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Taxability Model - US

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‎2014 Aug 16 10:52 AM

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SAP Managed Tags: HCM (Human Capital Management)

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

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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.
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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.

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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.

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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.

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Thus the configuration of the given tax model has been completed once all the three
above tables have been maintained.

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