What is payroll tax reconciliation?
A payroll tax reconciliation checks whether the PAYE tax calculated corresponds with the actual amount payable. A regular reconciliation lowers payroll tax exposure. An employer can carry out a reconciliation exercise quarterly, bi-annually, or annually.
As payroll data provides the input for payroll tax, it is crucial to check the completeness and accuracy of the payroll data first before reconciling taxes.
A review of the Pay-As-You-Earn (PAYE) tax computation usually involves the following steps;
- Collate the monthly payroll, one-off payments, and any other compensation data. The report will be from January to December.
- Compare the total amount on the PAYE tax receipts with the figure calculated tax. Reconcile any difference.
- Annualize the monthly income and tax paid of each employee
- Calculate the annual PAYE tax based on the relevant law.
- Compare the tax calculated with the amount paid.
- If there is a tax payable, remit the balance to the relevant tax authority (RTA).
Importance of reconciling payroll tax
An employer or a person in a management capacity is responsible for deducting and remitting PAYE taxes in Nigeria. Employers must file an annual employer tax return (Form H1) showing the income and taxes of employees. A timely reconciliation reduces the stress in the tax filing process, lessens the tax exposure, and helps identify any gaps in the payroll report.