Employee Tax

Overview

Taxation of individual Maltese employees' income is progressive. This means that high earners pay more tax than low earners. Talexio calculates employees' tax amounts each payroll period. The taxable amount per period can vary depending on previous payroll data, start date, bonuses and changes in income. Talexio takes all these factors into consideration to ensure that the tax calculation is correct and eliminate the need for tax bills/refunds at the end of the year. 

Tax status

There are 3 different tax statuses for individual employees:

• Single
• Married
• Parent

To see which one of these three statuses an employee falls under, you will need to refer to their FS4. It is important to note that these three are not necessarily the same as the employee's marital status. So if a person is married to another person, the employee does not automatically qualify for the married tax rates. 

Single Tax Status: these rates are applicable when the employee is not a parent, and their civil status is single or not currently married (i.e. widowed, separated, annulled or divorced). These rates also apply if the employee is currently married and the couple are both in full time employment. 

Married Tax Status: these rates are applicable when the employee is married, but also bearing in mind the below criteria:

• • The couple must be living together;
  • The employee is an EU or EEA national who derives at least 90% of their income from Malta; and
  • Only one person from the couple works in full time employment. 

Alternatively, the married rates apply to an employee who is a single parent. In this case, the employee:

• • Must not be married;
  • Must not be living with the other parent of the child;
  • Must be the sole beneficiary of social benefits on behalf of the child;
  • Must have full custody of the child who has not yet reached their 18th year or has not reached their 23rd year and is studying in tertiary education or has a severe disability; and
  • The child does not receive income of more than €3,400 per annum. 

Parent Tax Status: these rates are applicable where the employee satisfies the below criteria:

• • The employee must have custody of the child; 
  • Said child is up to 18 years old or else not older than 23 and is in tertiary education; and
  • Said child does not earn income of more than €3,400 per annum. 

Different Tax Rate Types

There are different tax rates. On Talexio, these can be selected from the employee's position (under 'Other Payroll Information'). The different options here are:

• Standard (this refers to the Main tax deduction method);
• Part time (if not main employment);
• Qualified person;
• Sport;
• Artist;
• Permanent non-resident;
• Other

How is Main Tax calculated?

Main Tax (or standard) rate type refers to the progressive income tax rates. This applies to employees whose position refers to their principal source of income. 

The tax statuses (single, married, parent) only apply to this tax rate type. 

If an employee has multiple employments, this tax rate type method is only applicable to one. The rest must be calculated using one of the other relevant tax rate types. 

The calculation also considers previous employment income within that same year, which is why it is crucial that FS3 data is uploaded when onboarding a new employee after 1st of January. 

So how does the calculation work?

1. First of all, you need to add all the taxable income earned so far together. This includes income from a previous company (for the same year) + income from the current company prior to the current payroll + income from the current payroll. The result is the total emoluments to date.
   
   
2. Next, we will determine the projected annual income. This is done by dividing the payroll periods so far (including the current payroll) by the total emoluments to date and multiplying the result by the number of payrolls in a year.  The result is the projected annual income. 
   
   
3. The projected annual income is then assigned to a tax bracket depending on the tax status. You may refer to this for the tax bands. The projected annual income is then multiplied by the tax rate, and the deductible amount applicable to this bracket is then deducted from the result. The result is the projected annual tax. 
   
   
4. The final step is to calculate the tax due for that particular payroll period. This is done by getting the projected annual tax and dividing it by the number of payrolls in a year. The result is then multiplied by the payroll periods so far (including the current payroll). From this, the tax paid so far is deducted. The result is the tax for this period. 

For example:

Employee started with your company on the 1st of June 2023. The employee's gross income from a previous employment for January-May 2023 was €10,000. The tax paid from that employment was €1,360. The employee earned €2,500 in June 2023 with your company and paid €500 of tax. You are currently working on the July payroll and the employee earned €2,500 in July 2023. The employee's tax status is single. 

1. Total emoluments to date = €10,000 + €2,500 + €2,500 = €15,000.
2. Projected annual income = €15,000/7 payroll periods so far x 12 payroll periods in total = €25,714.3
3. Projected annual tax = €25,714.30 x 25% = 6,428.57 - €2,725 = €3,703.57, rounded to €3,704.
   
