Employee Income Tax: withholding at source
As of January 2019, French income taxe will no longer be paid with one-year delay and income will be subject to withholding at source. Such change operates with the view to modernise the French tax withholding process and to avoid the gap in time for taxpayers.
While currently not involved, companies will play a key role in the new process. Indeed, there will be new obligations for companies to collect and repay employee income taxes to the tax office. Failure to do so may result in sanctions toward companies.
A national awareness-raising campaign has been launched to inform taxpayers of the change, so employees should have knowledge of this change, but we recommend to engage at the company level a campaign of communication towards employees, because their monthly salary earning will be directly impacted.
– Overview: new French tax withholding process
Individual tax rates are calculated by the Tax office on the basis of 2017 incomes which were declared by taxpayers in 2018. Taxpayers were informed of their tax rate via their online tax account in spring 2018, or will be informed through their tax statement in summer 2018. Their rate will apply to their income as from January 1st 2019.
Couples can opt for differential rates, and employees who do not wish their rate to be communicated to their employer can opt for a non-personalized rate.
Tax rates will be provided to companies by the Tax office via the “Nominative Social Declaration” (DSN). When the employee opts for a non-personalized rate, companies will refer to a grid of default rates.
For employees, withholding at source will be automatic and no action will be required from them. Related information, notably taxable net income, tax rate and its nature (personalized or non-personalized) will clearly appear on employees’ payslips.
– French Companies: key players in the new process
In practice, the implementation of withholding at source will take the form of additional information to be submitted by companies in the monthly DSN. More precisely, individual tax rates will apply on taxable net salaries, which are calculated via payroll software and already appearing on monthly payslips.
No personal tax information will be communicated to companies. Indeed, to change their tax rate (in the event of a change of situation affecting the level of incomes), employees should directly contact the Tax office which remains their sole point of contact.
In the event of a mistake when calculating the withholding or when repaying the tax, companies are responsible for correcting the payment with the Tax office. In the event of failure to comply with repayment obligations, the Tax office will use standard means toward companies but will not make any direct claim to employees who in fact would already have paid their taxes.
In the general case, Companies will have three specific obligations:
– apply individual tax rates (communicated by the Tax office via DSN) to the taxable net salary;
– withhold income taxes deducted from net salaries in month M; and
– repay income taxes to Tax office in month M+1 (or quarterly on option for Companies with less than 11 employees).
Companies will repay taxes to the tax office several days after the payment of salaries. Thus, they will benefit from a positive impact on cash flow depending on their size: from 8 days for companies with more than 50 employees, 18 days for companies with less than 50 employees, or 3 months on option for companies with less than 11 employees.
– Duty of confidentiality
The new process should ensure personal data protection. Indeed, no specific information regarding employees’ tax situations will be communicated to companies, and a same rate will cover various tax situations.
More broadly, companies have an obligation of professional secrecy. Intentional failure to comply with confidentiality may result in the application of penal sanctions.
It is also undeniable that such process should be covered by companies when implementing the new European data protection regulation. Indeed, individual tax rates are to be considered as personal data.
– Best practice
Considering the direct impact on employees’ earnings, the best practice at companies’ level would be to inform employees, individually and/or collectively, as well as employee representatives if they exist.
When possible, companies are invited to preconfigure the withholding at source in the last quarter of 2018. This reconfiguration would take the form of a simulation, which will appear on employees’ payslips. It will enable the employees to understand how their income would be impacted if the withholding already applied during this reconfiguration period.