Employee compensation can be said to be the benefit or payment made to an employee by the employer, for service rendered by the employee based on the terms of the contract of employment of the employee. Employee compensation, also referred to as employee emolument, may come in various forms ranging from cash emolument such as salary, bonus, allowances etc., to non-cash emolument such as employee share-award, provision of accommodation, assets, etc. for the employee's benefit. These emoluments leave different tax footprints, depending on the form of such items and how they are implemented by the employer.
In Nigeria, employers of labour have certain regulatory obligations with respect to their employees. These could be tax-related, such as deduction and remittance of Pay-As-You-Earn (PAYE) tax on employee emolument, or related to social security provisions for employee benefit such as pension fund contributions and employee compensation relief.
This article, which is sequel to our previous article on effective payroll management system in an organisation, discusses the various forms of employee compensation and some of the related tax and regulatory obligations of the employer.
Overview of Employee Compensation
Organisations desire to adopt the best practices in relation to compensation packages for their employees. This usually comes at a huge cost to such organisations. Hence, various methods for compensating employees are developed in order to reduce employment cost whilst attracting best hands in the labour market. These methods may be in the form of cash compensations, non-cash compensations or use of both methods.
This is the most common form of compensation. It is made in form of basic salary, transport allowance, housing allowance, lunch allowance etc., all of which sum to an employee's gross remuneration.
This type of remuneration comes in various forms. Non-cash compensations are usually referred to as benefit-in-kind. It arises in instances where an employee is granted the use of the organisation's asset; where a sale of the organisation's asset is made to the employee at a discounted price; where certain employee expenses are paid by the organisation etc. For instance, an employee can be said to have obtained a benefit-in-kind from his employer where the employee obtains a loan facility from the employer without interest or with lower-than-market interest rate. Another instance is where an employee is compensated by issuance of shares at no cost or at value lower than the market value of such shares. In both instances, the value of the benefit is the opportunity cost to the organisation for the loan facility granted or the share issued to the employee.
In summary, benefit-in-kind arises where an employee, by reason of his or her employment, enjoys any form of benefit from the organisation other than cash remuneration. It could be seen as a means of fostering a sense of employee loyalty to the organisation. However, the benefit should be directly attributable or assigned to the employee before it can be considered as compensation for that employee. For example, an organisation's pool vehicle used by its employees for official purposes cannot be said to be a direct benefit to any of the employees for tax purpose. However, where such vehicle is assigned for personal use of an employee, it becomes a form of compensation to that employee.
Employer Statutory Contributions as Non-Cash Compensation for Employee
As discussed in our previous article, an employer of labour is statutorily required to fulfil certain regulatory obligations such as pension contributions to its employees' retirement savings accounts and obtaining group life insurance policy for its employees, in line with the Pension Reform Act 2014 (PRA). Employers are also required to contribute to the Nigeria Social Insurance Trust Fund based on the provisions of Employee Compensation Act 2010 and the National Health Insurance Scheme. These obligations create additional cost of employment to the organisation. Hence, they can be considered as a form of benefit-in-kind to the employee.
The PAYE Regulations of Personal Income Tax Act CAP P8 LFN 2004 (as amended) ("PITAM" or "the Act") defines an employee's emolument as total emoluments including all allowances, salaries, wages, perquisites, bonuses, and compensation of such employee. Perquisites can be defined as a benefit which is enjoyed or entitled to a person on account of such person's job or position. The Black law dictionary defines perquisite as an emolument or incidental profits attached to an office or position beyond salary or regular fees.
Based on the foregoing, social security contributions as mentioned above made by an employer or organisation for the benefit of its employees should be considered as a benefit-in-kind to such employees. It is therefore arguable that such amounts expended by the employer should be included in the employee's gross emolument for the purpose of computing the employee's statutory reliefs as provided in PITAM. In addition, in line with the provisions of the PRA and PITAM, such contributions made by the employer for the benefit of its employees are tax-deductible in the hands of the employees.
Tax Implication of Cash & Non-Cash Compensations
Taxation of employee compensation is based on the provisions of the PITAM and it falls under the regulatory oversight of the respective State Internal Revenue Service depending on the state of residence of the employee. The value of non-cash compensation of the employee depends on the nature of the benefit. For instance, where an employee makes personal use of an asset that belongs to the employer, the annual value of benefit obtained from such use is 5% of the cost of such asset or 5% of market value where the cost cannot be ascertained. Furthermore, where the employer makes payment in the form or rent or lease for an asset which is to be used by the employee, the value of benefit-in-kind in this instance, is the total amount incurred by the employer for the provision of this benefit. However, necessary adjustments are made where any of these expenses is made good to the employer by the employee.
Based on the provisions of PITAM, considerations are given for non-taxable income, tax-deductible expenses, statutory reliefs and statutory deductions before the emolument is subjected to tax. Some non-taxable income as provided by the Act includes sum received as death gratuity or compensation for injuries and sum received as compensation for loss of office. It also includes interest on foreign currency domiciliary account and dividend, interest, rent, royalties, fee & commissions earned outside Nigeria and brought into Nigeria in foreign currency into a domiciliary account in a Nigerian Bank.
PITAM also treats certain expenses such as interest payments on mortgage for owner-occupied house incurred by the employee as tax-deductible, while social security contributions made to the national housing fund, national health insurance scheme, national pension scheme and life assurance premium are treated as tax exempt. These allowances and exemptions are deducted from the employees' gross emolument before the respective tax rates based on a graduated income scale are applied on the residual remuneration.
Employers face stiff penalties where they fail to perform their statutory obligations in relation to their employees. There is a need to ensure competence in the management of these functions so as to avoid additional cost resulting from payment of fines and penalties for not complying with the relevant statutes or not doing same within the statutory timeframe. There is also a need for adequate tax planning in defining an organisation's employee compensation structure in order to take advantage of the tax planning opportunities available in the respective tax laws. Andersen Tax is a global firm with a wealth of knowledge in various areas cutting across Payroll management and advisory practice, Family Wealth Practice, Private Client Services, Restructuring, Tax Advisory, and Regulatory Service; amidst others. We will be happy to work with you to set up a framework for effective payroll management that will ensure the growth and sustainability your entity or organization. We operate in a manner that accommodates terms of business that small and growing businesses can afford, without compromising on quality.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.