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Tax and insurance deductions from vacation pay
Tax and insurance deductions from vacation pay
One of the important issues that arises in practice is the taxation and social insurance obligations related to paid leave and compensation for unused leave. Expert Nusrat Khalilov provides clarification on these matters.
Payment in lieu of leave may occur in two forms: compensation for the current year and compensation for previous years. According to the clarification of the State Tax Service regarding whether such compensation is subject to income tax and social insurance contributions, the procedure for taxation and social insurance obligations for unused leave is as follows:
- When compensation is paid for unused leave from previous years, the amounts for each full year must be calculated separately. Similarly, compensation for unused leave of the current year must also be taxed separately from the salary paid in the month of payment and is subject to income tax and social insurance contributions independently.
- If compensation for unused leave from previous years is paid after January 1, 2019, income tax and social insurance contributions are calculated based on the rates effective as of January 1, 2019. Additionally, for income tax purposes, AZN 200 is deducted from the compensation for each year in accordance with Article 102.1.6 of the Tax Code.
Example 1:
An employee in the non-oil and private sector could not take annual leave in the current year and requests compensation instead. In April, the employee earned AZN 400 in salary and received AZN 379 as compensation for unused leave, totaling AZN 779. In this case, how should tax and social insurance be applied? Should the salary and compensation be taxed separately or together?
Compensation for unused leave of the current year must be taxed separately and not added to the salary of the payment month. Since the employee works in the non-oil and private sector and earns less than AZN 8,000, he is exempt from income tax for seven years starting January 1, 2019. If this were a state or oil sector job, each component would be taxed separately.
Therefore:
- AZN 400 (salary) and AZN 379 (compensation) are each subject to social insurance separately.
Social insurance contributions from salary:
- From the employee:
200 x 3% = 6 AZN
200 x 10% = 20 AZN
Total: 26 AZN
- From the employer:
200 x 22% = 44 AZN
200 x 15% = 30 AZN
Total: 74 AZN
Social insurance contributions from unused leave compensation:
- From the employee:
200 x 3% = 6 AZN
(379 - 200 = 179) → 179 x 10% = 17.9 AZN
Total: 23.9 AZN
- From the employer:
200 x 22% = 44 AZN
179 x 15% = 26.85 AZN
Total: 70.85 AZN
Example 2:
An employee working as a credit specialist in a bank since January 1, 2015, has not taken annual leave in 2019, 2020, and the current year. As a result, the employee has 70 days of unused leave (30 + 30 + 10). Upon termination of the employment contract, the employee is entitled to AZN 5,000 in compensation and AZN 1,200 for the current month’s salary.
Assume that:
- AZN 2,000 of the compensation corresponds to 2019–2020 (30 days)
- AZN 2,000 to 2020–2021 (30 days)
- AZN 1,000 to the current year (10 days)
- AZN 1,200 is the current month’s salary
Let’s clarify how tax and social insurance contributions apply.
According to the rule:
When compensation is paid for unused leave from previous years, each full year must be calculated separately. Compensation for unused leave from the current year is also taxed separately from the salary in the month of payment.
Thus:
- AZN 2,000 for 2019–2020 and AZN 2,000 for 2020–2021 will each be calculated separately.
- AZN 1,000 (current year) and AZN 1,200 (salary for April) will also be taxed separately.
- Depending on whether the employer is in the public or private sector, AZN 200 tax exemption (per year) applies under Article 102.1.6 of the Tax Code.
Example 3:
An employee took 40 days of annual leave from June 27 to August 6. Since the leave payment was made in advance and in one lump sum, how should income tax be applied?
Let’s assume:
- The employee’s monthly salary is AZN 800.
- Leave pay for 40 days is AZN 1,200.
- In June: AZN 700 salary and AZN 130 leave pay
- In July: AZN 910 leave pay
- In August: AZN 160 leave pay and AZN 700 salary
In this case, income tax must be calculated separately for each month. The employee’s monthly income for June, July, and August should be determined individually, and tax should be withheld from each month accordingly.
More specifically, the portion of the leave pay corresponding to each calendar month must be combined with that month’s salary, and income tax applied separately. Final payments, including compensation for unused leave from the final year and final salary, must be taxed similarly. Unused leave from previous years must also be taxed separately per year.
In this example, the employee’s taxable income:
- June: 700 (salary) + 130 (leave pay) = 830 AZN
- July: 910 AZN
- August: 160 (leave pay) + 700 (salary) = 860 AZN
Although the leave pay was made in advance, it is still taxed based on the months it corresponds to.
Additionally, lump-sum severance payments made under Article 70(b) of the Labour Code upon termination of employment are exempt from income tax and mandatory social insurance contributions according to Article 102.1.4 of the Tax Code.
