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Case Study for SURE! PayMaster Users: Resigned Employees and the Tax Adjustment Process

Situation

 Analysis

Since it was the user’s last pay period of the calendar year, the payroll officer had correctly selected the Year-End Annualization method for computing payroll and the mandated annualized taxes.

Note:  In accordance with the requirements of the Comprehensive Tax Reform Program (CTRP, also known as Republic Act 8424), the Year-end Annualization procedure of SURE! PayMaster computes the annual taxes due and computes the adjusted withheld tax or refund for all employees – resigned, inactive and currently employed.

In the annualization of the payroll of the following employees, additional taxes were required.  However, at the time of annualization these employees had already resigned or were designated as inactive several months earlier (see Table 1):

Since these people no longer had any income at the time the annualization was done (i.e., during the last pay period of December 2005), the resulting net pay for them is negative.  For obvious reasons, SURE! PayMaster does not allow negative net pay to be posted (How can you say: “I issued Juan de la Cruz a paycheck for negative P2000”?).  These therefore cannot be posted (logically so); consequently, user could not perform the End-of-Year Purge of records, a procedure required to be able to proceed with the 2006 payroll.

Table 1:

Section 2.83.1 of Revenue Regulations-2-98, amended, stipulates:  Every employer or person who is required to deduct and withhold tax on compensation, including the fringe benefits given to rank and file employees, shall furnish every employee from whose compensation taxes have been withheld, the Certificate of Income

Tax Withheld on Compensation (BIR form 2316), on or before January 31 of the succeeding calendar year, or, if employment is terminated before the close of such calendar year, on the day in which the last payment of compensation is made.  Failure to furnish the same shall be ground for mandatory audit of payor’s income tax liability including withholding tax upon the verified complaint of payee.

Thus, when de la Cruz and Santos resigned, their payroll should have been annualized – using the Selective Annualization option - during their respective last pay periods (the second pay period of June for de la Cruz, and the second pay period of July for Santos).  The payroll officer at that time clearly neglected to annualize the pay for these employees, as evidenced by the adjusted withholding taxes computed for these employees during the December 2005 annualization.

If the pay of de la Cruz and Santos were annualized during their last pay period, the respective adjusted/required withholding taxes reflected in Table 1 would have been computed then.  And since they had income during their respective last pay periods, their pay would not have been negative, thus the pay would have been posted at that time, and the net pay given to de la Cruz and Santos would also have been net of the adjusted/required withholding taxes. The problem at hand would not have arisen.

On the other hand, Chua and San Juan are not resigned, only marked inactive.  However, the same situation applies to them: Under the CTRP they are still subject to annualization since they earned income from the employer during the calendar year.  Thus, their last pay before they became inactive should have been annualized, so that the required withheld taxes at that time would have been computed and deducted from their last pay. If the annualizations had been performed as required by the CTRP, then the inability to post these would not have arisen.  The client would also have properly complied with the CTRP guidelines.

Solution

Create History Records for the four employees, reflecting Withheld Taxes equivalent to the computations in Table 1. (Go to Option D.B.: History File on your SURE! PayMaster screen.) Thus, when the annualization is done at year-end, SURE! PayMaster sees these history files.  Because these history files tell SURE! PayMaster that these amounts were already withheld, the resulting annualized taxes due from these employees is zero; hence no records are created that reflect a negative amount (a situation of zero income but there is a deduction for taxes).  The client can now post all Dec. 16 to 31 payroll records, perform the End-of-Year Purge, and therefore be ready to process 2006 payroll.

Very important: The history files that were just created in effect imply that the employer withheld a total of P1,037.78 from these four employees (which in actuality, it did not).

Therefore the client now has to include this additional amount in its Withheld Tax Remittances to the Bureau of Internal Revenue (BIR).  By doing so, the client will have complied with the BIR’s withholding tax requirements, and the resulting annualizations and Alpha Lists (another set of reports required by the BIR) will be accurate. At this point, you have now avoided a problem with the government bureaucracy.

But, since these amounts were not actually withheld from the employees during their last pay, the client (employer) will have to initially shell out of its own pocket the taxes (P1,037.78 in our example) that it was supposed to have withheld.  The client should then try to collect these amounts back from the above former employees, since they were in effect “overpaid” in their last pay period. Good luck with that. RCD. (To request a printer-friendly version of this article, e-mail us your request at balmori@balmorisoftware.com. Please cite your name and company name.)

Questions? Reactions? Write to balmori@balmorisoftware.com.  

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