SAP US Payroll Tax Class

SAP Payroll taxes SAP US Payroll Tax Class SAP Tax Terminology ................................................................................................................................................ 1 Tax Calculation Process ............................................................................................................................................ 2 Process Overview .............................................................................................................................................. 2 Data Model ................................................................................................................................................................. 3 Infotypes ............................................................................................................................................................. 3 Configuration of Taxes ............................................................................................................................................... 9 IMG – Implementation Guide Steps ................................................................................................................... 9 Tax Companies ................................................................................................................................................ 10 Load Tax Data .................................................................................................................................................. 11 Tax Data Maintenance – Tax Authorities ......................................................................................................... 12 Tax Data Maintenance – Tax Types ................................................................................................................ 15 Tax Data Maintenance – Tax Areas ................................................................................................................. 16 Tax Data Maintenance – Tax Models .............................................................................................................. 19 Useful Reports .................................................................................................................................................. 24 Tax Data Maintenance – Unemployment Insurance ........................................................................................ 24 Tax Data Maintenance – Tax Overrides .......................................................................................................... 25 Tax Data Maintenance – Symbolic Account Split ............................................................................................ 26 Priority of Tax Wagetypes ................................................................................................................................ 26 Tax Wagetypes ........................................................................................................................................................ 27 Descriptions of tax wagetypes ......................................................................................................................... 27 Linking tax wagetypes to other tax data ........................................................................................................... 28 Gross to Net Wagetypes .......................................................................................................................................... 30 Gross-Ups ................................................................................................................................................................ 31 Cash or Regular Gross-ups.............................................................................................................................. 31 No-pay Gross-ups ............................................................................................................................................ 34 Problems with Gross-ups ................................................................................................................................. 35 Reconciling Taxable Wages – No Retrocalculation ................................................................................................. 36 Retrocalculations ...................................................................................................................................................... 37 Cash vs Tax Perspective.................................................................................................................................. 37 Gross to Net Equation ...................................................................................................................................... 37 Forming Retro Differences ............................................................................................................................... 37 Claims............................................................................................................................................................... 38 Taxation of Retrocalculations ................................................................................................................................... 40 Tax When Paid (TWP) vs Tax When Earned (TWE) ....................................................................................... 40 Balanced & Unbalanced Offsets ........................................................................ Error! Bookmark not defined. Tax Priority & Caps ............................................................................................ Error! Bookmark not defined. Retroactive changes to gross-ups ...................................................................... Error! Bookmark not defined. Crossing Years ................................................................................................... Error! Bookmark not defined. W-2 Corrections (W-2C) ..................................................................................... Error! Bookmark not defined.

SAP US Payroll Tax Class SAP Tax Terminology
Business Term Federal Employer ID Number (FEIN) Tax Formula Wage Base SAP Term Tax Company Tax Type Formula Tax Model Definition A legal entity for tax reporting purposes The type of tax levied (required to be paid) by a tax authority Instructions for how to calculate a tax amount A definition of which wages and deductions are considered taxable for specific tax authority and type of tax

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SAP US Payroll Tax Class Tax Calculation Process
Process Overview

Tax Infotypes

Other Infotypes

Year-toDate Payroll

Previous Payroll

SAP Tax Preparation (schema UTX0)

BSI Tax Calculation

BSI Tax Formulas

SAP Special Processing (schema UTX0)

Payroll Results (RT, TCRT, TAX, TAXR, XDFRT, UNB, BAL)

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SAP US Payroll Tax Class Data Model
Infotypes Infotype 207 Title Resident Tax Description / Notes This is the tax area where the employee lives. They can only live in one place at a time, and payroll reads this infotype as of the check date.

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SAP US Payroll Tax Class
Infotype Infotype 208 Title Title Work Tax Description / Notes Description / Notes This infotype stores the various tax areas the employee works in – they can work in multiple areas at once, and each is pro-rated by a certain %. The total % can not be more than 100. If it is less than 100, the remainder is allocated to the resident tax area. Payroll reads all the infotype 208’s active during the pay period and pro-rates wages according to each infotype 208 occurrence.

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SAP US Payroll Tax Class
Infotype 209 Title Description / Notes Unemployment State This infotype contains the state and worksite the employee is taxed in for unemployment taxes. For payroll calculations it is read as of the period-end date. If the worksite is filled in then you can use SAP’s Multiple Worksite Reports in Tax Reporter.

