CALCULATING PAYROLL: 5 COMMON QUESTIONS ANSWERED

March 5, 2018
|In Accounting, Bookkeeping, Business, Payroll, Software, Taxation
|By Eoin Fleming

In 2017, Revenue collected a record €50.7 billion for the Exchequer. Of that €50.7 billion, €20billion came from Income tax. In other words, 40% of all revenue collected comes from income. A large portion of income tax comes directly as payroll taxes.

As such, the government takes it very seriously. As an employer, you merely collect the payroll tax for your staff and pass it onto the Revenue. You are responsible for calculating it correctly and calculating payroll is complex.
We are often asked about calculating payroll. Here are the most common questions we get regularly asked.

What taxes do I have to collect and when?

Every payroll you run, whether it is weekly, fortnightly or monthly, there are three types of tax you need to collect – PAYE, PRSI and USC. Each have their own calculations and must be followed. You may also have to deduct Local Property Tax if an employee has chosen that option.

Do I need payroll software?

In a word yes. Unless you have employees, who never change their schedule, you could potentially use a spreadsheet. But it gets complicated when maternity leave, holiday leave, paternity leave and perhaps flexible time are needed.
It is much easier to use a payroll software system. It’s especially imperative if you are in retail and have staff on shifts, shift changes, shift swaps etc. It gets unmanageable if you follow a spreadsheet.
Human error, despite process checks, is inevitable.
And it is a legal requirement to give payslips which many of the payroll systems allow you to do – including electronic payslips, print or download as a PDF.

What do I need to do when an employee starts with me?

Whether you’re taking on your first staff member or your 100th, you still need to get certain mandatory pieces of information from them.
In the majority of cases, you will need to get the P45 from their previous employment. If a person is starting working for the first time, then your new employee will have to complete a Form 12A. This is an application for a Certificate of Tax Credits and Standard Rate Cut-Off Point.
Thereafter, you send the forms to your local Revenue office, upon which they will send you an employee’s tax credits and standard cut-off rates. You can access this through ROS electronically via downloading an up to date P2C file.
Emergency tax kicks in if you don’t have one of the following:
the employees P45
a PPSN (Personal Public Services Number) on the P45
a tax certificate for the current year
In order to avoid having to calculate emergency tax, ensure that you have all the correct details before an employee starts if possible or as close to start date as possible.

What is a P60 and P35?

Even though you calculate the three types of tax on a monthly basis and submit a monthly form to Revenue, you must return a P60 for every employee. There was talk last year about the Revenue digitising the mountains of paperwork that you incur by 2019. Until then, it’s important you file the returns.
A P60 is a certificate of your employee’s annual pay and deductions. You must give this to your employee by February 15th after the tax year.
There is no exception.
The P35 is an annual return that is completed by employers after the tax year end. This return gives details for everyone you employed at any time during the tax year. Employers must submit P35s by the relevant deadline which was 15th February 2018. This date is extended to 23rd of February for ROS submissions.

How do you calculate holiday entitlements?

As I said at the outset, payroll is complicated. One aspect of pay that needs to be calculated correctly and is often calculated incorrectly is holiday pay. Holiday pay is calculated depending on how much work is done in the leave year and how it is calculated. There are three main ways to calculate holiday entitlements:

  • 4 weeks off This is where an employee works 1,365 hours in a year. They will get 4 working weeks.

  • One third of a working week. one-third of a working week for each month in the leave year in which he or she works at least 117 hours.

  • 8% of hours worked 8 per cent of the hours he or she works in a leave year (but subject to a maximum of 4 working weeks):

An employee may use whichever of these methods gives the greater entitlement. Once you have the working hours calculated, most accounting packages will be able to help you identify which method is better.