INTRODUCTION
Taxability model is used to define the taxability of wages in US payroll calculation under various tax authorities, viz., federal, state and local regulations. In order to understand the taxability model, we will consider a small example, wherein an employee is residing and working in State of Arizona, earning a basic salary of USD 2,000 per month is assigned to a given taxability model. Further for the purpose of understanding taxability model, we will consider the State of Arizona to levy only FED and State taxes and no other local taxes.
The below screenshots depict the infotype/table data in SAP for the given employee.
Residence Area (IT 0207) – State of Arizona
Work Tax Area (IT 0208) State of Arizona (100%)
Basic Pay (IT 0008) – 2000 USD PM
Taxability Model (T5UTM)
In order to create tax model, we need to update the below three tables.
- T5UTE - Tax Authority / Tax Calculation Model
- T5UTM - Tax Model
- T5UTY - Tax Type Combinations
The relevance of each of these tables will be shared in the below document. However, prior to describing the tax models, it is important to share couple of important terms that are used while configuring taxability model.
COMMON TERMS
- Tax Authorities
- Tax Areas
- Tax Types
- Tax Class
- Tax Combo
TAX AUTHORITIES (T5UTZ)
Tax authority is used to identify the government agency that is authorized to levy taxes. Depending on the jurisdiction, the level of tax authority may be Federal, State, County, City or School District. This level of authority in SAP is defined as Tax Level and is denoted with a single alphabet, viz, Federal – A, State – B, County – C, City – D, School District – E etc. Tax authorities are maintained under table T5UTZ.
TAX AREAS
Tax Areas are used to identify the area to which the employee is subjected to taxes. For example in State of Pennsylvania, the employees in some of the counties may be subject to local service taxes besides the withholding taxes for both resident and non-resident. These details are being maintained under the section of ‘Tax Areas’ in SAP.
The given SAP node can help to maintain both residence and work tax areas that may be valid for the organization.
TAX TYPES (T5UTT)
Tax type is used to indicate the type of tax that is levied by the given authority, e.g. withholding tax, unemployment tax, employee occupation tax etc. Each of these tax type is denoted by two digit letters in SAP and are maintained under table T5UTT.
An important point to note here is that not all taxes may be applicable for all areas. Some areas may have only withholding taxes applicable for their area, while other may have additional taxes applicable to them. This assignment of tax types to a given authority is being maintained in the table T5UTD - Assignment of Tax Authorities to Tax Type.
TAX CLASS
Tax Class is used to indicate the specification for processing class 71 (Wage type tax classification). For example in our example the wage type 0200 – Salary is assigned specification of 1, i.e. regular wage type.
Thus if a wage type contains ‘1’ in processing class 71, then only those models which have ‘1’ in the tax class field will be applied to that wage type and only those wage types will be taxed using the given combination.
TAX COMBO (T5UTY)
Tax combo is used to identify the combination of tax types that are used for a given taxability table. This is maintained in table T5UTY.
TAXABILITY MODEL – CONFIGURATION
To maintain the taxability model, we need to maintain the below tables. It is advisable to maintain the given sequence of table while configuring tax authority, else the system will give up due errors.
- T5UTY - Tax Type Combinations
- T5UTM - Tax Model
- T5UTE - Tax Authority / Tax Calculation Model
Thus for our example, we will first define the tax type combination applicable for a particular tax area, assign this tax type combination to the required tax model and then attach the tax model to the given tax authority.
TAX TYPE COMBINATIONS (T5UTY)
The value of ‘01’ under filed ‘tax type’ indicates that it is withholding tax (01), and the field ‘taxability indicator’ as ‘Y’ specifies that processing class 69 (Taxable earning or non-taxable contribution) is applicable for this combination.
TAXABILITY MODEL (T5UTM)
Under this table we define the taxability model that will be applicable for our tax authority.
- Residence, work or unemployment tax – The given field indicates whether the tax type combination is applicable for residence, work or unemployment authorities. Residence Tax is denoted by R, Work tax– W and Unemployment tax – U.
- Tax Modifier – There may be certain scenarios where certain section of employees may be taxed differently. In such cases, different tax modifiers are assigned to different employees grouping, after which we can specify each modifier in a tax model. The payroll driver will then determine the tax modifier in the Personnel Calculation Rule – UMOT.
TAX AUTHORITY / TAX CALCULATION MODEL (T5UTE)
In this table, we finally assign each tax authority to a tax model which has its own set of taxation rules. The details / description of each tax authority can be seen under table V_T5UTZ.
Thus the configuration of the given tax model has been completed once all the three above tables have been maintained.
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