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SAP US Payroll Tax Class
Infotype 210 Title Withholding Info Description / Notes This infotype stores the W-4 or state-equivalent information needed for calculating withholding taxes. It is read as of the check date. Various tax authorities use different fields on this infotype, and the available fields change depending on the tax authority entered (which is also the subtype).

Tax Exempt Indicator codes control which wages & taxes get calculated: X = no taxable wages or taxes; R = don’t take taxes but do report taxable wages; Y = don’t take taxes and don’t calculate reportable or taxable wages. Def. Form.No. is the default formula number SAP will use for the tax – and that can be overridden with the ‘Assign Form.No.’ field. For other fields, select them and press F1 for the SAP help text. This screen layout will change from one tax authority to another.

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SAP US Payroll Tax Class
Infotype 234 Title Tax Overrides Supplemental method: Many withholding taxes have an optional flatrate method that can be used. Some have more than one supplemental method – here we can override the supplemental method for an employee’s paychecks. Override amount: This amount will override any withholding tax amount calculated by the system. Empl. Override group: This is a code created in BSI that defines a custom tax calculation, such as a custom flat-rate for certain bonus payments. The override group has to be created in BSI and then applied here. Description / Notes This infotype contains various overrides for calculating withholding taxes, and is read as of the check date.

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SAP US Payroll Tax Class
Infotype 235 Title Other Taxes The formula numbers and ‘Exe.’ (exemption indicators) used here serve the same purpose as they do on infotype 210, but for everything except withholding taxes. Infotype 210 is withholding taxesonly, and 235 is for all other tax types. Description / Notes This infotype contains overrides for all other taxes than withholding, and is read into payroll as of the period-end date.

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SAP US Payroll Tax Class Configuration of Taxes
IMG – Implementation Guide Steps Transaction SPRO is used to access the SAP Implementation Guide. The transaction will first display various ‘project IMGs’, press F5 or the Enterprise IMG button to get to the complete IMG structure. Open the Payroll Accounting -> Payroll: USA -> Tax section. If you do not have access to transaction SPRO, you can view the corresponding tables with transaction SE16 (Data Browser).

To get more documentation, double-click on a line’s text. For example, double-click on the ‘Tax’ text line and you get this documentation:

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SAP US Payroll Tax Class

Tax Companies

This is the step where Tax Companies are defined and then assigned to each personnel area/subarea combination. The tax company is not the same as the Company Code (or accounting company) that is seen on infotype 1. In fact, Tax Company does not display on infotype 1. The information entered in the ‘Define tax companies’ (table t5utl) step is used for regulatory tax reporting (Tax Reporter). The screen below shows where Tax Company is assigned to the personnel area/subarea (table t5u0p): Page 10

SAP US Payroll Tax Class

The Tax Company is where taxes & taxable wages are reported for regulatory purposes. The accounting debits & credits go to the Company Code on infotype 1, which may or may not correspond to the Tax Company. For example, this screen shows that taxes and taxable wage are report ed to the government under ‘Overseas’, and the description on the personnel area says the accounting goes to Company Code 001.

Each tax company is identified by an employer ID number for every tax authority it reports to. Those employer ID numbers (EIN’s) are entered in the ‘Define tax identification numbers by BSI tax company’ step (t5uth), and then assigned to a tax type within the tax authority in the ‘Define federal/state/local employer ID number’ step (table t5uti). SAP Payroll will not calculate a tax if the corresponding EIN does not exist in these tables. Load Tax Data

This section is primarily for the first-time system setup, where we copy some data from the BSI Tax Calculation system into SAP tables. It is normally maintained by periodic updates to the system that come from SAP.

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SAP US Payroll Tax Class
Tax Data Maintenance – Tax Authorities

The ‘Check tax authorities’ step (table t5utz) is used to configure certain options for each tax authority. This data is delivered by SAP and normally it is also updated by them as new tax authorities come into existence. You might want to customize some options here to tailor the system to your needs.

