TAX AND OTHER STATUTORY REQUIREMENTS
One of the most important features of a payroll is the accurate calculation of PAYE and other statutory deductions. While on a simple payroll this is not a difficult task it certainly is when backpay is involved and especially backpay which relates to an already closed tax year.
We pride ourselves in always handling such items in full accordance with the law, however complex those requirements might be. When it comes to the issue of tax certificates at the year end, we comply with the complex rules laid down by the Malawi Revenue Authority (MRA) without any reservations. We would venture to say that not many payrolls could make this claim.
When tax rates change after the budget, we issue updates to system tables (not program changes!) within a week of the budget announcement. Immediately any statutory notice is published changing for example, PAYE tax rates, subsistence rates or earnings limits or rates for statutory deductions, we issue updates to tables to our user base by email. Thus it is never necessary to wait anxiously for program changes which may or may not be forthcoming in time for the implementation date.
We are fortunate in being able to use the services of Ron Warren, an acknowledged expert in these matters and the editor of publications dealing with these matters, to keep us up to date on requirements and to assist users with any unusual tax situations that arise.
A fact acknowledged by most computerised payroll suppliers is that the majority of queries received by their help desks relate to tax calculations. To make it easy for our users to answer tax queries themselves, nuQ provides a tax query report which can be invoked for any employee for any payroll period, however far back in the past. Look at our sample query report to appreciate how superior this report is to anything else available on the market and how easy it is to understand.
A constant bone of contention in payrolls is the basis on which tax is to be calculated. The use of the tax tables published by MRA will almost always result in more tax being deducted during the year than is actually due, resulting in an adjustment having to be made in the last calculation of the tax year or tax period. This is because for simplicity’s sake, the tax is calculated by reference to the current period’s earnings only.
Tax is always calculated by forecasting what an employee’s annual earnings are likely to be, calculating the annual tax on those earnings, and then reducing that annual tax to its proportionate current period value. The Maalwi Revenue Authority (MRA) tax tables therefore multiply a week or a month’s earnings by 52 or 12 respectively, then calculates the annual tax on those earnings, divides the annual tax by 52 or 12. It is obvious that if an employee’s earnings fluctuate during the tax year, the tax so calculated will be incorrect at the year end, which is why a final tax calculation has to be performed at the end of the year based on actual earnings for the year.
Employers are authorised to either use the tax tables, or other methods of more accurately estimating annual earnings. nuQ gives three different methods of estimating annual earnings:
- Treating each pay period in isolation in the same way as the tax tables
- One suitable for employees earning more or less fixed amounts with provision for an annual increment, which assumes that future earnings will be at the same rate as the current period’s earnings, and adding to that the actual past earnings. This allows for an increasingly accurate forecast of annual earnings and tax as the year progresses, with the tax being 100% correct in the final period of the tax year as no further forecasting is required
- One suitable for employees whose earnings fluctuate considerably from period to period. This would apply to erratic overtime and commission earners. Here the earnings to date (including the current pay period) are assumed to be the rate at which the employee will continue earning for the rest of the year. Fluctuations in tax are minimised and smoothed
Each user can specify the method of tax calculation to be used as the default for a payroll and can override the default to some other method for individual employees. Thus a logical and explainable tax deduction can be made for each pay period.