SAP US Payroll Taxes

Few months ago, a question was asked to me about tax configuration and had to do some digging to find the answer.  Since then have been thinking about writing a blog about basic's of SAP US payroll taxes and finally got around to write about same, hopefully this would help some of you.

Basic understanding of US Tax Structure:

In US payroll taxes could be imposed on earnings at following levels:

(a)    Federal

(b)   State

(c)    Local

It’s worth noting that applicability of taxes to an employee depend upon multiple criteria’s like type of earning / earning amount / residence location / work location and others.

Also in US, Payroll taxes are applicable to both employees & employers.

Few important types of employee Payroll taxes:

• Federal income tax withholding.
• State income tax withholding
• Various local tax withholdings
• Social Security tax withholding (6.2% up to the annual maximum – Limit could change yearly)
• Medicare tax withholding (1.45%)

Few important types of employer Payroll taxes:

• Social Security taxes (6.2% up to the annual maximum – Limit could change yearly)
• Medicare taxes (1.45% of wages)
• Federal unemployment taxes (FUTA)
• State unemployment taxes (SUTA)

FICA stands for the Federal Insurance Contributions Act and it consists of both employee & employer contribution of Social Security and Medicare taxes.

Payroll taxes after deduction should be filed with appropriate regulatory bodies(ie remitting tax deducted to governing agencies etc)  within stipulated time period. The time period is decided by tax collecting bodies and generally one of following options exists for companies for tax filing:

(a)    Use in house payroll team for tax filings.

       (b)   Use third party tax filer like ADP or others for tax filing.

I have normally seen that most organizations outsource the tax filing part(even if they execute Gross to net payroll in house) because it becomes too cumbersome for in house teams to deal with tax filings.

SAP US Tax Processing:

SAP use BSI tax factory(third party solution) for tax calculation in US. BSI tax factory which is generally installed on customers intranet(separate server) and is called directly from SAP payroll driver (at time of running payroll) via function USTAX and it returns the details of taxes which should be deducted.

Now let us discuss, some important building blocks of SAP US Tax processing:

Tax company(t5utl) is logical level at which companies want to report taxes and taxable wages for regulatory purpose. Tax companies are assigned to personal areas/personal subareas.  Every regulatory body(Tax authority) which collects a particular type of tax provides a EIN(Employer Identifier number). This EIN is assigned to the appropriate tax authority/tax type for the tax company.

 

Tax authority (t5utz) is the smallest regulatory body which can impose taxes. For instance, tax authority DE01 is for city of New castle in Delaware.  Tax authorities are used in following US tax related infotypes:

0161 - IRS Mandates

0209 - Unemployment State

0210 - W-4 Withholding Information

0234 - Withholding Overrides

0235 - Other Taxes

Other details like valid filing statues/W4 indicatory(IT0210 requirement) / IRS Manadate(IT0161) are also defined at tax authority level.

Tax level – All tax authorities are classified via tax levels and below is a list of possible tax levels:

A – Federal

B – State

C  - County

D – City

E – School district

F  – Others

For instance, tax authority DE01 is assigned to tax level ‘D’ because represents a city.

Tax Type(t5utt) – Based on regulatory definitions, each tax authority can collect one or more types of taxes. Assignment of tax authorities to tax types can be found in V_T5UTD. For instance, PAQH(Freeburg Borough – Pennsylvania) is setup to deduct both withholding(tax type – 01) and employee occupation(tax type – 51).  

Tax Area(t5utw and t5utr) – Grouping of tax authorities which are applicable to a given location are called tax area. Tax areas are defined both for work area and residence area. Tax areas are used in Following US tax related infotypes:

0207 – Residence tax(t5utw)

0208 – Work tax (t5utr)

For instance, if an employee lives at New Castle(Delaware) then Resident tax area on IT0207 would be ‘DE01’ and it would comprise of DE01(New castle), DE(State) and FED(Federal) level tax.

Now that we have an understanding of basic building blocks, let us dive into Tax model configuration which is used to drive wage type taxability in SAP US payroll.  

Define tax authority model (t5ute )– Assign tax authorities to a three digit tax authority model based on same taxability. Tax authority model is essentially used to group together tax authorities which have same set of taxation rules. Hence one tax authority model can be(and mostly will be) assigned to multiple tax authorities.  For instance, IN01 to IN09 are assigned to tax authority model ‘023’.

Define taxability model(t5utm) – Tax models are used to group together tax authorities model which have same:

 

      (1)    Tax authorities model

      (2)    Residence/Work or unemployment tax.

      (3)    Value of tax modifier.

Tax Modifiers(Rule -> UMOT)
Tax Modifier	Employee Group
U1	Domestic employees & other retiree payments
U2	No longer used (was Sundor)
U3	US Expatriates
U*	Others

 

  (4)    Processing class 71 value of individual Wage type(taxability class)

 

PC71 value	Meaning	PC71 value	Meaning
0	Regular Taxable	1	Regular Wages
2	Unemployment taxable only	3	Taxable portion of
4	Completely tax free	5	Nonresident Taxation
6	Resident (e.g. FICA) tax & credit	7	Regular wages excluding resident (e.g. FICA) tax & credit
A	Adoption Assistant	B	Substantiated Business Expense Reimbursement
C	Cafeteria Plans	D-W	Others

 

Define Tax Type combos(T5UTY) – Define which tax types are mapped to individual tax combo’s.

 

Putting it all together

Let us say we have an employee(whose earning WT[1000] has processing class 71 value ‘0’) and whose Residence/Work and Unemployment state is set on appropriate infotypes as ‘PA’. 

 

Screen shot from T5UTE entry ( PA tax area would comprise of tax authorities PA & FED and hence tax model of both will be considered.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Screen shot from T5UTM entry for these tax models for R/W/U ( * U1 is the tax modifier and tax class ‘0’ is the processing class 79 for the wage type).

 

                            

 

 

 

 

 

 

 

 

 

 

Screen shot from T5UTY for appropriate tax type combo’s:

 

Hence based on entries above and validity dates, following tax types should be applicable for tax authorities:

 

FED ( Tax combo’s 011 & 003 ) -> 01 / 02 / 03 / 04 / 05 / 06 / 10

PA ( Tax combo’s 001 & 004) -> 01 / 10 / 20

** Note that tax type ‘02’ is EIC and not applicable.

 

Screen shot from Payroll log for USTAX function illustrates appropriate tax types were queried.

 

 

 

 

See it's simple :)