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SAP US Payroll Tax Class

The ‘Sort no.’ controls the sequence in which the tax authorities will be displayed in select lists. The ‘W4’ indicator controls whether of not you want to require an infotype 210 for the tax authority, make it optional, or not allow one to exist. The IRS column is to indicate whther of not you want to apply the IRS 10-exemption limit rule to the authority. The ‘NoUS’ column is used to indicate US Territories & Possesions, such as Puerto Rico and the US Virgin Islands. The next IMG steps - ‘Check sort number for authority’, ‘Check W -4 and exemption limit indicators’, and ‘Check status of territories’ are just different views on this same information. ‘Check tax authority mapping’ (table BTXTAXC) is where we map the SAP Tax Authority code to the BSI Tax Authority code. This is normally maintained by SAP and does not require customer maintenance. BSI has its own codes for each tax authority, but lets the customer create whatever codes they want to use. Those customerdefined codes are mapped to the BSI codes here.

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SAP US Payroll Tax Class

Each tax authority can have its own set of valid filing status codes, and these are controlled in the ‘Define valid filings statuses’ step (table t5utk). This data is generally maintained and updated by SAP.

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SAP US Payroll Tax Class

Tax Data Maintenance – Tax Types Each tax authority can have one of more different types of tax they collect. All the various tax types are defined in this step.

‘Check tax types’ (table t5utt) is a list of all valid tax types, and ‘Maintain tax types per tax authority’ (table t5utd) is where we define which tax types are valid for each authority. Page 15

SAP US Payroll Tax Class

Tax Data Maintenance – Tax Areas A Tax Area is simply a collection of tax authorities that are applicable to a given location. For example, if you live inside Cincinnati, your tax area would include Cincinnati, Ohio and Federal. SAP assigns tax areas to resident and work locations.

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SAP US Payroll Tax Class

The views for defining tax areas for work and resident locations are very similar. SAP delivers these tax areas with the system, and updates them as new ones come into existence. The ‘Maintain work -related tax areas’ (table t5utb) is where we define valid tax areas for the work location.

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SAP US Payroll Tax Class
For each tax area we define the tax authorities that correspond to it in the ‘Maintain tax authorit ies per work tax area’ step (table t5utw). So here we see that work tax area AL0H includes tax authorities Alabama and Jefferson.

Resident tax areas are setup in a similar manner, but stored in table t5uta. Likewise, resident tax areas are stored in table t5utr. Resident tax areas have additional functionality that enables the system to suggest a list of tax areas that may be valid for the employee, based on the employee’s zip code. The ‘Maintain zip code ranges per residence tax area’ (table t5utf) specifies a range of zip codes for each tax authority. When a new infotype 207 is created, the system will search this table with the employee’s zip code to get a list of tax areas that might be appropriate for the employee. Although a zip code range exists for work tax areas, there is no other system functionality to support that process (i.e it doesn’t work).

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SAP US Payroll Tax Class

Tax Data Maintenance – Tax Models

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SAP US Payroll Tax Class
The Tax Model is where we define the taxability of wages in SAP Payroll. The ‘model’ is a set of three SAP configuration tables. The first step ‘Define tax authority model’ (table t5ute) is where we associate each tax authority with a two digit model number. The model number is just an arbitrary two digit number that was chosen at the time the system was first setup. If a tax authority changes the way it taxes earnings or deductions, then you would create a new tax model for it, using the effective dates in t5ute.

The second step is ‘Define taxability model’, or table t5utm. In this table we link each taxable wagetype to a tax model. There are four aspects to this link – the resident, work and unemployment taxation of the wagetype, and the taxation for different groups of employees (the tax modifier). The link to the wagetype is via processing class 71 – called the taxability class. For each taxability class we specify if the wagetype is taxable for the tax authority an employee lives in, works in, and for unemployment taxes. These three settings can be customized per tax modifier. For example, we may tax wages for every tax authority for regular employees, but only tax wages for Federal for expatriates. In that case, we put expatriates and regular employees in different tax modifiers, and control the assignment of wagetypes to tax authorities via table t5utm.

