Calculating and processing a Net-to-Gross salary for expats. The case for Grossing Up in Swiss SAP-HR Payroll
Here’s an interesting (yet complex) problem to solve: expats and staff, active on international assignments in Switzerland, often have ‘net salary agreements’ by which a net wage compensation is agreed. How to gross-up the salary to take all applicable taxation into account and provide them with a correct Gross salary amount?
The standard Swiss SAP-HR Payroll (PY-CH) does not offer a solution to gross-up an amount considering Social Insurance AND Withholding Tax. However, for companies with many expats this is a common need e.g. to compensate the expat for rent in his homeland and rent in Switzerland. Adessa Group has built a solution, tailored for the Swiss Payroll market.
What is a grossing up?
Grossing up (or sometimes referred to as ‘gross up’) is the process of converting net of tax payments of salaries, expenses, dividends, interest …., into gross figures by adding back the tax credits attached to those payments. The payroll system calculates the tax and social insurances due, if this amount has to be taxed. This tax and social insurance are also paid by the employer, not the employee.
For example, an employee (an expat) comes over to Switzerland. Even though the employee already has a house in his country of origin, the employee now also has to rent a house in Switzerland. The employer promises to increase the monthly net income of the employee with an additional rental bonus for the house in Switzerland. To make sure the expat is fully compensated this implies, that the employer will also have to calculate and pay the withholding tax and the social insurance due over this net amount.
Let’s look at an example.
Below you can see two pay slips. To the left, you can see the pay slip of the employee without any rent. To the right, you see what the employee gets when the employee is compensated for a rent of 1673 CHF. The difference in net payment with the automated solution is 1671,40 CHF (the rent due). The costs to the employer to reimburse the 1673 CHF are the rent, the withholding tax and the social insurance or 1671 + 918 + 100 = 2689 CHF.
The standard Swiss SAP-HR Payroll (PY-CH) offers no solution for grossing up when the employee is liable to pay withholding tax. When entering a net amount, SAP HR permits to calculate the grossing-up of the social insurance. However, SAP is not able to calculate the grossing up of the Withholding tax.
At Adessa Group (with its office in Blonay (CH)) we have built a solution for grossing up considering Withholding Tax within SAP-standard customising. It works for all cantons, including the four annualised cantons (Fribourg, Vaude, Tessin and Valais) and even includes the canton of Genève.
What are the benefits of an automatic versus manual grossing up?
An automatic grossing up has at least four benefits compared to a manual grossing up:
- The process of grossing up is very time-consuming and, if done manually, prone to errors.
In calculating the withholding tax, the tax percentage is, among others, dependent upon the amount of the income that month or, in the four annualised cantons, even the projected income over that year. When an employer decides to pay also the Withholding tax and the social insurance over an amount, both amounts are taxable as well. This means, that to calculate the Withholding Tax due …
- You start with the net amount you want to reimburse (e.g. the rent) and you calculate the tax and social insurance over this net amount. The tax and social insurance you want to reimburse are also taxable, so …
- You take again the net amount (e.g. the rent) and add the amounts for tax and social insurance from step 1. Then again you calculate the tax and social insurance, but these new amounts are also taxable.
- You take again the net amount (e.g. the rent) and add the amounts for tax and social insurance from step 2. Then again you calculate the tax and social insurance, but these new amounts are also taxable.
- The iteration of the calculation continues until the difference between the amounts of two steps is sufficiently low. Then the iteration stops.
As you can conclude from the above this iteration is a time-consuming process prone to errors if done manually.
- The grossing up iteration has to be repeated in case of changes in income or the employee’s family situation
The tax percentage of the Withholding Tax depends upon:
- Income, regular and one-off payments (e.g. a bonus)
- The canton in which the employee is living
- The marital status of the employee (e.g. single, married with spouse with or without income)
- The number of children
If any of the above four factors changes, the calculation has to be repeated. If the calculation is automatic, the system takes into account the new employee master data automatically and calculates the new amounts for withholding tax and social insurance without the loss of time or risk of errors of a manual calculation.
- The grossing up iteration can be forgotten
As mentioned in the previous point, the grossing up iteration is dependent on four factors. If one of these factors changes, the calculation has to be repeated to calculate the new amounts in accordance with the new situation. But because four factors are involved, it is quite easy to forget the manual calculation. The result is either that the employee does not get what he is entitled to or that the fiscal authorities of the canton do not get what they are entitled to. In other words: a compliance issue.
- Less expertise needed
A manual grossing up is quite complex and time consuming. For this you need expertise. In case of an automatic grossing up you need less of this expensive expertise.
What are the organisational challenges to deal with when rolling out an automatic grossing up?
When replacing a manual grossing up by an automatic grossing up we encountered the following four challenges:
- How to convert existing commitments to the automatic solution?
Imagine the case an employee has been promised a net increase to compensate for e.g. his rent four years ago. This net amount has been converted to a gross amount at that moment. The promised net amounts have been replaced in the HR-system by manually calculated gross amounts. Now these gross amounts again have to be replaced by the original promised net amounts, because the system will convert the net amount to a gross amount. Are these originally promised net amounts easily accessible? I am referring to a live-case at one of our customers, where more than 1000 employees needed to be converted.
- What are the costs of the new automatic solution compared to the old manual solution?
The old gross amounts have been calculated manually with a spreadsheet. This is a first source of errors. The life situation of the employee or the income may have changed, but the manually calculated gross amounts may not have been changed (forgotten to recalculate the amounts). This is a second source of errors. As a result, the costs of the automatic solution may be lower or higher than the old manual solution.
Is management prepared to take the additional costs in case due to the higher accuracy of the automatic solution this automatic solution is more expensive?
- What do we communicate to employees when the new amounts result in a lower / higher net income?
Because of differences between the manual and the automatic calculation the net income after introducing the automatic calculation may be higher or lower. What do we communicate to the employee in case the net income is suddenly higher implying that for years he has not received the amount promised (underpaid)? What do we communicate to the employee in case the net income is suddenly lower implying that for years he has received more than the amount promised (overpaid)?
- How do we handle employees who are not liable to Withholding Tax but are also entitled to a compensation for e.g. a double rent?
The decision we have taken here was to calculate from the net amount a gross amount as if the employee would be liable to Withholding Tax. This gross amount will be paid to the employee. Once a year we will recalculate the amounts considering the family situation and income of the employee at that moment.
Adessa Group has solved the technical challenge of automatically grossing up net amounts in the Swiss SAP-HR payroll considering Withholding Tax for all cantons, including the cases with an annualised calculation of Withholding Tax. However, it is also important to think about the organisational challenges well before the end of the project.
Reach out to me, if you want to know more about this solution: firstname.lastname@example.org
Below an example showing the difference between rent as a gross wage type and rent as a net-to-gross wage type (grossing up). The employee should receive 3648,45 CHF but receives only 3017,40 CHF. The disadvantage of 631,05 CHF is due to the Withholding Tax and the social insurance.