Is additional Wage tax deducted from vacation pay?
Written by Angela Calmero
Posted on 17 Jun 2022 - 3 minutes read
On a regular basis, we receive questions from employees about why there is so much less left from their gross vacation pay in comparison to their fixed monthly salary while the gross amount is the same? The explanation is as follows:
There are two types of Wage tax tables. Wage tax that must be deducted from periodic salary is determined using the Periodic wage tax table. But in the case of one-time benefits such as vacation pay, bonuses, year-end bonus, etc., the Wage tax must be determined using the Extra earnings wage tax table. There is a clear difference between these two types of wage tax tables. The periodic table includes all the (lower) tax brackets as well while the extra earnings table uses the final percentage based on the previous year’s annual income.
The following are 3 examples, which clearly show that the amounts differ for each Wage tax table applied:
For a salary of ANG 2,500.00 gross per month, according to the periodic wage tax table (in this case the monthly wage tax table 2022 with an application of the basic discount), approximately ANG 33.00 in wage tax should be deducted.
But when we look at the annual salary of the previous year of ANG 32,500 (13 x ANG 2,500.00) in the wage tax table for extra earnings, an amount of ANG 244.00 should be deducted from the vacation pay of the same ANG 2,500.00. This is a difference of ANG 211.00 more wage tax.
With a salary of USD 1,800.00 gross per month, according to the periodic wage tax table (in this case the monthly wage tax table 2022), approximately USD 231.00 in wage tax should be deducted.
But when we look at the annual salary of USD 23,400 (13 x USD 1,800) in the Wage tax table for extra earnings, on the vacation pay of USD 1,800.00 an amount of USD 547.00 should be deducted in wage tax. This is a difference of USD 316.00 more wage tax.
With a salary of ANG 2,500.00 gross per month, the periodic wage tax table (in this case, the 2022 monthly wage tax table), should have approximately a wage tax deduction of ANG 133.00.
But based on an annual salary of ANG 32,500 (13 x ANG 2,500) in the Wage tax table for extra earnings, on the vacation pay of ANG 2,500.00 an amount of ANG 312.00 will have to be deducted in wage tax. This is a difference of ANG 179.00 more wage tax.
As indicated earlier, the vacation pay is paid once on top of the regular periodic salaries and the periodic table should not be applied to it. If the employer does so, then on an annual basis too little income tax will be withheld from the employees. This difference will still have to be paid by the employee to the tax authorities after filing the annual income tax return.
However, there are vacation pay arrangements where gross vacation pay is paid out periodically, so wage tax is calculated based on the periodic wage tax table. In this case, this same amount of gross vacation pay can also be deducted from the employee’s net pay and is being “saved”. This “saved” amount is then paid out to the employee in a later period agreed upon.
In this case, the wage tax and social premium contributions are calculated in accordance with the periodic wage tax table and the payment of the “saved” net amount still takes place once a year. The reason that it is now not necessary to use the Wage tax table for extra earnings is that the vacation pay is paid (read: taxed) periodically and not once per year. The fact that the employee requests the employer to withhold the amount, “save” it and pay it out once a year is irrelevant.
Which method is the most advantageous: spreading vacation pay over the year or having it paid out and taxed once per year?
On an annual basis, both methods should in principle yield the same result. After all, the annual salary is in both cases the same, only with the difference that in one method the vacation pay is paid out in periodic pieces, and in the other method, it is paid out all at once.
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