4. Tax for this period = €3,704/12 payroll periods in a year x 7 payroll periods so far - €1860 (€1360+€500) (tax paid so far) = €301 tax for July. 

You can refer to the FSS calculation report for these workings. 

How is Part time Tax calculated?

Part Time Tax rate type applies in the below scenarios:

• The employee has a full time employment elsewhere or is married to someone who is in full time employment; and
• The employee's part time role is not more than 30 hours per week 

or

• The employee's part time role is not more than 30 hours per week; and
• The employee is a locally taxed pensioner or is a student.

This is applicable up to the first €10,000 which an employee earns from part time work. This is not applicable on fringe benefits. 

The rate is 10% of the gross. Once the €10,000 is skipped, the employee is taxed at 25%. 

If an employee is on the part time tax rates and is also earning fringe benefits as part of their salary package, these are taxes at the main tax rates. Click here to read more on Fringe Benefits. 

Employees not working a full year

The tax calculation is based on the projected annual income referred to earlier in the article. But what happens if an employee does not work a full year? 

For example: an employee has a yearly income of €20,000. 

But the employee's start date is 01/06/2023 and the employee was not employed in between 01/01/2023 and 31/05/2023.

The employee's tax for August would be worked out as follows:

Yearly salary: €40,000

Monthly salary: €3,333

1. Total emoluments to date up to June = €3,333.
2. Projected annual income = €3,333/6 payroll periods so far x 12 periods in total = €6,666.67.
3. Projected annual tax = €0 because €6,666.67 is not within the threshold. 

 The next month's tax will be calculated as follows:

1. Total emoluments to date up to July = €6,6667.67 (3,333 + 3,333).
2. Projected annual income = €6,667.67/7 payroll periods so far x 12 periods in total = €11,428.57.
3. Projected annual tax = €11,428.57 x 15% = €1714.29 - €1,365 = €349.29, rounded to €349.
4. Tax for this period = €349/12 payroll periods in a year x 7 payroll periods so far - €0 (tax paid so far) = €204 tax for July. 

The tax will then update month by month as the projected annual income increases, until the end of the the year when the tax will be calculated over the actual annual amount (since the calculation in December will be income so far divide by payroll periods so far x periods in total (where these 2 amounts will be the same). 

Employees who get married (Non-Responsible Spouse)

If an employee gets married, their Tax Status will not necessarily change. As explained above, not all married employees are eligible for the married rates. If an employee gets married and maintains the same Tax Status, one member of the newly wed couple is eligible for a tax rebate. But how does this work?

Upon marriage, one of the spouses is chosen to be the Responsible Spouse, whilst the other is the Non-Responsible Spouse. The responsible spouse is chosen by the couple. The non-responsible spouse will have 2 FS3s for the month of marriage (one before the marriage date, and one after). The responsible spouse's FS3 will not be split (there are no changes in payroll for such person). 

Upon the date of marriage, the non-responsible spouse's tax calculation resets to €0. Therefore, this spouse will have 2 payslips and 2 FS3s for the year (for that company): 1 will be from the beginning of the year (or engagement date) until the day before marriage; the other will be from the date of marriage until the end of the year (or earlier if the employee is terminated). For the second payslip and FS3, the tax resets to €0, so the employee will enjoy a period of less tax (up to €12,000 is tax free for employees under the single tax status, up to €15,000 is tax free for employees under the married tax status, and up to €13,000 is tax free for employees under the parent tax status). 

To set up an employee as the non-responsible spouse, please follow the below steps:

1. Search for the employee from the People section or from the search bar on the top, and go to the employee's Details tab.
2. Scroll down until you see Payroll.
3. Select Married or Civil Union from the dropdown menu in the Marital Status field.
4. Tick Not the Responsible Spouse.
5. Fill in the spouse's ID card number and the date of marriage.
6. Press Save.

We recommend that the above steps are actioned during the same month of the marriage (before the relevant payroll is closed). Doing so after the payroll is closed will not result in 2 payslips being generated. The system will still create 2 FS3s.

Refer here for official source articles.