GETTING IT RIGHT. Payroll Processing: What does it really involve?
Payroll is not simply a payroll run exercise using a software package, which automatically calculates the employees’ taxation and social security contributions, produces the monthly FS5s, and the annual FS3s and FS7s. Besides ensuring that the employees are registered with Jobsplus and the Inland Revenue Department (IRD), that they are taxed at the correct and most beneficial rates of taxation (single, married or parental rates as applicable) and deducting the National Insurance contributions (NI), as well as paying its employer’s share of NI and maternity fund contributions in time, the employer must also be well versant with the various regulations/legal notices in place, that may affect its employees’ level of taxation and hence the whole payroll run.
A few of these to be considered are the following:
- Women returning to employment
It is important to be well aware of the rule that benefits women returning to work after their maternity leave, or after a certain number of years. A tax credit of up to a maximum of EUR 2,000, is available for women who have been absent from work for 5 years and have a child under the age of 16, or for every child born from 1st January 2007 onwards. The tax credit may not only be set-off against the tax on employment income, but may be availed of over a period of two consecutive years of assessment, commencing from the year of assessment during which the return to employment occurs. Instead of utilising the tax credit of EUR 2,000, a mother can opt for one year tax credit (up to a limit of EUR 5,000.00) in respect of every child if the income is from employment. This also applies in the case of self-employment. Specific forms will need to be enclosed with the Personal Income Tax Return so that the tax credit can be availed of. Lastly, it is important that once a woman returns to work a revised FS4 should also be submitted.
- Highly Qualified Persons
Employing companies licensed with the Malta Financial Services Authority (MFSA), the Malta Gaming Authority (MGA) or Transport Malta (TM) may employ senior individuals occupying certain key positions (specifically outlined in the regulations), who may avail from tax benefits pertaining to the Highly Qualified Persons Rules. Such senior employees may opt to pay tax at the Flat Rate of 15% on employment income and fringe benefits, derived in respect of work or duties carried out in Malta (or in respect of any period spent outside Malta in connection with such work or duties). Certain conditions need to be fulfilled before this beneficial tax rate can be applied. An RA17 form would need to be completed and endorsed by the respective authority.
- Fringe Benefits
The term Fringe Benefit refers to any benefit provided or deemed to be provided by reason of an employment or office.
Only fringe benefits listed in the regulations are subject to tax. The regulations determine the value of the benefit for tax purposes. Most common fringe benefits relate to company cars, car cash allowances and provision of accommodation to employees.
A recent change occurred in the Share option Scheme.
The value of the benefit is the excess, if any, of the market price of the shares if sold on the date when benefit is provided over the option price of the same shares. This benefit is being taxed at the special flat tax rate of 15%
Not all fringe benefits are subject to tax: Below is a list of just a few exemptions:
- The cost of travel for business purposes including a reasonable subsistence allowance;
- Cost of travel between Malta and Gozo;
- Cost of business related training;
- Subscriptions in respect of an employee’s membership to a professional body;
- Part Time Rules
These apply to full-time students, apprentices, full-time employees and pensioners.
The benefits and conditions to apply these rules are namely the following:
- Income from part time employment is taxed at 15% up to a maximum of Euros 10,000 /Euro 12,000 i.r.o. self-employment.
- Once the above thresholds are exceeded, normal tax rates will apply,
- Part time activity can be either employment or self-employment,
- Employee must be registered with Jobsplus,
- Full time and part time employment must not be carried out with the same employer or employers within the same group of companies,
- Part time employment cannot exceed 30 hours per week.
In Payroll processing, one is processing significant personal data and this also brings us to the important subject of GDPR which cannot be left unmentioned when speaking about payroll processing. GDPR came into full force on 25 May 2018, and although handling of personal data was always considered important, now payroll providers had to undergo a radical change in all their internal processes to ensure they are compliant. These include:
- Completion of data registers specifying what personal data is being processed, how it is being processed, who is responsible for it, etc.,
- Implementing a data retention policy ensuring personal data is not kept longer than necessary (legal minimum retention periods would supersede GDPR retention requirements),
- Consolidating personal and payroll data in one location,
- Creation of a GDPR readiness plan,
- Undergoing GDPR audits to make sure all processes and systems are GDPR compliant,
- Considering appointing a Data Protection Officer,
- Giving employees full visibility of the data you hold on them,
- Creating GDPR-compliant privacy notes for your employees.
Organisations are responsible for their own data and to ensure it is protected. Third-party relationships with HR/payroll partners/providers could present both a risk and opportunity.
It is important that a GDPR data processing agreement is put in place outlining clearly the duties and obligations of the data controllers and the data processors. Very often the data controller is the client who gives the instructions and the payroll providers/partners are the data processors. The agreement should stipulate various matters including, that the latter shall process personal data solely in accordance with the agreement, they shall ensure that personal data is not disclosed or transferred to any third party without the prior explicit written consent of Data Controller, except as specifically stated in this Agreement or as explicitly required by law. The Data Processor shall not engage another processor (sub-processor) without prior written authorisation of Data Controller. The latter should be informed in writing who shall approve or disapprove any such other processor. The Data Processor shall inform Data Controller of the location of the Personal Data upon the request of the Data Controller. The Data Processor shall allow for and contribute to audits, including inspections, conducted by an authorised auditor appointed by Data Controller.
Due to the above and many other considerations that one needs to be aware of during payroll processing, outsourcing the payroll to a professional service provider whose payroll and tax department work hand in hand and are continually updated with new regulations could be the way forward. Strong HR/payroll partners/providers can assist organisations in being also GDPR compliant and take away a part of the burden and risk, because their systems and processes would ensure protection of your employees’ personal data.