There are major discrepancies in the monthly tax produced by the IRC Tax Calculator and the actual tax that should be paid as prescribed by the IRC Tax Calculation rules (see attached). We advise using the tax as calculated by SmoothPay.
The IRC's actual tax calculation rules effective 1 July 2012 states the calculation for a period other than 1 fortnight is as follows (in this case 1 month, for K3000 for an employee having 3+ dependants):
- the IRC rules actually say: Monthly salary / days in that month x 14 to produce the fortnightly amount, yet the calculator does NOT ask how many days there are). This method causes a variation in tax and net pay each month which is unacceptable to most users.
- We calculate salary per fortnight more accurately as follows: K3000 * 12 months / 26 fortnights = K1384.62 (this produces a correct average salary per fortnight so the tax remains the same each period - K1384.62 x 26 fortnights = K36000.12 (the 12 Toea extra is due to rounding)
- Tax on K1384.62 is K238.08 (both the IRC calculator and SmoothPay calculate this amount correctly)
- the IRC rules then say: multiply by fortnights, add pro-rated portion of fortnight remaining (so in a 31 day month you would have K238.08 X 2 + (K238.08 / 14 days x 3 days = K51.02) totalling K527.18
- We calculate to avoid the discrepancies this causes in tax and net pay each month as follows: K238.08 x 26 fortnights / 12 months = K515.84 (a very insignificant difference of K12 approx)
- the IRC calculator shows K429.43 - a major discrepancy no matter how you look at it
This is the calculation that is actually specified by the IRC calculation rules (for November, 30 days):
- K3000 / 30 x 14 = K1400 per fortnight
- Tax is K243.46 x 2 + (K243.46 / 14 x 2) = K521.70 (a K7 difference to the averaging used by SmoothPay and K92.27 difference to the IRC calculator)
This is the calculation that is actually specified by the IRC calculation rules (for December, 31 days):
- K3000 / 31 x 14 = K1354.84 per fortnight
- Tax is K227.66 x 2 + (K227.66 / 14 x 3) = K504.10 (an K11 difference to the averaging used by SmoothPay and K74.67 difference to the IRC calculator)
Consider it this way as well.
- If the employee was paid fortnightly they would pay K238.08 on earnings of K1384.62. The total tax paid in a year would be K6190.08.
- If you calculate the tax per the IRC tax rules (refer examples above):
- 1 x 28 day month: K1500 tax K278.46 x 2 = K556.92
- 4 x 30 days months: 4 x K521.70 = K2086.80
- 7 x 31 day months: 7 x K504.10 = K3528.70
- Total tax K6172.42 (diff is K17 from SmoothPay's calculation)
- If you rely on the IRC calculator, the total tax paid would only be K429.43 x 12 = K5153.16 (a discrepancy of K1019 underpaid). This might be welcome news to the employee, however it doesn't match the IRC's specifications and cannot be trusted to provide accurate results. If you wish to use the IRC Calculator result then you'd need to override the tax (in the employee's Pay Summary - use the Summary tool in the toolbar), however we'd advise against it.
Similar issues occur with the IRC's printed tax tables in that they do not cater for part periods (tax is allowed to be calculated as a proportion on days worked)
Feel free to use the method that best suits (if you can justify it then use the calculator's result), however we're bound to calculate according to the IRC's rules (or as close as we can, and producing the same net pay per period).