How to read payroll?

  1. Introduction
  2. What is payroll?
  3. Why do we need payroll?
  4. Payroll Header
    1. Company data
    2. Employee’s data
  5. The Gross Salary
    1. Wage incomes
    2. Non-Wage incomes
  6. Deductions
    1. IRPF (Personal Income Tax)
    2. Social Security Contributions
  7. The net salary
  8. Payroll Infographic
  9. How can a lawyer help you?

¿Have you ever read any payroll? If you feel that it looks gibberish, it’s time for you to understand where your money goes and how the salary changes from gross to net.

How do I know how much I really have to pay per month to my employees? How much does the Tax Agency withhold from my taxes? What the hell is an accrual? Every month, the same thing: you have to send payrolls to your employees and have the impression that you are faced with a hieroglyphic that is impossible to decipher. But don’t worry, in those cases where we are a company or a self-employed person with employees, we must take special care with the creation of payrolls and be aware of all the legal aspects. 

Introduction

You don’t have to do a master’s degree in accounting to understand it, we are here to help you in any question you have about it. What’s more, appearances can be deceiving, since the salary is in fact a document full of useful information: retirement, holidays, health insurance… 

We give you the tools to learn how to interpret it and we help you with this manual and repetitive work that you have to carry out each month, such as the creation of payrolls can sometimes lead us to make mistakes. Either because we take the previous month’s payroll as a model, or because someone tells us a change and we don’t remember it later, or simply because we make a mistake with the calculator.

To minimise errors that could cause us problems in the future with the Social Security Administrator, we are here to help you and assist you regarding this matter.

What is payroll?

Payroll is a document intended for the issuance of wages, bonuses, benefits for temporary disability or other payments to employees.

What is the objective of the payroll?

The objective of the payroll is clear: to inform the employee about his or her remuneration for the work done, in addition to other important aspects such as:

  • hours worked
  • holiday
  • Overtime
  • gross wage
  • details of social contributions
  • allowances and deductions
  • total taxable salary

But the payroll is also the best proof of all the work they have done, especially when it comes to calculating, for example, their future pension.

Make sure you keep all your payslips and have them at hand: companies are obliged, under the Commercial Code, to keep employee’s payslips for six years.

To understand the payroll in its entirety, you must bear in mind that it is divided into four different sections: 

  1. Identity of the parties involved
  2. The gross salary
  3. The social security and tax contributions
  4. The net taxable salary

1. The header

The payroll is an invoice and, as such, there are some minimum data that it must contain, related to the type of work and the economic amounts. 

Company data as: 

  • Legal name of the company (which appears in the registry)
  • Company address
  • Tax Identification Number (NIF)
  • Social Security contribution code
  • Payroll period
  • Place of work

Following that, the employee’s data must also appear:

  • Name and surname
  • National Identity Card Number (DNI) or Foreigner’s Identity Number (NIE)
  • Employee’s Social Security contribution code
  • Professional category or professional group
  • Date of seniority
  • Type of contract code
  • Any extraordinary data or information that the employer or employee agree upon can be included in the payroll.

2. The labyrinth of payments: THE GROSS SALARY

The second point that must appear on every payroll is the incomes. These referred to the income received by the employee, which can be divided into two types:

  • Wage incomes: are the amounts to be paid to the employee as remuneration for his or her work.
  • Non-wage incomes: are those goods or services that the employee receives from the company but which are not taxed as salary (such as restaurant tickets, meals or transport allowances). These can never exceed 30% of salary payments.

Wage incomes are divided into different categories:

  • Base salary: the minimum salary set by our collective bargaining agreement
  • Wage supplements: remuneration fixed according to the circumstances of each employee: responsibilities, knowledge, languages, work performed, results for the benefit of the company, etc.
  • Overtime: this item corresponds to the additional working hours performed beyond your working hours, whether they are voluntary or imposed by the company.
  • Extraordinary bonuses: in Spain, there are two mandatory extra payments, one at Christmas and the other according to the collective labour agreement.
  • Salary in kind: this is the remuneration that the employee receives as goods or services which takes part of his salary (it is taxed). It is totally optional for the employee, who is not mandatory to receive this type of benefits for his or her work unless it is reflected in his or her collective bargaining agreement.

Non-Wage incomes are also classified into different groups:

  • Compensations: these are the expenses that the employee has had to advance for the performance of a job. It can be as transportation expenses, for meals, etc.
  • Social Security benefits and compensations: this concept refers to benefits for transfers, suspension or dismissal, as well as expenses paid by the company for incapacity or temporary unemployment.

3. Deductions

Keep in mind that this gross remuneration is not definitive: now it is the turn of social and tax deductions. 

For although there is an element that adds up, such as incomes, unfortunately there is also one that subtracts: deductions.

These are the amounts that we, as taxpayers, contribute to the IRPF (Personal Income Tax) and to Social Security. The company makes these deductions as an intermediary of the State. As a consequence, the money in the payroll is reduced and that amount is paid to the public agencies.

IRPF (Personal Income Tax)

IRPF (Impuesto Sobre la Renta) is the amount that goes to the Tax Agency and that we will use to make our Income Tax Return. Although as far as IRPF is concerned, each employee has a different amount in their payroll, it is advisable to understand what It means and how it affects you.

Depending on the gross amount the employee receives during the year, there is a classification. Depending on the employee’s personal situation, such as the number of children they have, they will be given the percentage to be deducted. 

Social Security Contributions

Social contributions are common taxes to any employee, regardless of their personal situation. The total amount to be paid to Social Security is assumed by both the employee and the company and is normally shown in the payroll.  

The payment made by the employee corresponds to various items for which contributions must be made:

  • Unemployment: 1,55%
  • Common contingencies: 4,70%
  • Professional training: 0,10%
  • Overtime due to force majeure: 2%
  • Other overtime: 4,70%

4. The net salary

Finally. After all this process of subtracting taxes and withholdings, the moment of truth has arrived: once the deductions have been made from the gross monthly salary, the remaining amount is the net monthly salary

Understanding the payroll is essential to ensure that everything is correct and you pay the right amount. We are experts on the payroll assessment for our foreign clients and we can help them not only to avoid tax problems but also to make them sure how they can prove if they have a regular income, which is necessary, for example, when applying for a loan from the bank or renting an apartment. 

Payroll Infographic

Source: Alfredo Vela’s personal Blog (original version in Spanish)

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