Purpose in Payroll:

To ensure that employees are taxed progressively according to their income level.

Why Needed:

Different portions of income are taxed at different rates (progressive taxation).

The payroll module uses the tax brackets to determine which tax rate applies to each portion of the employee’s earnings.

Automating this process ensures accurate tax deductions and compliance with tax laws.

Example:

If the law states that income up to $20,000 is taxed at 10%, and income above that at 20%, the payroll module needs these brackets to calculate tax correctly for an employee earning $30,000.

Purpose in Payroll:

To determine when an employee becomes liable for income tax.

Why Needed:

Employees earning below a certain income threshold are exempt from paying income tax.

The payroll module must store this threshold value to identify employees who fall below it and automatically exclude them from tax deductions.

This ensures fairness and prevents unnecessary tax deductions from low-income earners.

Example:

If the annual tax threshold is $5,000, the system will not deduct tax for an employee earning $4,500.

Purpose in Payroll:

To apply reductions in tax payable for eligible employees.

Why Needed:

Rebates reduce the final tax liability, ensuring employees receive the tax benefits they qualify for (e.g., age-based, disability, or dependent-related rebates).

The payroll system must account for these rebates to compute accurate net pay and reflect government-provided reliefs correctly.

This also simplifies end-of-year tax reconciliation for both employer and employee.

Example:

If an employee’s total tax is $2,000 and they qualify for a rebate of $300, the system deducts only $1,700.