One of the important issues that arises in practice is the taxation and social insurance obligations related to paid leave and compensation for unused leave. Expert Nusrat Khalilov provides clarification on these matters.
Payment in lieu of leave may occur in two forms: compensation for the current year and compensation for previous years. According to the clarification of the State Tax Service regarding whether such compensation is subject to income tax and social insurance contributions, the procedure for taxation and social insurance obligations for unused leave is as follows:
- When compensation is paid for unused leave from previous years, the amounts for each full year must be calculated separately. Similarly, compensation for unused leave of the current year must also be taxed separately from the salary paid in the month of payment and is subject to income tax and social insurance contributions independently.
- If compensation for unused leave from previous years is paid after January 1, 2019, income tax and social insurance contributions are calculated based on the rates effective as of January 1, 2019. Additionally, for income tax purposes, AZN 200 is deducted from the compensation for each year in accordance with Article 102.1.6 of the Tax Code.
Example 1:
An employee in the non-oil and private sector could not take annual leave in the current year and requests compensation instead. In April, the employee earned AZN 400 in salary and received AZN 379 as compensation for unused leave, totaling AZN 779. In this case, how should tax and social insurance be applied? Should the salary and compensation be taxed separately or together?
Compensation for unused leave of the current year must be taxed separately and not added to the salary of the payment month. Since the employee works in the non-oil and private sector and earns less than AZN 8,000, he is exempt from income tax for seven years starting January 1, 2019. If this were a state or oil sector job, each component would be taxed separately.
Therefore:
- AZN 400 (salary) and AZN 379 (compensation) are each subject to social insurance separately.
Social insurance contributions from salary:
- From the employee:
200 x 3% = 6 AZN
200 x 10% = 20 AZN
Total: 26 AZN
- From the employer:
200 x 22% = 44 AZN
200 x 15% = 30 AZN
Total: 74 AZN
Social insurance contributions from unused leave compensation:
- From the employee:
200 x 3% = 6 AZN
(379 - 200 = 179) → 179 x 10% = 17.9 AZN
Total: 23.9 AZN
- From the employer:
200 x 22% = 44 AZN
179 x 15% = 26.85 AZN
Total: 70.85 AZN
Example 2:
An employee working as a credit specialist in a bank since January 1, 2015, has not taken annual leave in 2019, 2020, and the current year. As a result, the employee has 70 days of unused leave (30 + 30 + 10). Upon termination of the employment contract, the employee is entitled to AZN 5,000 in compensation and AZN 1,200 for the current month’s salary.
Assume that:
- AZN 2,000 of the compensation corresponds to 2019–2020 (30 days)
- AZN 2,000 to 2020–2021 (30 days)
- AZN 1,000 to the current year (10 days)
- AZN 1,200 is the current month’s salary
Let’s clarify how tax and social insurance contributions apply.
According to the rule:
When compensation is paid for unused leave from previous years, each full year must be calculated separately. Compensation for unused leave from the current year is also taxed separately from the salary in the month of payment.
Thus:
- AZN 2,000 for 2019–2020 and AZN 2,000 for 2020–2021 will each be calculated separately.
- AZN 1,000 (current year) and AZN 1,200 (salary for April) will also be taxed separately.
- Depending on whether the employer is in the public or private sector, AZN 200 tax exemption (per year) applies under Article 102.1.6 of the Tax Code.
Example 3:
An employee took 40 days of annual leave from June 27 to August 6. Since the leave payment was made in advance and in one lump sum, how should income tax be applied?
Let’s assume:
- The employee’s monthly salary is AZN 800.
- Leave pay for 40 days is AZN 1,200.
- In June: AZN 700 salary and AZN 130 leave pay
- In July: AZN 910 leave pay
- In August: AZN 160 leave pay and AZN 700 salary
In this case, income tax must be calculated separately for each month. The employee’s monthly income for June, July, and August should be determined individually, and tax should be withheld from each month accordingly.
More specifically, the portion of the leave pay corresponding to each calendar month must be combined with that month’s salary, and income tax applied separately. Final payments, including compensation for unused leave from the final year and final salary, must be taxed similarly. Unused leave from previous years must also be taxed separately per year.
In this example, the employee’s taxable income:
- June: 700 (salary) + 130 (leave pay) = 830 AZN
- July: 910 AZN
- August: 160 (leave pay) + 700 (salary) = 860 AZN
Although the leave pay was made in advance, it is still taxed based on the months it corresponds to.
Additionally, lump-sum severance payments made under Article 70(b) of the Labour Code upon termination of employment are exempt from income tax and mandatory social insurance contributions according to Article 102.1.4 of the Tax Code.