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SAP US Payroll Tax Class
The tax modifier is determined in payroll in rule ZUDG (tax schema ZUA2). Tax Modifiers Tax Modifier U1 U2 U3 U4 U5 U6 U7 Employee Group Domestic employees & other retiree payments No longer used (was Sundor) US Expatriates Retiree stock options (pay types L and S) No longer used (was Outbound expats) Never used Any employee (expat or regular) whose resident tax infotype (208) is set to Puerto Rico

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SAP US Payroll Tax Class
Table t5utm is where we link the tax authority and tax types to the wagetype:      Tax model: The code for a tax authority, from t5ute Res/wrk/UI: R = resident tax, W = work tax, U = unemployment tax Tax Modif: The tax modifier for the employee Tax Class: The processing class 71 value for the wagetype Tax type combination: A code from t5uty that specifies which tax types the wagetype is taxable for

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SAP US Payroll Tax Class
The third step is where we tell SAP which types of tax to use for each row in t5utm. Table t5uty (define tax type combinations) is where we define codes to represent a set of tax types. In t5utm, if a tax class is taxable for a particular combination of resident, work, unemployment and tax modifier, the system then gets the tax type combo value and looks it up in t5uty to see which types of tax to use. This is how SAP knows which /3xx wagetypes it needs to build. For example, tax type combo 06 would tell the system to build wagetypes /303, /304, /305 and /306.

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SAP US Payroll Tax Class
The Tax Model Diagram shows how the tables, infotypes and wagetypes come together to tell the system which /3xx taxable wagetypes to create: Tax Model Diagram

Employee tax infotypes (207, 208, 209)

Wagetype, processing class 71 (t512w)

Tax type combinations (t5utm)

Tax authority model (t5ute)

Taxability model (t5utm)

Tax modifiers (rule UMOT)

Taxable wagetypes (/3xx)

Useful Reports SAP has a standard program RPUTMDU0 (HR -> Payroll -> Americas -> USA -> Subsequent activities -> Period independent -> Tools -> Tax utilities -> Expand tax models) that reads the tax model tables and shows which tax types are used for each line of t5utm. There is also a standard report that displays all the tax authorities in the system (Display tax authorities on the Tax Utilities menu, or program RPUAUTU1, or view table t5utz via transaction se16).

Tax Data Maintenance – Unemployment Insurance Every state in the US collects an unemployment tax to fund unemployment insurance claims. This is an employerpaid tax, so there is not effect on the employee. However, each state has its own tax rate and that tax rate can vary from one company to another in the state. The company-specific tax rate is call the ‘experience rate’ because it’s based on the state’s experience in paying out unemployment claims for employee s laid-off from a company. The more people a company lays-off, the higher the experience rate. This experience rate can change every quarter. Client XXX does not pay unemployment taxes based on what is calculated in SAP. Instead, the total taxable unemployment wages are multiplied by the experience rate outside of SAP when the quarterly unemployment tax returns are filed. Some states requires companies to report their unemployment wages per physical site within the state – this is called Multiple Worksite Reporting and is controlled via the worksite field on infotype 209. Again, Client XXX does not use SAP for its worksite reporting so that part of the system is not used.

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SAP US Payroll Tax Class

Tax Data Maintenance – Tax Overrides SAP and BSI allow companies to override certain parts of the tax calculation. Most of the configuration is done is BSI; the one piece of it done in SAP is to define employee override groups. These groups also need to be setup in BSI (Tax Factory). The employee override group can then be entered into infotype 234 or set dynamically in a rule in payroll. The override groups and rules allow you to override the tax calculation formula so that you can withhold taxes at rates different than the standard ones provided by BSI. This is currently used for some stock option and relocation payments.

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SAP US Payroll Tax Class
Tax Data Maintenance – Symbolic Account Split SAP gives you an option to post a given tax type to different FI/CO accounts based on which tax authority or tax level (Fed, state, local) it belongs to. For example, Federal taxes are posted to one account, and state/local taxes posted to another. The process is simple – look at every tax wagetype and then copy its contents to another wagetype that is then posted to the correct account. At Client XXX there are three tax-posting wagetypes – 9TAF (Federal), 9TAS (state) and 9TAL (local), generated in rule ZUHF in the tax schema ZUA2.

Priority of Tax Wagetypes When deducting tax, the system follows a certain order or priority, This is defined in the ‘Maintain priority of tax wagetypes’ step, or table t5us0. Generally there is no need to maintain this table, since it is delivered by SAP to take Federal taxes first, then state, then local. There are other settings in this table to control how taxes are deducted when not enough money is present, and whether or not the tax wagetype is from regular income or tip income.

