How to calculate salary-related taxes

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.

Our company provides all relevant accounting services in Tbilisi, Batumi, and other cities of Georgia.

New regulations in crypto

From 1 July 2023, a new regulation was introduced in Georgia, which defines “Virtual Asset Service Provider” (hereinafter “VASP”) and requires registration with the National Bank of Georgia. Besides, VASPs must follow instructions and have continued obligations after the initial registration.

 

In this article we will not be discussing the technical details of mandatory registration, instead, we will focus on the practical and substantive aspects of the new regulation and will be answering to frequently asked questions.

 

What changes?

Before the new regulation, any company could carry out crypto-related transactions such as crypto exchange operations, crypto transfers, storage, administration, portfolio management, etc. Starting from 1 July 2023, companies that carry out such transactions are required to register with the National Bank of Georgia.

 

Will the changes affect me?

If you are an individual, who is personally trading in cryptocurrencies, rest assured, the new regulation does not affect you. Similarly, if you are an individual, who is involved in the mining of cryptocurrencies, you are not affected.

Put simply, the new regulation affects companies, that provide crypto services to other companies or persons. For example, cryptocurrency exchange, providing crypto-trading platforms, managing third parties’ crypto portfolios, storing and safekeeping cryptos for third parties, administering cryptos for third parties etc. The key here is that they conduct operations for the benefit of third parties.

To sum up, if you are involved in cryptocurrency trading or mining for your own benefit, you are not affected by the new regulation. On the other hand, if you provide services to third parties, then it is mandatory that you register with the National Bank of Georgia.

 

My company accepts payments in cryptocurrencies, does anything change for me?

If you own or manage a company, which is not a crypto service provider, but accepts payments in cryptocurrencies and sometimes makes payments to suppliers in cryptocurrencies, it would be interesting for you to learn about any impact you may have from the new regulation.

For example, let’s discuss a company that sells cakes and juice and accepts payments in Laris as well as cryptocurrencies. First of all, it should be noted that your company does not fall under the definition of VASP and therefore should not register with the National Bank of Georgia.

The only thing that you should be aware of is that you are prohibited from accepting payments directly in cryptocurrencies without intermediary (VASP). This is because in Georgia, the only legal payment currency is Georgian Lari. Noone prevents you from offering payment to customers in cryptocurrencies, however the payment must go through intermediary, which takes the amount paid by your clients and converts them to Laris. Eventually when the payment made by client reaches your account, it has already been converted by the intermediary in Laris. From client perspective, nothing changes, customers can make payments in cryptocurrency, however, your company received Laris converted by the intermediary (intermediaries are subject to registration in the National Bank of Georgia). Besides, companies are prohibited from making salary or other payments directly in cryptocurrencies (of course the exception to this rule is the purchases from abroad or salary payments to foreigners/non-residents). For example, if your company owns Bitcoin and transfers it to employees’ wallets as compensation, this transaction represents a violation of Georgian law. Company can only make salary and other payments in Bitcoin (or other cryptocurrencies) through intermediary, which converts the cryptocurrencies to Laris and transfers the converted amounts.

To sum up, in Georgia, the only legal way of payment is Georgian Lari, which means that entity receiving the payment, whether employee or supplier, must receive the transferred cryptocurrencies in equivalent Laris, which is only possible through intermediary, which converts transferred cryptocurrencies to Laris and then directs to the receiver.

 

What do I need to do if my company falls under the definition of Virtual Asset Service Provider (VASP)?

As discussed above, any company, which provides crypto services to third parties, whether it is conversion, storage, portfolio management or any other service, must register with the National Bank of Georgia as a Virtual Asset Service Provider. For this, the entity submits an application to the National Bank. Registration criteria and other details are discussed in Georgian on the following webpage:

https://www.matsne.gov.ge/document/view/5829496?publication=0

Registration fee equals 5 thousand Georgian Laris. It should be noted that NFTs are out of scope of the new regulation, while cryptocurrencies are included in the scope.

Since the purpose of the new regulation is to prevent money laundering and financing of terrorism, registered companies have continued obligations, that include conducting procedures to identify information about clients, their beneficial owners, and origins of their money. Exactly what these mandatory procedures must address, is discussed on the above indicated link.

We represent the leading accounting firm in Georgia, that serves hundreds of clients on a daily basis. We can offer you all the necessary services related to VASP registration and related accounting.

Why outsource your accounting?

This may sound counterintuitive, but outsourcing accounting services for your company is cheaper and is of superior quality compared to hiring and an internal accountant.

 

Less costs

Outsourcing is often cheaper than hiring an accountant. This is caused by the fact that it is inefficient for small and medium sized entities to hire a full-time accountant, because such entities do not usually need 100% of the accountant’s time and often one third or even one fourth of qualified accountant’s time is needed to achieve the same result. As for the large companies, setting up accounting department and purchasing appropriate accounting software is significantly more costly for them. Our automated systems and modern methodologies allow us to offer accounting service to large companies at lower fees.

 

Access to experts

Upon signing a contract with us, companies get access to different specialists, including tax experts, financial reporting specialists, experienced accountants and financial consultants. Each of them is master of their field with complex and thorough experience.

 

Insured risks

We have three-level control of accounting and tax filing process. Accounting transactions posted by an accountant is checked and verified by chief accountant, portfolio manager and finally by internal audit department. As a result, tax filings are monitored by three separate specialists.

In case of any errors, we are responsible for any tax penalties caused by our mistake.

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