Employee annual leave may be paid in advance for 2 reasons:
- Your offices are closed and/or the payroll administrator is on holiday – often the case over Xmas/ New Year
- Employees are going on annual leave and wish to be paid for it in advance (which is their right)
Creating pay runs in advance
Within the same tax year
Pay runs can be created, paid and submitted to Revenue in advance when they are in the same tax year.
Spanning two tax years – eg Dec 2020/Jan 2021
Pay runs can be processed in advance however the payment should be scheduled for the actual year of the payment date and the submission made to Revenue in the actual year.
Remember – Revenue allocate tax credits and standard rate cut off points as per the date payment is made not the dates the payment covers.
Example – you are due to pay employees on 2nd Jan 2020 (week one 2020) but your office is closed until the 6th Jan. You can create and process the payment in December 2019 with a payment date of the 2nd Jan. The payment should not be made in Dec 2019 it need’s to be scheduled to be made via your bank in the first week of January. The submission can be made to Revenue after your return on the 6th Jan.
***If you pay 2020 wages in 2019 your employees will be required to submit a form 11/12 tax return and you as the employer will be obliged to complete additional paperwork to balance the PRSI weeks***
For further clarity if needed please refer to page 4 of the attached document from Revenue released in Dec 2019 https://www.revenue.ie/en/employing-people/documents/pmod-topics/payment-date-alignment-and-general-issues.pdf
Annual Leave paid in advance
In Ireland it is an employees’ right be paid their annual leave in advance, prior to actually going on leave.
This inflates their payslip, so in order to avoid being overcharged tax, most payroll software system allow you to nominate how many periods are being paid in advance. This allows the system to calculate the correct tax due and locks out the advanced payslips. In Parolla, this is done from within the employee payslip itself, when entering the leave taken.
The payslip should always be reported on or before the day being paid, and should accurately reflect the amounts involved. However, the issue is more complicated when the leave period spans two tax years.
The allocation of future tax credits from the following year would result in an underpayment of tax in the current year. So paid-in-advance tax credits should not be used. The employee should be taxed on the total income including the paid-in-advance component, which will result in higher than normal taxes. The following year, while the employee is still on leave, their payslips should be nil submissions. The employee would then gain the benefit of the tax credits in the following year when they return.