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SAP US Payroll Tax Class Tax Wagetypes
Descriptions of tax wagetypes These wagetypes store the results of tax calculations; other than the wagetypes for employee taxes, they are not really linked to the amount of cash the employee receives. Wagetype /3xx Description Taxable earnings Explanation This is the amount of earnings (payments) that is taxable for each authority and tax type. It does not include pre-tax deductions. These amounts are the /3xx earnings minus the pre-tax deductions. These amounts are sent to BSI for taxation. These are the amounts that are taxed for each authority & tax type. These wages reflect tax caps (i.e. for FICA and unemployment) and reciprocity. The /7xx wagetypes are returned to SAP from BSI. These amounts are for employee and employer taxes, based on the /7xx wages, as calculated by BSI. Certain wages can be reported as taxable, but no tax is required to be taken from them. Notes Some tax authorities require the company top report these wages. Other than that, they are not used in the tax calculation process. States require companies to report their /610 unemployment wages every quarter. These amounts are the ones reported on the W-2.

/6xx

Reportable wages

/7xx

Taxable wages

/4xx

Taxes

Contains employee-paid and employer-paid taxes (processing class 72 determines this) Imputed income on group-term life insurance is a good example of a taxable-not-taxed earning.

/Qxx

Taxable not taxed wages Uncollected taxes

/Nxx

There are cases where an employee Uncollected FICA and Medicare taxes has taxable income, but not enough will try to balance out in future money to pay for the taxes on it. payrolls, and others do not. Instead of /4xx taxes, SAP records the amount of uncollected tax in /Nxx wagetypes. (Taxable wages are not always cash wages). In some cases the system is able to deduct a pre-tax deduction but does not have enough taxable income to offset it. The amount of taxable income that could not be offset (i.e. reduced) is stored in the /Ixx wagetypes. The system will try to reduce wages in the next payroll by these amounts. If an employee has /Ixx wagetypes, then their FICA/Medicare and other flat-rate taxes wont tie back to their /7xx wages (i.e /703 * 6.2% <> /403).

/Ixx

Not reduced wages

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SAP US Payroll Tax Class
Linking tax wagetypes to other tax data Each tax wagetype also has a split indicator set, and this links it to the tax authority it is reportable to. For example, we could have two or three /401 wagetypes in a payroll, and the split links us to the TAX table in the payroll result that tells us the tax authority it is reportable to. In the following case we see that a split of ‘01’ links us to Federal in the TAX table, and split ‘02’ links us to OH (this is from the Display Payroll Results tool, or report RPCLSTRU): RT (Results Table)

The two-digit number in the ‘C1’ column in the RT links us to the ‘SS’ column in the TAX table. So when the C1 split is 01, we know that wagetype is linked to tax authority FED. When C1 is 02, then the wagetype is linked to tax authority OH.

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SAP US Payroll Tax Class
The TAX table also shows us the data used to calculate taxes in that payroll result. For Federal, we see that this person had 13 tax exemptions, filed Married, and this was used for his resident and unemployment tax calculations. If they were exempt from any taxes, we would see that in the ‘Tex indicator’ line – there would be an exemption indicator under each ‘Tax type’ that was exempted. TAX Table

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SAP US Payroll Tax Class Gross to Net Wagetypes
These wagetypes control the amount of cash the employee receives. The various wagetypes used to make payments and take deductions all cumulate, or add into these wagetypes. These gross-to-net wagetypes therefore may or may not have anything to do with taxable wages or taxes. They simply keep track of how much money to pay the employee. Wagetype /101 Description Total Gross Explanation This contains all the cash payments to an employee – whether those payments are taxable or not. All employee deductions that were taken from the employee’s pay for the current pay period. All employee taxes taken from the pay this pay period The total amount of net pay for the employee. If the employee deposits their pay into multiple accounts, then there will be a /559 for each account. The sum of /559 equals /560. Notes

/110

Total EE Deductions Total EE Taxes Net Pay

/5U0 /560

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SAP US Payroll Tax Class Gross-Ups
Cash or Regular Gross-ups A gross-up is a guaranteed net payment of a taxable wage to the employee. For example, the company wants to pay a $100 award to an employee, and since that is taxable income, the employee owes taxes on it. So we know that is the employee is to get $100 in net pay, we need to have a higher gross, or taxable, amount. This amount is added to taxable income, and when taxes are deducted from it we get back to the original $100 net payment. In SAP there are two wagetypes for a gross-up – the net wagetype and the gross wagetype. The net wagetype does not really pay anything – it is not cumulated to /101 (Total Gross), so it does not add any cash income to the payroll. And although it is not taxable, it has processing classes 68, 69 and 71 set so that we know what to include st in the gross-up. The link between the net and gross wagetype is stored in the ‘1 der. WT’ field in table t512w; the st gross wagetype will be coded into the ‘1 derived wagetype’ field on the net wagetype. The gross wagetype does cumulate to /101, and it does add to taxable wages. Once taxes are deducted from the gross, we end up back to the net amount. For example, a $100 net might gross-up to $160. Then SAP would deduct $60 in tax from that, leaving a net pay of $100.

