TAXES AND PAYROLL DBA 151 BUSINESS MATHEMATICS TAXES

TAXES AND PAYROLL DBA 151: BUSINESS MATHEMATICS

TAXES �A tax is a compulsory levy charged by a government on the citizens to raise revenue to provide social amenities like roads, schools, hospitals, etc. �Justice Oliver Wendell Holmes Jr. said “Taxes are the price we pay to live in a civilized society” �Every good citizen or corporate body must pay tax.

�It is important to not that the focus of this course is not on types of taxes and how taxes are determined or what the tax rates in Ghana are. �The focus here is on how to calculate tax where it exist. �However, mention will be made of the taxes and rates that are of interest to this course.

�Taxes are generally levied on either sales, or property, or income. �Taxes on sales are called Sales Tax and they are paid on the amount of retail sales. �Taxes on property are called Property tax and they are paid at a rate determined by the local authority usually based on the value of the property. �Taxes on Income are called “income tax” and they are paid on income earned at a rate determined by the

Sales Tax �Sales rate tax = Amount of Sales × Sales tax �Example: A customer bought five loafs of bread for GHc 25 excluding tax. If sales tax rate is 5%, how much did the customer pay? Solution: Amount to pay = Cost of bread + sales tax Cost of bread = GHc 25 Sales tax = 0. 05 × 25 = GHc 1. 25 Amount to pay = GHc 25 + GHc 1. 25 = GHc 26. 25

�Generally in Ghana, �Corporate tax rate is around 25% �Sales tax is around 15% �VAT used to average 15% on selected items excluding food. Today, the government has reduced VAT to 3% flat on almost all things. �All overtime income and allowances are taxed at a flat rate of 10%

Personal Income Tax �Income tax in Ghana follows a progressive system of taxation such that as the chargeable income increases the rate of tax also increases.

�The Annual Income Tax rates applicable to RESIDENT individuals effective 9 th June, 2010 are: �Chargeable Income Rates of Tax �First GH¢ 1, 008 Nil �Next GH¢ 240 5% �Next GH¢ 720 10% �Next GH¢ 14, 232 17. 5% �Exceeding GH¢ 16, 200 25% �B. NON - RESIDENT �The Income Tax Rate applicable to nonresident individuals is 20% flat.

Calculating Income Tax Example: Determine how much an individual earning GHc 38400. 00 per annum in Ghana pays as tax. Solution: Amount paid as tax = Sum of Tax from all levels taxable First GHc 1008 nil Next Ghc 240 @ 5% = 240 × 0. 05 = GHc 12. 00 Next Ghc 720 @ 10% = 720 × 0. 10 = Ghc 72. 00 Next Ghc 14, 232 @ 17. 5% = 14232 × 0. 175 = Ghc 2490. 6 Remaining Ghc 22200 @ 25% = 22200 × 0. 25 =

Amount paid as tax = 12 + 72 + 2490. 6 + 5550 = 8124. 6 per annum Since incomes are earned per month, the various threshold are divided by 12 to obtain the monthly levels but the tax rates are the same. In this case, the monthly tax will be Ghc 677. 05 i. e. @ First Ghc 84 Nil Next Ghc 20 5% Next Ghc 60 10% Next Ghc 1186 17. 5%

Payroll

Preparing a Payroll �A payroll is a document showing a list of staff, total earning of each staff, total deductible amount, and net earning of each member of staff in the organisation. �The first step in preparing a payroll is to determine the Gross earning (i. e. the total amount of money before deductions earned by each member of staff) �Taxes and other deductions (like loans, social security, etc. ) are taken from the Gross earning to get the net earning.

Computing Gross Earning Gross earning = (Hours worked × hourly rate) + overtime pay + Allowances (NB: Note that this is where wages are paid on hourly basis) �Where wages are based on a fixed monthly pay agreed between the employer and employee, then the Gross pay = Salary + overtime pay + allowances

� Overtime generally refers to hours worked in excess of 8 hours in 1 day or 40 hours in 1 week. �Overtime pay is usually 1½ times the regular rate. This rate is called “time and half”. This means that is hourly rate is GHc 10. 00, then any overtime will earn (1. 5 × 10 = Ghc 15. 00)

Example of Payroll SN Name of Personnel Earnings Total Hours Worked Net Earning Deductions Regular Income Overtime Hours Overtime Income Allowance s Gross Income Total Taxes SSNIT Other Deduct ions

�Example

Guideline to solving the question 1. 2. 3. 4. 5. 6. 7. Compute the non-taxable income for each employee Determine the overtime hours and overtime rate for each employee Compute the regular income and overtime income by multiplying the regular hours by the regular rate and the overtime hours by ‘time and half’ the regular rate. Determine the Gross earning Compute the taxes and SSNIT based on the schedules provided. Compute the total deductions Subtract the total deductions from the Gross earning to obtain the net income.