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UNDERSTANDING THE BASIC CONCEPTS OF PAYROLL IN GHANA.
Employees are the greatest asset of every organization, and the success of every organization is predominately dependent on the employee’s delivering on the organization’s promise. Employers, after the engagement, must pay the agreed remuneration at the time and place agreed on in the contract of employment. Not only is this a responsibility or a duty to your employees but a legal requirement.
The agreed sum of money employers pay to employees is referred to as Payroll. Having a basic understanding of payroll as an employee enables you to know how much you get at the end of the month or week, deductions, and other contributions made on your behalf by your employer towards Tax (PAYE), Pension (Social Security) and others.
Before running the payroll, employee salary and personal details must be captured. Salary details must include Basic Salary, Allowances, Medicals, Bonus, Overtime, Provident Fund, Investment, and other incentives (if any). Employee data must include Social Security Number, Tin Number, and Salary Credit Account details among others. Once you have defined all the elements for payroll calculations, gross salary and other deductions are easy to measure up.
Elements of the Salary Structure are offered below:
Basic terminologies of Payroll
Basic Salary– This is the amount paid to the employee before any deductions (Income tax, social security) and additions (allowance, bonus, overtime, health insurance, etc.) The basic salary structure differs in every organisation. Some companies offer a higher basic salary with low allowances as compared to other companies offering lower basic salaries with higher allowances. The risk with the lower basic salary structure is that employers end up paying less tax for their employees which affects the PF or tier 3 and SSNIT contribution.
Therefore, in salary negotiations, it’s always advisable for the employee to negotiate for a higher basic salary with a low allowance to safeguard future investments like PF and SSNIT.
Gross Salary– Gross salary is the total amount an employee receives before tax and deductions are taken out. And it is inclusive of bonuses, allowances, overtime, and other benefits. Deductions include both statutory and non-statutory payments. An employee’s pay statement will often reflect gross salary as the highest amount an employer will pay based on the agreed contract.
For example, if your basic salary is GHS 1,000, Transport Allowance GHS 200, Housing Allowance GHS 200 and GHS 100 as Meal allowance, your monthly gross salary will be GHS 1,500
Net Salary– The Net salary is your take-home pay. It’s the amount credited to your salary account after all deductions and additions from your gross. The deductions taken from the employee’s gross salary to reach the net salary includes but are not limited to Taxes, SSNIT, Provident fund and loans. The net salary can always be seen at the bottom of the payslip and can be calculated as the total gross – All deductions = Net Income
Cost to Company: Just like the salary structure, the cost to company packages also varies from one company to the other since it has its structure and salary component. Cost to Company is the total amount your employer expends in hiring and sustaining your service. It consists of the total Gross, 13% employer SSNIT contribution and employer Provident Fund contribution (if any).
Monthly Deductions
Every pay period, employers make deductions from employees’ salaries either on a statutory or voluntary basis. The statutory deduction is a mandatory deduction required by law. Employers withhold Income Tax (PAYE) and Social Security contributions (Tier 1 & 2) from the employee’s salary.
Income Tax (PAYE)
Taxes are the most important source of Government revenue for its country’s infrastructure and nation-building. It is mandatory fees or charges imposed on corporate entities and working individuals. Taxes are calculated based on a specific threshold by the Government under the Ghana Revenue Authority. Every employer is expected to file monthly Pay-As-You-Earn (PAYE) for employees by the 15th of every month.
Social Security Pension Contribution (Tier 1 & 2)
The Social Security and National Insurance Trust (SSNIT) is a statutory public Trust charged with the administration of Ghana’s National Pension Scheme. This is a combination of both employer and employee contributions. The employer contributes 13% of the employee’s basic salary and the employee contributes 5.5% making a total of 18.5%. 13.5% is paid to the first tier managed by SSNIT and 5% to the 2nd tier managed by a private custodian.
Non-Statutory Deduction is a voluntary deduction done by the employer in consultation with the employee. These schemes include but are not limited to:
Provident Fund (PF)– The provident Fund, also known as PF or tier 3 is an optional pension scheme. With this scheme, the decision lies with both the employees and their employers to determine how much of the monthly income is to be deducted towards the contribution of the tier 3 scheme. Aside from PF, there are other types of optional schemes like Investment Savings which require employees to determine the amount of money to be deducted from their monthly salary into the investment account.
The amount contributed is dependent on both the employer and employee and varies from company to company. Employees receive tax relief on contributions up to 16.5% of total PF contributions (both employer and employee contributions).
Union Dues- Monthly dues contribution by members of the Union. Members of the union often contribute a percentage of their gross salary as dues. The percentage involved also varies from company to company and union to union. Union Dues are used to support a wide variety of programs or activities including pension, health, welfare and safety funds of the union members. How union dues are collected also varies from company to company. In some organisations, dues are deducted automatically from the source and transmitted into the Union’s account whiles other companies collect dues from members directly. In all, understanding the basic concept of the salary structure is a skill every employee needs to develop, to know how much of their monthly salary goes into Pension Scheme, Tax, and Investment among others.