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SAP US Payroll Tax Class

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SAP US Payroll Tax Class

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SAP US Payroll Tax Class
No-pay Gross-ups Sometimes employees are paid some sort of taxable income outside the system – relocation expenses for example. In that case, we want to increase their taxable income to record that ‘net’ payment that was made to them, but we don’t want to pay them any ‘cash’ money. In these cases SAP can process non -cash, or ‘no-pay’ gross-ups. The net and the gross do not generate any cash payments to the employee, but the gross-up does add to taxable wages. $100 in the net wagetype. SAP then grosses-up that amount to $160, but the gross-wagetype does not cumulate to /101, so it does not pay anything to the employee. However, we still have $60 in taxes to deduct, so SAP generates a third wagetype, a cash payment, to exactly offset the amount of tax. For a no-pay net it generates $160 in gross, and $60 in a cash payment that equals the $60 in tax. There is a zero net effect on the employee. nd In the wagetype table t512w, we see the tax payment wagetype in the ‘2 der. WT’ field. In this case, the net is 270E, the gross is 270F and the tax payment is 270G.

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SAP US Payroll Tax Class
For a $100 no-pay gross-up, we enter the net wagetype and then the system generates the gross and the tax payment when payroll runs. Period 1 in 1 Wagetype /101 /5U0 /560 270E 270F 270G Description Total gross Total EE Tax Net Pay Tax Equal Net Tax Equal Gross Tax Equal Tax Amount $60 $60 $0 $100 $160 $60 No-pay net No-pay gross – no cumulation to /101 Cash payment to cover $60 in expected employee tax Notes Since 270G is a cash payment, it is cumulated into /101 Actual employee tax deducted from employee

Problems with Gross-ups If the employee has a claim when a no-pay gross-up is processed, the cash payment for taxes will first go to satisfy the claim, instead of offsetting taxes. Claims always come before taxes. In the $100 no-pay gross-up example, we would then have $100 net, $160 gross, zero net payment, and uncollected taxes. Period 1 in 1 Wagetype /101 /5U0 /Nxx Description Total gross Total EE Tax Uncoll EE tax Amount $60 $0 $60 The $60 in 270G was used to pay off the existing claim first, so there was no money leftover to pay for taxes. Now the employee’s taxes are not in balance with their wages. Notes

/560 /561 /563 270E 270F 270G

Net Pay Claim Claim paid Tax Equal Net Tax Equal Gross Tax Equal Tax

$0 $60 $60 $100 $160 $60 No-pay net No-pay gross Cash payment to cover $60 in expected employee tax

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SAP US Payroll Tax Class Reconciling Taxable Wages – No Retrocalculation
Many times we have to reconcile the taxable wages back to the wages paid to the employee. To do this, identify all the taxable wagetypes in the RT and add them together. Taxation may be different from one authority and one tax type to another. You can use the ZP_TAXMODEL program to determine which wagetypes are taxable for the various tax authorities, tax types, and tax modifiers. When reconciling the wages, be sure to keep in mind which ones are taxable vs. taxable-not-taxed. Wagetypes that are ‘taxable’ will go into /3xx, /6xx and /7xx. Taxable-not-taxed wagetypes will cumulate into /Qxx. The W-2 adds the /7xx and /Qxx wagetypes together for reporting. When balancing taxes to the taxable wages, also be aware of any uncollected taxes that may be present.

