Abacus has an extensive history helping local Bermuda businesses with their finances and helping answer complex accounting questions. For many business owners, understanding payroll tax can be the cause of a lot of stress. We’re here to help.

In this second part of our payroll tax blog series, we’ll cover the two key components in calculating payroll tax and the tax bands that dictate how much is owed.

For an introduction to payroll tax, defining taxable remuneration, and understanding important exemptions, make sure you read the first blog in this series, The Basics of Bermuda Payroll Tax – Part 1: What Is Taxable Remuneration?

How is Payroll Tax calculated?

There are two key components to calculating payroll tax in Bermuda: the employer portion and the employee portion. While the way we calculate these two portions has changed over time, the components themselves have remained the same. To keep things as helpful and straightforward as possible, we’ll cover the way these two portions are defined and calculated today.

First up is the employer portion. The employer portion of payroll tax is based on the annual taxable remuneration paid by the employer or company as a whole. Because this portion is based on the company, it remains a constant amount throughout the calculation process.

Next is the employee portion. While the employer portion is relatively straightforward, the employee portion is measured at a marginal, progressive rate, and is based on each employee’s taxable remuneration earned. Because each employee’s salary and perhaps even benefits are different, this value differs for each employee.

The total of these two amounts, combined together, is remitted to the Office of the Tax Commissioner quarterly, on 15 April, 15 July, 15 October, and 15 January every year (since the tax year in Bermuda follows the government fiscal year of April 1 through March 31).

How to Determine the Employer Portion of Payroll Tax

The employer portion of the total amount due for payroll tax is determined by the tax band and/or the total annual taxable remuneration of the employer across all their employees. Depending on the amount of remuneration your company pays, as well as some key industry factors, you slot into a tax band that dictates the percentage owed for the employer portion of payroll tax.

Recently, the government greatly expanded the amount of tax bands available, which allows growing businesses to pay incrementally more in taxes without jumping straight to the higher bands.

Here are the various tax bands, as defined by the Office of the Tax Commissioner.

      • 0% Tax Band. Similar to the exemption list in our previous blog that highlighted when some remuneration would be considered nontaxable, some businesses as a whole are charged a 0% tax rate. These organizations include the government, parish councils, government boards, the Bermuda College, other approved schools, registered charities, religious and cultural organizations, and the Bermuda Festival Ltd. Retail businesses also are exempt from January-March every year, and restaurants receive exemption from November-March of every year.
        • Two important additions to this band are new start-up businesses, who receive tax exemptions for 4 quarters or one fiscal year, and employers within an Economic Empowerment Zone, who receive tax exemption status for 9 quarters (remember, payroll tax is paid quarterly, which is why these exemptions are measured in quarters). To properly take advantage of either of these programs, we recommend getting in touch with the Bermuda Economic Development Corporation, or the BEDC.
        • There are also additional relief options available, including New Hire Relief and additional COVID Hotel, Bar, and Restaurant Relief, that can affect business exemptions. If you think you qualify for either of these exemptions and want additional information, contact us to learn more.
      • 1.75% Tax Band — Businesses with an annual payroll of less than $200,000, as well as educational, sporting, or scientific institutions, associations or societies, farmers, fishermen or horticulturists.
      • 3.50% Tax Band — Businesses with annual remuneration between $200,000 and $350,000, as well as the Bermuda Hospitals Board and the Corps of Hamilton and St. George’s.
      • 6.00% Tax Band — Businesses operating a restaurant or hotel with an annual payroll of $200,000 or greater.
      • 6.50% Tax Band — Businesses with annual remuneration between $350,001 and $500,000.
      • 7.00% Tax Band — Retail establishments with annual remuneration over $500,000 and whose primary business is the sale of fashion, shoes, jewelry, and/or perfume.
      • 9.00% Tax Band — Businesses with an annual payroll between $500,001 and $1,000,000.
      • 10.25% Tax Band — Businesses with an annual payroll greater than $1,000,000 and exempt undertakings.

    One question that we get asked pretty often is: What happens when my company is shifting between tax bands quarterly? For example, if you filed your tax return in the first quarter and your total remuneration was $40,000 – so you were in the 1.75% tax band – but then in the second quarter of the year your remuneration was $53,000 – which on an annual basis would bump you into the next band of 3.5%. In these circumstances, we encourage you to project where your anticipated annual remuneration is going to fall. If you add the figures from Q1 and Q2, the combined total is $93,000, which still puts you on track to be less than $200,000 for the total year. In this situation, we would encourage you to do a manual return for Q2 filing at the lower tax rate and send this supporting information of your projected annual remuneration to the Office of the Tax Commissioner to show why you’re submitting a return for the lower amount. If your new projected annual remuneration has elevated enough to bump you into the next tax band, then you would need to calculate your taxes going off that new tax band.  You will also need to perform an annual reconciliation at the end of the taxation year to ensure that you paid the correct percentage of total tax owing based on where your annual taxable remuneration falls within the above-mentioned tax bands.

    How to Determine the Employee Portion of Payroll Tax

    Even with the exemption possibilities and range of tax bands listed above, the employer portion of the payroll tax tends to be relatively straightforward. Once you determine what that number is, it’s the same for all your employees and should remain constant for the year.

    The employee portion, on the other hand, can seem a little trickier. The employee portion is marginal and progressive, which means that the rate of tax that employees incur on each additional dollar of earnings is what sets the tax rate. As running earnings rise, each dollar is taxed at a higher rate.

    Here are the tax bands for the employee portion of the payroll tax:

      • 1.5% Tax Band: $0 – $48,000
      • 9.0% Tax Band: $48,001 – $235,000
      • 9.5% Tax Band: $235,001 – $900,000
      • The maximum taxable remuneration is $900,000

    When we say that this portion is marginal and progressive, what we mean is, as the employee’s earnings rise, each dollar they earn above the previous level is then taxed at the next rate. For example, if your employee is going to earn less than $48,000 annually, this is a straightforward calculation and that employee’s tax deduction will only be 1.5%. However, if your employee is going to earn $50,000 annually, you must calculate the first $48,000 earned at 1.5%, then the next $2,000 earned at the 9% rate in order to come up with the total annual rate.

    You must also anticipate what the annual earnings for each employee will be for this step. If anything happens to change the anticipated annual earnings, such as a bonus, unpaid leave, somebody starts or finishes employment during the fiscal year, you have to recalculate the anticipated annual and adjust the tax.

    If this sounds complicated, don’t worry! We’ll introduce a helpful set of tools, provided by the Office of the Tax Commissioner, in our next blog that will help.

    It is also important to note that the name “employee portion” can seem misleading. Payroll tax is only paid by the employer, and while the employer can deduct the entire employee portion as a withholding from the employee’s salary to pay the payroll tax, the responsibility of paying the full tax amount – the employer and employee portions – belongs solely to the employer.

    Hopefully this has been a helpful introduction into the employer and employee portions of payroll tax calculation. We understand that this is a complex system and can feel like a complicated process. We have good news! Our next blog will introduce the incredible tools made available by the Office of the Tax Commissioner, completely free to use, that make calculating both portions of the payroll tax, and the total payroll tax for your company, significantly easier. Remember, if you’d like any assistance or additional information, please contact Abacus today.