As an employer, you are responsible for ensuring that the bookkeeping and accounting obligations are met by submitting annual accounts. This applies even if payroll processing, payment and withholding is carried out by a payroll agency.
Every employer who has paid wages in a calendar month is obligated to report these to the Danish Customs and Tax Administration. As an employer, you must also secure basic vouchers, control trail and transaction trail, cf. the Danish Bookkeeping Act.
At Azets, we assist many companies with both payroll and accounting, and we often meet customers who are in doubt as to what they need to do towards the end of a year in relation to payroll. This article will give you an overview and a useful guideline in relation to the end of the year.
Cap on Deductions for Elevated Salaries
From January 1, 2023, an update has been made to the rule that dictates how businesses can claim tax deductions on salary expenditures.
This rule curtails the ability of businesses to claim deductions on salaries exceeding 7,721,900 kr. (set at 2023's rate). The definition of salary expenditures covers standard wages (subject to AM levies), certain equity schemes, staff benefits, bonuses, and tax-free travel reimbursements among others.
It's essential to recognize that if an individual has roles in multiple entities of the same corporate group, the deduction cap remains with the person. Furthermore, this stipulation is relevant even for those employees not subject to Danish taxation.
Reconciliation of salaries
The Danish Executive Order on Minimum Accounting Requirements requires your company to present a reconciliation of the salaries, fees, etc. which have been reported to the Danish Customs and Tax Administration.
A payroll reconciliation consists of two parts:
- Reconciliation between payroll system and the Danish Customs and Tax Administration
- Reconciliation between payroll system and accounting system
I would recommend that you create salary types in your payroll system so that individual payroll items are handled separately. In the same vein, it’s a good idea to create a number of separate accounts in your accounting system for posting these payroll types. This gives you a better overview of the individual salary components and facilitates reconciliation work.
Provision of holiday pay and bonus, etc.
In order for your annual accounts to accurately show a period's salary costs, it is important that as an employer, you calculate holiday pay, holiday supplements, bonuses, etc., so as to create a fair basis for making provisions for this in the annual accounts.
As an employer, you should pay particular attention to the method to be used for calculating holiday pay accruals. For recognition in the annual accounts, the specific (accounting) method must be used. If as an employer you have chosen to keep the frozen holiday pay obligation, this must appear as a long-term liability, and it must be indexed annually at the rate provided by the Employees’ Fund for Residual Holiday Funds (Lønmodtagernes Feriemidler).
I recommend that as an employer, you make a monthly statement of the company's holiday pay obligations, incl. holiday bonus. This way you ease the work on reconciliation of holiday pay and settlement of holiday pay in case of e.g. resignations.
What is the auditor looking for?
If your payroll process is manual, errors will occur more often than if the payroll process is automated. A manual payroll process therefore increases auditors' interest in control.
Your auditor should, as a minimum, check that you have conducted payroll reconciliation and that there are legitimate explanations for any differences. The auditors don’t only check that the income subject to social security contributions has been reconciled, but also that pensions, tax-free transport, canteen VAT, etc. has been reconciled. At the very least, the auditors should also check that all the provisions have been calculated and booked correctly.
After the amendment to the Holiday Act, both provision and reconciliation of holiday pay have become a focal point for the auditors. This applies not least to the correct handling of the indexation of holiday pay for those companies that have chosen to administer the frozen holiday pay themselves.
In my experience, auditors also request documentation that A tax, social security contributions, ATP, etc. has been paid in, so that no debt is owed for this. For this reason, I would recommend that you reconcile your tax account.
Do you need help?
At Azets, we can help you optimise the entire payroll process and power the manual parts of the process. An optimisation of the payroll process will free up resources that you can use to focus on your core skills.
If your company isn’t ready for outsourcing, we can also assist you for a limited period to get you ready for the end of the year. We will e.g. carry out your payroll reconciliation and ensure correct calculation of holiday pay, etc.