Company owners and directors, who don’t have financial background, often ask questions on how to calculate so called “gross” salary i.e., salary including applicable taxes. They understand a company must pay taxes on employee salaries; however, they don’t have information on the exact formula for calculation of such taxes. In this article, we will be discussing all combinations of such taxes.
What are the applicable taxes on employee salaries if the employee is involved in the pension scheme?
For example, let’s assume that a company pays 1,000 GEL salary to an employee. On salaries and other employee benefits, companies must pay 20% PIT (Personal Income Tax) and 4% pension contribution (of which 2% is the company’s share and 2% is the employee’s share). As a result, the company’s aggregate salary expense including taxes is derived using the following formula:
1,000/98%/80%*102% = 1,301.02
Therefore, in case an employee is involved in a pension scheme and assuming company pays 1,000 GEL salary, the company must additionally pay 301.2 GEL in the form of PIT and pension contributions. Out of this amount, 250 GEL represents PIT and 51.02 GEL represents pension contribution.
What are the applicable taxes on employee salaries if the employee is not involved in the pension scheme?
When an employee is not involved in the pension scheme a company must pay only PIT.
First, let’s discuss in which cases an employee is not involved in the pension scheme. An employee may not be involved in the pension scheme if he/she is relatively older. When the pension scheme was introduced in Georgia in 2019, involvement in the scheme became mandatory for individuals below the age of 40; Individuals above 40 were automatically involved in the scheme, however they could opt to come out from the scheme; As for women above 55 and men above 60, they were not involved in the scheme, however they could opt to get involved voluntarily. Apart from the age, there are other criteria – foreigners (non-residents of Georgia) are not involved in the pension scheme.
The aggregate salary expense for those persons who are not involved in the pension scheme, is derived using the following formula:
1,000/80% = 1,250
Therefore, in case an employee is involved in a pension scheme and assuming company pays 1,000 GEL salary to the employee, the company must additionally pay 250 GEL PIT.
How can a company learn before hiring an employee whether he/she is involved in the pension scheme? If a company has the employee’s identification number (ID), whether the employee is involved in the pension scheme can be ckecked on the following webpage: www. pensions.ge
What are the applicable taxes in case of hiring a freelancer?
First, it should be noted that, if a freelancer is also registered as an “Individual Entrepreneur” and the work that he/she performs represents a service rather than work of an employee, then the payment to such person represents payment for service rather than a payment of salary. In such cases, the company does not have to pay any taxes and the tax declaration burden rests on the freelancer. Besides, Individual Entrepreneur’s involvement in a pension scheme is voluntary. However, in a number of cases, when a company hires a freelancer, contract with the freelancer may have a substance of an employment agreement rather than a freelance work. In such cases, “substance over form principle“ applies, which means that the tax authority is authorized to reclassify the contract in accordance with its substance and request from company to declare employment-related taxes. To help companies determine whether it has hired a freelancer and pays service fee or hired and an employee and pays salary, the tax authority has published a questionnaire, which helps companies distinguish between the two contracts. Link to the questionnaire is as follows: Employment agreement or service contract
In cases where company pays service fee to Individual Entrepreneur (freelancer), it does not have to withheld and pay any taxes. If a company pays 1,000 GEL, the applicable taxes are declared and paid by the freelancer. If a freelancer has “Small Business” tax status, then the freelancer himself/herself (and not the company) will pay 1% of the generated income. If a freelancer does not have such status, then he/she pays 20%. For more information regarding the “Small Business” status, please refer to the article in our blog (Small Business Status). In any case, whether the freelancer has the tax status or not, a company is not liable to withheld and pay taxes. Instead, the Individual Entrepreneur is obliged to declare and pay the applicable taxes.
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