Pay streaming is a payroll practice where an employer divides an employee’s income into smaller, more frequent payments using third-party services, rather than issuing a single lump-sum payment. While this approach has benefits for employees who prefer regular cash flow, it comes with specific obligations for employers in Ireland that differ from practices in other countries.
This blog will outline the legal and payroll implications of pay streaming in Ireland, with a focus on Section 985C of the Taxes Consolidation Act 1997 and its associated employer responsibilities.
Legal Framework: Section 985C of the Taxes Consolidation Act 1997
Section 985C governs the operation of Ireland’s Pay As You Earn (PAYE) system when an intermediary is involved in making employee payments. Employers must ensure compliance with the following provisions:
1. Employer’s Responsibility
If a third-party intermediary pays an employee on behalf of the employer and fails to apply PAYE, the employer is legally considered the payer. This means the employer must:
- Deduct the correct income tax.
- Remit the tax to Revenue under the PAYE system.
2. Grossing-Up Net Payments
When an employee receives a net payment (e.g., stated as “tax-free”), the employer must calculate the gross equivalent—the amount that would have been paid before taxes. The employer is then liable to pay tax on the grossed-up figure.
3. Definition of an Intermediary
The law defines an intermediary as:
- A person acting on behalf of the employer, funded either by the employer or a connected party.
- Trustees managing property on behalf of individuals or groups that include the employee.
These rules ensure that employers cannot bypass PAYE obligations by routing payments through intermediaries.
Implications for Payroll Management
From a payroll perspective, pay streaming requires careful planning and compliance. Key considerations include:
- Payroll Submission Request (PSR):
- A PSR must be submitted to Revenue before any pay streaming payment is made to the employee.
- This effectively generates a full payslip for each payment event.
- Administrative Burden:
- Employers may face increased administrative work due to the frequency of payroll processing and PAYE submissions.
- Tax Compliance:
- Employers must ensure accurate grossing-up of net payments and timely remittance of taxes to Revenue.
How to Stay Compliant
Employers must stay informed and follow guidance from the Revenue Commissioners to navigate the complexities of pay streaming. Key resources include:
- Revenue’s Tax Consolidation Act, Note for Guidance on Section 985C: This document provides detailed explanations of the rules governing pay streaming. View the guidance here.
- Revenue Tax and Duty Manual, Pay As You Earn, 42-04-65: Offers insights into operational compliance for payroll managers using intermediaries on Page 11. Access the manual here.
Final Thoughts
Pay streaming can offer flexibility and convenience for employees, but it places significant obligations on employers under Irish tax law. By understanding the requirements of Section 985C and ensuring robust payroll processes, employers can stay compliant while leveraging pay streaming as a benefit for their workforce.
For more in-depth information, consult the resources provided or speak to a tax professional. Stay ahead of your obligations to avoid costly penalties and maintain smooth payroll operations.