70 ÷ 100 = 3,618.16 (for those using a regular calculator)  Step 4. Calculate the Total Tax deduction. Total Tax Deducted = 90,000.00 + 3,618.16 = 93,618.16 NOTE: 90,000 is amount the government allows us to make without having to pay PAYE. You will always use 90,000 to find your Total Tax Deduction answer. CALCULATING INCOME TAX  Step 5. Calculate the Chargeable Income Chargeable Income = 120,000- 93,618.16 = 26,381.84  Step 6. Calculate the Tax on Chargeable Income. Tax on Chargeable Income = 26,381.84 x 25% = 6,595.46 NOTE: 25% is the standard rate to calculate PAYE.  Step 7. Calculate the PAYE deduction PAYE deduction = 6,595.46 ÷ 12 months = 549.62 549.62 is the amount to be deducted monthly from the employee's Gross Salary. CALCULATING INCOME TAX- WORKED EXAMPLE  WORKED EXAMPLE Payroll for Jan month 2023 – 5 weeks  HOW JANET’S PAYE WAS CALCULATED Janet James  1. Total Annual Income Gross Salary 9,500.00 9,500.00 x 12 months = 114,000.00 PAYE deductions 424.62  2. Total Annual NIS NIS deductions 497.00 99.40 x 52 weeks = 5,168.80 H/S deductions 41.25  3. 70% of NIS payment others 150.00 5,168.80 x 70% = 3,618.16 Net Salary 8,387.13  4. Total Tax deducted 90,000.00 + 3,618.16 = 93,618.16  Janet James monthly Gross Salary =  5. Chargeable Income $9,500.00 114,000.00 – 93,618.16= 20,381.84  6. Tax on Chargeable Income 20,381.84 x 25%= 5,095.46  7. PAYE deduction 5,095.46 divided by 12 months = 424.62 PAYROLL RECORDS The three main records kept are: 1. The payroll 2. The payslip 3. The individual record card THE PAYROLL A payroll (or paysheet) is a list of employees and the payments due to them for wages or salaries for a pay period. It summarizes the gross salaries or wages, the total deductions and the net salaries or wages of all the employees. Each time salaries or wages are paid whether weekly, fortnightly or monthly, a payroll is made up. The number of analysis columns drawn up on the payroll depends entirely on the requirements of the firm. THE PAYSLIP Each time an employee receives his salary or wage he receives also a payslip which summarizes the information on the payroll. He can check to see if his gross wage or salary, the deductions and his net wage or salary are correct. The format of payslips differs from firm to firm. THE INDIVIDUAL RECORD CARD An individual record card is kept for each employee. Each time an employee receives his wage or salary, the information that is recorded on the payroll is transferred to his personal record card. It summarizes the gross wage or salary, deductions and net wage or salary for the year. TIME CARDS Some businesses require that each employee must have a time card which he must “punch” when he arrives at work and whenever he leaves. Punching the card entails placing it in a timing machine which records the exact time of arrival or departure. This helps the employer to calculate the gross wages of the employees if they are paid at an hourly rate. It also helps when checking on the attendance record and punctuality of the employees. ACCOUNTING ENTRIES When wages or salaries are paid, the double entry required to record the transaction is simply: Debit Wages or Salaries Credit Cash if paid by cash or Bank if paid by cheque If there are statutory deductions to be remitted to the legal authorities at a later date, then the double entry is: Debit wages or salaries Credit bank or cash (the actual amount paid to employees) Credit individual statutory payments due ACCOUNTING ENTRIES When statutory payments are made, the double entry is (as appropriate): Debit national insurance payable Debit health insurance payable Debit cash or bank