A tax accountant is the best source of information when it comes to the financial side of hiring and terminating employees. Dismissing a worker may sound straightforward. Maybe things aren’t working out, or the business need isn’t there anymore. No matter what the reason is, you still need to make sure you have everything covered – including taxes.
What Are Employment Termination Payments?
An employment termination payment, or ETP, is used to describe funds paid to an employee after they are terminated. The total should include a number of items owed to the worker like unused time off, unused sick leave, redundancy payments, payments in lieu of notice, and early retirement funds over the tax-free amount.
After dismissing an employee, you must go through your records and figure out how much is owed to them and how much tax must be withheld. There are a number of areas that are frequently miscalculated. Errors related to how much should be paid, the tax rate, and how much of the payment is tax-free are common. Many businesses hire a tax accountant to ensure that their numbers are accurate.
Two Parts to ETPs
The ETP consists of two main parts. The first is the tax-free component and the second is the taxable component. The applicable taxes will vary based on the circumstances. Factors like type of redundancy, early retirement, or if it includes compensation for unfair dismissal, personal injury, harassment, or discrimination can affect the tax amount.
A genuine redundancy is described by the Australian Tax Office (ATO) as a situation where an employer decides to eliminate a job. That means that no replacement will be hired and the job will not exist any longer.
There are specific tax requirements that apply to genuine redundancies. The payment is tax-free to a certain amount that’s based on a formula provided by the ATO. A limited base is calculated then added to a service amount and multiplied by the number of years the employee provided service. Your tax accountant can supply current figures for this year’s base rate.
The employer must withhold taxes before paying the former employee. This should include all applicable amounts. The percentage will vary based on age when the redundancy occurred.
Do You Know How to Calculate Tax Redundancy Payouts?
Employers and employees should understand redundancy payouts and the taxes that apply to them. Accuracy is important to avoid possible issues down the track. The safest way to deal with ETPs is with the help of a tax accountant. Contact Oculus Group on 07 5536 3755 or complete our online contact form to learn more.