- 12 Marks
Question
Kaakyire, the Finance Director of Dwarf Ltd, is on a monthly basic salary of GH¢1,400. She was paid overtime amounting to GH¢500 during the month of April 2022.
Required:
i) State the principles underpinning the computation of overtime in accordance with the Income Tax Act, 2016 (Act 896).
(6 marks)
ii) State how her overtime will be taxed and compute the tax for the month of April 2022.
(6 marks)
Answer
i) Principles Underpinning the Computation of Overtime:
- Overtime is subject to withholding tax when paid to a qualifying junior employee. A qualifying junior employee refers to a junior staff whose annual qualifying employment income does not exceed GH¢18,000.
- The employer withholds tax from overtime payments as follows:
- Where the overtime payment does not exceed 50% of the employee’s basic salary for the month, it is taxed at a rate of 5%.
- Where the overtime payment exceeds 50% of the employee’s basic salary, the portion of the overtime up to 50% of the basic salary is taxed at 5%, and any amount exceeding 50% is taxed at 10%.
- For employees who do not qualify as junior staff, overtime payments are added to their basic salary and taxed at the graduated rates under the first schedule.
(3 points @ 2 marks each = 6 marks)
ii) Tax Treatment of Kaakyire’s Overtime:
Since Kaakyire is the Finance Director (not a junior employee), her overtime payment will be added to her basic salary and taxed at the graduated rate.
Tax Computation for April 2022:
| Details | Amount (GH¢) |
|---|---|
| Basic Salary | 1,400 |
| Overtime | 500 |
| Chargeable Income | 1,900 |
Tax Liability Calculation:
| Income Brackets | Tax Rate (%) | Tax (GH¢) |
|---|---|---|
| First 1,200 | 0% | 0 |
| Next 420 | 5% | 21 |
| Next 280 | 10% | 28 |
| Total | 49 |
Total Tax Payable: GH¢49
(6 marks)
- Tags: Income Tax, Overtime, Tax computation, Tax Principles, Withholding Tax
- Level: Level 2
- Topic: Income Tax Liabilities
- Series: MAR 2023
- Uploader: Kwame Aikins