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SAP US Payroll Tax Class Retrocalculations
Cash vs Tax Perspective In both current-period and retro-period calculations, there really is no direct link between cash wages and taxable wages. It is best to think of them as two separate processes. Gross to Net Equation For every payroll period the net pay can be calculated with this equation: /101 - /110 - /5U0 + /552 + /561 - /563 = /560 Or in friendlier terms: Total cash payments – total employee deductions – total employee taxes + retro differences + claim – claims paid = net pay. Forming Retro Differences Using the gross-to-net equation as a guide, an abbreviated payroll result could look like the table below. One exception is that we don’t put accounts on /101, /110 and /5U0 – instead we account for their individual components such as base pay, overtime, cafeteria deduction, withholding tax and so on. Period 1 Wagetype /101 /110 /5U0 /560 Amount $1000 $200 $300 $500 Debit $1000 $300 $300 $500 Credit

Wagetype amounts can change retroactively. For example, if an employee was underpaid by 8 hours of overtime in a previous period, the amount of the overtime wagetype would increase retroactively. Since overtime is a cash payment, it would cause /101 to increase retroactively, showing that we now need to pay the employee $100 more in this case. But, in a retrocalculated period we can not change the amount of net pay, since that pay was already transferred to the bank (or paid via check). The difference between what was paid originally vs what should now be paid is put into a wagetype called ‘retro differences’, or /551. This keeps the retro payroll period in balance (i.e. debits equal credits). Period 1 in 2 Wagetype /101 /110 /5U0 /560 /551 Amount $1100 $200 $300 $500 $-100 Debit $1100 $200 $300 $500 $100 Page 37 Credit

SAP US Payroll Tax Class
Then in the current period, the system sums all the /551 wagetypes from the retro periods, multiplies by negative 1 and places that amount in /552. If positive, this adds to the amount of net pay, if negative then it will reduce net pay. /551 and /552 should always exactly offset each other. Period 2 in 2 Wagetype /101 /110 /5U0 /560 /552 Amount $1000 $200 $310 $590 $100 $100 Debit $1000 $200 $310 $590 Credit

Claims Retro differences (wagetype /552) is added to total net pay (wagetype /560) in the current period. If /552 is negative, it could reduce /560 to a negative amount, which is not allowed (can’t have negative net pay). The amount it would go negative is the amount that can not be recovered in the current period, and that amount is stored in /561 – a Claim. The claim is the amount of money the employee still owes the company because they don’t have enough to pay it back. For example, assume the employee was really on leave of absence beginning in period 1, so they would have had a total gross of zero, but they were originally paid $1000. In that case, the results would look like: Period 1 in 2 Wagetype /101 /110 /5U0 /560 /551 Amount $0 $200 $300 $500 $1000 $1000 Debit $0 $200 $300 $500 Credit

In period 2, the employee is still on leave of absence, so no payments, deductions or taxes are taken. The $1000 overpayment from period 1 in 2 is stored as a claim, since there is no net-pay to offset it. Period 2 in 2 Wagetype /101 /110 /5U0 Amount $0 $0 $0 Debit $0 $0 $0 Page 38 Credit

SAP US Payroll Tax Class
/560 /552 /561 $0 $-1000 $1000 $1000 $0 $1000

The claim (/561) is the amount the employee owes the company. In every subsequent payroll the system will apply money towards paying off the claim, before it uses the money for any deductions or taxes. For example, in period 3 the employee gets paid $600, and all of that gets allocated to reduce the claim. Period 3 in 3 Wagetype /101 /110 /5U0 /560 /561 /563 Amount $600 $0 $0 $0 $400 $1000 $400 $1000 Debit $600 $0 $0 $0 Credit

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SAP US Payroll Tax Class Taxation of Retrocalculations
Tax When Paid (TWP) vs Tax When Earned (TWE) Since SAP’s payroll system has retrocalculation functionality, it can happen that we change payments in the past that affect taxable wages. This is something that tax authorities never expect, and don’t really recognize. Tax authorities want companies to tax payments based on when the employee has ‘constructive receipt’ of the wages. Constructive receipt in SAP terms means that we tax the wages when they are paid, not when they are earned. The tax when paid date corresponds to the check date and/or period end date depending on the infotype. So when SAP does retroactively change wages in the past, those changes are rolled forward to the current period and taxed there. However, the taxable wagetypes change in the retro periods. For example, in the first retrocalculation case /101 increase in period 1 in 2, because the overtime wagetype increased. But that increase was not taxed in period 1 in 2, it was rolled forward to period 2 in 2 and taxed there (which is why taxes are higher there). There are some cases where wages are taxed when earned – gross-ups/gross-downs, retroactive changes in tax

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