Payroll can be defined as the sum financial records for all employees in a company, e.g. salary or wages, bonuses, incentives, tax or any other deductions, pension funds, provident funds, etc. Payroll can also be referred to as the remuneration paid for services provided by the employees within a certain period. Payroll is crucial for any company since it is subjected to various regulations and laws in various countries. For example, US payroll is subject to state and federal regulations and thus substantially affects the net profit of most companies. Most importantly, companies should avoid any payroll irregularities or errors and hence payroll has to be conducted accurately and with timely remittances of accurate deductions to all the employees.
Below please find a brief comparison of payroll considerations in some major countries.
Payroll taxes are levied in proportion of salary of employees and are expenses above the expenses of gross pay of an employee; however, US payroll and income taxes collected through deductions are held by the employer in trust for later remittance. Regularity of generation of payrolls varies from company to company and across various job designations in the same company. Common payroll frequencies may be: daily, weekly, bi-weekly, semi-monthly, monthly. Bi-monthly, quarterly, semi-annually and annually are less preferred payroll frequencies.
Net pay = gross pay - payroll tax deduction - voluntary payroll deductions
Gross pay = pay rate * (number of hours worked + overtime if any)
Payroll taxes in US include:
- Federal income tax withholding (based on Publication 15, Employer's Tax Guide by IRS) and Federal unemployment taxes (FUTA)
- Social security tax withholding (6.2 % up to 106,800; in case one is self-employed, one needs to pay a combined amount of 12.4 % for both employee & employer)
- Medicare tax (1.45 % on entire salary; in case of self-employed, one needs to pay a combined amount of 2.9 % of net earnings)
- State income tax withholding and state unemployment taxes (SUTA)
- Various local tax withholding, e.g. county taxes, city taxes, school taxes, unemployment and state disability insurance
Payroll frequencies: weekly, bi-weekly, monthly, quarterly, half-yearly and annually. There may be multiple payrolls per company, e.g. monthly casual payroll and monthly staff payroll.
Features: Support for COSR/COMP pension schemes, tax and net income calculations, unlimited payments and deductions, email payslips, reporting across pay periods (including different tax years), leave management for sickness or holiday, pay grades, spine points, employer costs across many cost centers.
Calculation types: % gross, % taxable pay, daily rate, hourly rate, etc.
Additional functions: e.g. "Reduce Pay Item", where salary gets reduced by the amount of occupational sick pay in order to avoid any overpayments; "Inherit Pay Item Units" for manufacturing companies, where pay element is automatically completed with hours from selected pay item since they also pay an hourly bonus to their employees.
Payroll systems: Attendance Driven Payment and Data Driven Payment
With a growing number of cross-border employees and self-employed people engaged in cross border activities, there lies a chance that expatriates may be subjected to double taxation depending on their place of residence, i.e. income tax may be charged by both the country of residence of the employee as well as the country where the employer has been working. Thus, Germany has signed double taxation agreements with around 90 nations to exempt employers from paying the tax twice so that the disincentive to foreign investment gets reduced.
Features of German payroll:
- Payroll is based on the PAYE (Pay-As-You-Earn) system in which employers deduct the amount of tax debt from the salary or wage.
- Foreign businesses which don't have their branch offices in Germany but send their employees to work in Germany are partially liable for German payroll (social insurance, workers compensation board) if the employee has a permanent work residence in Germany or is a permanent representative for the company.
- An individual may need to pay about 14 to 42 % tax. A solidarity surcharge gets added (supplement on income tax 5.5 %) depending on his or her income. Church tax of around 8 to 9 % is levied on members of the Catholic as well as Protestant church. Unemployment (3 %) and retirement insurance charges (19.6 %) are also payable, but this is refundable if the employer leaves Germany after 2 years. An individual is entitled to German retirement benefits if he or she stays more than 60 months in Germany. One is also required to pay health insurance (15.5 %). Long-term care insurance (1.95 %) is also levied on taxpayers who don't have children.
- The amounts of social insurance payments are subject to certain income thresholds.
- Net salary = gross salary – (income tax + solidarity surcharge + church tax + social security).
- Relevant principles laid down by the German government with regard to taxation include: Equality in taxation, lawfulness of taxation, the ability to pay principle and the welfare of state principle.
Thus, any German payroll service provider needs to have profound knowledge of the specificities of payroll regulations for employees delegated to Germany. Moreover, the data of the employees as well as the company are very confidential and sensitive; hence high data security is required. The staff of the service provider need to comply with the German Data Protection Act and the German payroll service offered needs to be compliant with German legislation. Usually, the payroll services provided are:
- Registrations of starters or de-registrations of leavers
- Setting up of payroll system for the company with their cost centers
- Inclusion of pension schemes, wages details and calculation of net wages
- Preparation of payroll reports, nominal journal, social security references and reimbursement claims for maternity or sickness
- Production of payslips and payment documents to be sent to the banks
- E-submission and printing of social security evidence and tax notifications
- Production of income tax certificates annually, annual social security reports and end of year reports
- Some additional services may be: bookkeeping, social security registration and filing, funds transfer, leave management, answering to third party queries, reviewing of travel expense reports, assistance in audits etc.
A specialized German payroll service provider manages the whole payroll processes effectively and efficiently for clients who are not so familiar with German legislation of human resources. The service provider advises regarding an individual's obligations as an employer or employee in Germany and thus makes sure that everyone is compliant with German Payroll laws.
For more information contact us now!