What is the FSS?
Final Settlement System (FSS) is a system designed to produce accurate tax deductions for the employee's taxable gross emoluments.
With this methodology, the Commissioner for Revenue aims to reduce the number and amount of tax claims from as many cases as possible.
How is the FSS Tax Calculated?
This article will help explain how the FSS tax is calculated.
If you are using Buddy, you can find the explanation of any FSS calculation by hovering over the FSS payroll within the Run Payroll Page.
The same breakdown of calculation can be seen from the Payslips page within the employee's profile (see: Viewing Individual Payslips).
Main Tax Rates
In the case of the main tax brackets (single, married and parent), Buddy’s tax calculation is based on the Malta Tax and Customs Administration's FSS Calculator
Our tax calculations can be held accountable by comparing them to the calculated amounts within that spreadsheet.
Calculated tax is based on the projected emoluments, measured by taking a person’s taxable earnings to date, dividing it by the number of pay periods until now*, and multiplying by the number of pay periods in the year.
For example, while doing a monthly payroll in March, you divide the taxable gross earned between January and March, divide by 3 and multiply by 12.
From the projected emoluments, you may find how much projected tax would be due for the whole year, based on the tax band it falls into. Dividing this amount by the number of pay periods (e.g. 12) and multiplying the number of periods to date (e.g. 3), you will get the tax due to date. Tax for the current pay period should be calculated as the difference between the tax due and tax paid to date.
*Identification of Income and Tax to Date
Buddy checks any previous payslips whose pay date is prior to this payslip. In case the totals to date are not including all income, ensure that the pay dates have been set correctly.
Other Fixed Rates
The other tax rates are generally calculated as a flat percentage on the gross emoluments. For example, Part-Time (Qualified) rate taxes income at exactly 10% for the first €10,000.
However, once the employee earns more than €10,000 part-time qualifying emoluments, their tax rate should default to 35% unless specified otherwise.
Non-Resident Rates
As non-resident tax rates are only applicable for a short duration, the income is done based on their total earnings to date.
For example, if an employee earned €1418 in their first payslip, this will be taxed as if they have earned €1418 for the full year. This ensures that should the employee leave Malta, their tax bill will be 100% accurate without any uncollected tax fees for the MTCA.
My New Employee Has €0 Tax. Is this Correct?
Most times, employees new to the workforce may not have to pay any tax within their first couple of months, depending on how much they earn, their tax rate and when they joined.
It is common for new employees to not pay tax in their early payslips, despite being eligible to pay tax within future payslips as they continue to earn more. Although this may not seem intuitive, this method will both reduce tax claims and refunds for your employees, but also help newer employees in the workforce earn a bit more take-home pay towards their start of employment.
What if my Employee Had a Previous Job?
If the employee has been employed before joining your company, you need to factor in the previous earnings and tax paid. On Buddy, one can fill this in using the Previous Earnings section:
One crucial thing to consider: employees' income will most likely vary from their previous job, especially if they were paid any bonuses, such as payment for any accrued leave that had not been utilised.
This means that this may lead to variations in tax in the first few months as the projected income is re-factored, and underpaid/overpaid tax is handled.
What is the 50% Rule?
The FSS in any given payslip cannot exceed 50% of the employee's take-home pay. Although it may be uncommon, this may be the case when previous periods were undertaxed, or there is a high disproportion of income throughout different periods.
In such instances, the FSS will be capped at 50%
What Happens when Tax Rate is Updated Mid-Year?
The FSS calculation on main rates (Single, Married, Parent and Other) uses an annual projection computation. This means that if an employee has their tax rate updated, their next payroll will recalculate using the totals to date.
In some instances, the employee may have underpaid FSS in previous months which can increase the tax due. This is capped based on the 50% rule mentioned above.
Any underpaid or overpaid amount by the end of the year would then be received as a tax bill from the official governmental entities.
Does It Matter When I Pay Irregular Bonuses to Employees?
Yes, it matters! Although the tax will balance out at the end of the year, this has significant implications throughout the year.
Since the FSS uses a projected calculation, be cautious of handing out significant amounts early in the year, as this will inflate the projected income and proportion tax due.
For instance, a large bonus in February would mean that employees will pay more tax and earn less net income in March, compared to the income they may be used to, such as in months like January. This may have a significant impact on their lives and can strain employee-employer relationships, especially if they are not prepared in advance.
One can consider paying for these towards the end of the year or evening out the bonus across different periods to avoid this.