Payroll Tax Models in SAP HR

Tax models drive how wages are taxed in the SAP US payroll calculation. SAP supplies a general tax model with the system, but if you do business in local tax authorities or have complex taxation rules then you will most likely have to configure your own tax models. There are several steps and basic settings that define what is taxable, non-taxable, or adds to a taxable wage base. Several items on the tax jurisdiction (i.e. tax authority) have to be set up and then that is matched to the appropriate processing class values to achieve proper taxation.

The first step is the most basic - identify each tax authority and give it a number. This number is the Tax Authority Model found in table T5UTE. In short, the Tax Authority Model is a jurisdiction, or group of jurisdictions, that has one set of taxation rules. To configure the tax models correctly you have to set up each authority that has a unique set of taxes. States such as California and New Jersey would have to have their own, but states that only have a withholding tax and have the same taxable wage base could be grouped together. However, for ease of configuration and to facilitate possible future changes, we advise you create a Tax Authority Model for every state. Since there are so many local tax authorities, grouping those by the state they are in and on taxation rules is the best option. Even grouping like authorities can lead to many different Tax Authority Models.

The next step is to set up various Tax Type Combinations, found in table T5UTY. This is a grouping of the different types of taxes into sets that would be applicable to an authority and applicable processing class 71 value. The same combination can be used with many authorities and many processing classes, as long as it matches the taxation rules. In many cases, most states would just have a tax type of 01(withholding). But some states or locals may have a 01(withholding) and a type of 53(school tax). To get those taxes to apply to one authority, you create a combination that has both tax types linked to it. An example could be tax combo 01 only has tax type 01(withholding) attached to it, but tax combo 02 has tax types 01 and 53(school tax) attached. Combinations should also take into consideration whether they are going to be applied to a residence tax area, work tax area, and/or unemployment tax area. This should be evaluated based on whether the tax type is driven by residence or work location. Occupational taxes are generally determined based on your work location.

When the tax type combos have been created, you can then attach those to the tax models you created in the first step (table T5UTM). You have to attach these based on what you need for the work tax authority, residence tax authority, and unemployment tax authority. If a tax combo is not valid for a work tax area, but is valid for a residence tax area, then you would only attach that combo to that authority for the residence tax area. When attaching the tax authorities, you also need to specify what processing class 71value you want to tie to that combination. For example, you would want to create a PC71 value for a wage type that is to be added to a withholding tax wage base and not to be taxed. That PC71 value would have a tax combo tied to an authority that said tax type 01 with a value T (taxable base-no tax).

Example

Say you had three processing classes, x, y, and z. For processing class 71, x was fully taxable, y had earnings that should go to a wage base only for work and residence, and z was non-taxable for residence, but taxable for work. Below is a chart of a state and some tax type combinations set up for it.

For processing class X you would use R and W with combo 1. For processing class y, you would use R and W with combo 3. If you want a wage to be taxable based on residence status, then you would only set up an R with a combo of 1.

If you set up a combo with a tax type in it for a specific processing class, then the wage types with that processing class will have the taxes specified in the tax type combo taken out. If you don't want those taxes taken or applied to wage bases, then you do not link anything to that processing class. If you just want the wage type to add to a tax base, then you have to link the processing class to the correct combo that would utilize the taxability indicator of a T.

Now, when payroll runs on an employee, here are the simplified steps it goes through to determine how to tax various items in the paycheck: · Read infotypes 207, 208 and 209 to see what tax authorities the employee is subject to · Read infotype 210 and 234 to get additional details for withholding taxes · Read infotype 235 to see if the employee is exempt for other types of taxes · For each wagetype (in the RT) and tax authority (T5UTE), use processing class 71 to lookup the tax type combo (T5UTM) - do this three times, for residence, work and unemployment. · Find out what tax types are setup for each tax type combo and then use that to build the taxable wages per authority and tax type - now we have a matrix of wages by authority and tax type · Send all this data to BSI, where the actual tax calculation happens

Payroll tax is one of the most complex areas of any payroll system. This is just the tip of the iceberg of how it is done in SAP's Payroll module!