Employee Income

Employments

Employment income is a separate category of income under tax law. The category covers income received from an employment and income received from an “office”. As with others categories of income dealt with in other chapters, there are special rules of computation and in relation to allowable deductions.

Employment income is income from an employment, as opposed to income earned as an independent contractor. See our Employment Law guide in relation to what is an employment contract and what is a contract for services.

In some cases, the distinction can be difficult to make. It is critical that the employer correctly classifies the position. If the true position is that a contract of employment exists,  the employer has obligations under the PAYE system to deduct and pay income tax and levies to the Revenue.

Employment income covers not only monies, but also benefits arising from employment.  Payments and benefits received, that are in any way referable to employment, are potentially taxable as employment income. Income from occupational pensions are taxed under the employment income category.

All employments which a resident employee  recipient holds are aggregated. In the case of a non-resident, only employments exercise in state are subject to Irish income tax.

PAYE

The taxable income of the recipient from employments is calculated and entered on the individuals tax return. If, as is commonly the case, the recipient’s income is entirely or almost entire derived from employment, his entire tax liability may be accounted for through the PAYE system and the person may not be obliged to make a tax return.

Taxation is on the basis of the relevant tax year. This is the calendar year. Income tax applies to earnings rather than receipts. They will coincide in almost all cases. However in strict terms it is the earning /legal entitlement to remuneration rather than its receipt that triggers the tax liability.

A tax return is desirable in order to accurately calculate the actual liability. The PAYE system may not give the taxpayer credit for all deductions and credits to which he is entitled, unless they have been previously claimed and are credited in the PAYE deduction.

Even in this case, the deduction may change and not be known until year end. It is largely a matter for the employee to make the return and claim the allowances, deductions and credits that may be available.

Offices

Income from offices are categorised as employment income. This has the important consequence that any director will be subject to PAYE and employment income rules, irrespective of whether the director is also an employee. A director may, but need not   necessarily be, an employee.

Officers hold a position which is separate from the person who holds the position.  An office is a position or role, with its own legal functions. The most commonly encountered office is that of a company director. The office holder has a legal role or function.

Many offices are established by law. A company director is an office holder, who is designated by company law as part of the body of persons (the board of directors) which controls a company.

Directors of Irish incorporated companies are chargeable to tax and subject to PAYE on income referable to their  the directorship unless specifically exempted by a double taxation agreement. This is the case regardless of the residence of the director. Where there is an exemption a PAYE exclusion order may issue from revenue

Test of Employment

Formerly, the principal test as to whether a person is an employee, is whether he is subject to control as to both what he must do and how he must do it.  The modern approach uses a composite test involving the following factors;

• the degree of control;
• whether the person is in business on his own  account;
• whether the terms are consistent employment contract;
• whether the role is an integral part of the business;
• ability to sub-contract;
• receipt of benefits by way of share of profits.

The modern approach emphasises the question whether the person concerned is “in business” by himself. The reality or substance of the position will take precedence over the label or form.

The Revenue Commissioners have produced a Code of Practice on determining  whether a person is an employee or an independent contractor.  The Revenue Code emphasises a number of criteria.

A person would normally be regarded as an employee if he supplies labour only and receives a fixed income in return. If, on the other hand he chooses his working hours, participates in management,  is exposed to financial risk, supplies his own materials  and can subcontract the work, these are factors which point away from  employment.

Schedule E

Schedule E applies to every person holding an office or employment within the State. It charges income tax on the profits of the employment or office.  In the case of foreign employments, Schedule E applies to an employment exercised in the State. An employment exercised abroad, may be charged under a different schedule, Schedule D Case III, where it is a “foreign possession”.

Schedule E also taxes pensions, including occupational pensions, social welfare pensions and  other retirement pensions.  Pensions payable out of the public revenue of the State are subject to PAYE.  Pensions payable from foreign public revenues are generally exempted.  Other pensions paid from abroad may be assessed under Schedule D Case III.

Schedule E applies to salaries, fees, wages, prerequisites and profits whatsoever of an employment or office. It applies to, employment exercised in the State or elsewhere, in the case of an Irish employment and to employment exercised in the State, in case of a foreign employment.

Monies Taxed

Emoluments are taxable. They cover all salaries, fees, prerequisites and profits arising from the employment.  A prerequisite must be in the form of money or something convertible into money i.e., money’s worth.  Ex-gratia and other payments, howsoever described, are taxable.

Schedule E also applies to certain payments associated with employment, including benefits in kind, payments in connection with approved profit-sharing schemes and share options, payments related to sickness and approved permanent health benefit schemes and payments on  retirement or removal from office. Exemptions and reliefs may apply.Schedule E applies  to certain social welfare payments.

Payments made in connection with the commencement of employment may be  taxable as emoluments depending on circumstance.  An inducement to commence employment may be taxable.  If it can be shown that it is compensation for the loss of some previous right arising as a result of taking up employment, it may not be taxable.

Foreign Employment

An employment may be treated as a foreign possession (subject to Schedule D Case III) if the contract is drawn up under foreign law and income is paid abroad.

Foreign service  employment is not subject to Irish tax unless  taxed  on the remittance basis. The performance of duties of a foreign office or employment in the State is not foreign service.

Performance outside the State (formerly exclusive of the United Kingdom) by a person not domiciled or by a person who is a citizen not ordinarily resident is foreign service. Since 2008 U.K.  source income is now foreign income.

Social Welfare Income

The following social welfare payments are  taxable as income

• State contributory pension
• State transitional pension
• Jobseekers benefit
• Illness benefit
• Widow widowers contributory pension
• Maternity paternity adoptive leave benefit
• Occupational injuries benefit
• One parent family benefit
• Invalidity benefit
• Carers allowance
• Carers benefit

The following are exempt

• Jobseekers allowance
• Supplementary welfare allowance
• Family income supplement
• Back to work allowance
• Health and safety benefit.