ESCT wrongly appears on the Profit & Loss Report

Legacy KB ID: 4809

Question

Why does Employer Super Contributions Tax (ESCT) appear on my Profit & Loss Report?  The tax is paid by the employee and should not appear as an expense of the business.

 

Answer

ESCT is not a payroll tax – it is a special tax and is not included in the PAYE system.  Reckon Accounts Payroll automatically sets aside the PAYE tax from gross payments to the employee.

ESCT can be paid either by the employer or the employee, as stipulated or implied by the employment contract.  This tax cannot be processed through the PAYE system.

To enable the ESCT payroll item to handle both options, the ESCT tax processing requires a Profit & Loss account. 

Reckon Accounts is operating correctly.

 

If the employer pays the ESCT tax.

In this situation ESCT is an expense to the business and must appear as an additional tax expense.  We suggest the following assignments in the ESCT payroll item setup:

1.    Liability Account:  Payroll Liability:ESCT Withheld

2.    Expense Account:  Payroll Expense:ESCT.

 

 

If the employer pays the ESCT tax.

In this situation ESCT is an expense to the business and must appear as an additional tax expense. 

We suggest the following assignments in the ESCT payroll item setup:

1.    Liability Account:  Payroll Liability:ESCTpaid

2.    Expense Account:  Payroll Expense:ESCT.

Profit & Loss and Balance Sheet Accounts affected:

a.    Payroll Expenses:KiwiSaver will show full KiwSaver amount (eg: $4.00)

b.    Payroll Expenses:ESCT will show the appropriate tax amount for KiwiSaver paid (eg: at ESCT of 10.5%, $0.42)

c.    Payroll Liabilities:Super will show $4.00;

d.    Payroll Liabilities:ESCTpaid will show $0.42.

 

 

If the employer pays the ESCT tax.

In this situation ESCT is an expense to the employee.  However, to process the withholding of this tax from the employee Reckon Accounts does the following:

1.    The stipulated Super Contribution plus KiwiSaver is treated as the “grossed up” value;

2.    Amount to be paid to the Super Fund is calculated as Grossed Up value divided by one plus the applicable ESCT tax rate expressed as a decimal.

a.    If Employee annual salary is $10,800, then ESCT rate is 10.5%;

b.    Weekly wage of $200.00 with only KiwiSaver attracts contribution of $4.00;

c.    Amount paid to the Super Fund, and the amount to appear as Company Contribution KiwiSaver is:  4.00 / 1.105 = $3.62.

d.    ESCT will be $0.38

3.    Profit & Loss and Balance Sheet Accounts affected:

a.    Payroll Expenses:KiwiSaver will show $3.62

b.    Payroll Expenses:ESCT will show $0.38

c.    Payroll Liabilities:Super will show $3.82;

d.    Payroll Liabilities:ESCTwithheld will show $0.38.

4.    We suggest the following assignments in the ESCT payroll item setup:

1.    Liability Account:  Payroll Liability:ESCTwithheld

2.    Expense Account:  Payroll Expense:ESCT.

 

Note:  Users should refer to their accountants for exact wording and structure of accounts. 

 



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