What to watch out for if we fail to declare and pay our employees’ individual social security contributions

If a company has many employees, it is possible even with due care that it fails to declare, deduct and pay a particular employee’s social security contributions to the authorities. Correcting such a mistake is a rather complex task, and if the error is found by the tax authority, the given company can expect to have to pay the contribution shortfall in addition to the legal consequences.

If a company finds that it has calculated and deducted the social security contributions payable by a private individual incorrectly, it first has to record the error. Next, a self-revision of the social security contribution returns must be performed, with any differences in these contributions settled with the private individual and, if need be, reported to the tax authority.

If the contribution amount assessed and deducted was lower than prescribed, i.e. if the employer deducted fewer contributions than required, the correction process is rather complex. After the error has been registered the company must examine whether or not the employee concerned is still employed, and whether the difference in contributions may or may not be deducted from the private individual’s salary, with due consideration of the statutory restrictions. Based on the Act on the Rules of Taxation and in order to settle any differences in contributions, a maximum of 15% of the monthly salary less the payable health care contribution, pension contribution and tax advance can be deducted in addition from the private individual in such cases every month. Another limitation is that legislation permits the differences to be deducted in such a manner for no more than seven months.  Yet the employer needs to correct the tax and social contribution returns by means of a self-revision in this case too, and it must declare and pay a self-revision penalty on differences that it failed to deduct and pay on time.

It is possible that the full amount of the social security contribution difference cannot be settled within the afore-mentioned framework as the difference exceeds the maximum amount deductible from the private individual’s salary within the set period, or because the private individual has since terminated their employment. But of course, the remaining difference in social security contributions still needs to be settled in this event as well.
In such a case the employer must report the amount of the remaining social security contribution difference, the tax identification number of the private individual concerned, the grounds to the payment and the issue date of the payment certificate to the employee’s state tax authority within 15 days of the next failed deduction, and must inform the private individual about the details of this notification, assuming their address is known.  It is imperative that such reporting must be performed using the tax authority’s designated form; the informal letter accepted for this purpose in previous years is no longer approved.  Based on the report, the tax authority sets forth in a resolution any differences in social security contributions that cannot be settled by deduction, prescribing that such amounts be paid by the private individual.

The employer is also obliged to submit a report concerning the social security contribution difference that cannot be settled by deduction, but in this case only the contributions payable by the employer must be reported. In addition to the self-revision penalty charged on such differences, the self-revision penalty charged on individual social security contributions that cannot be settled by deduction must be expressed in figures in the report and must be paid by the employer too.

It is simpler if the error benefited the private individual, i.e. the company deducted too much of a social security contribution. In this event, if the private individual is still employed, the company just reimburses said individual for the difference. If the private individual is no longer employed at the company, the tax authority credits the social security contribution difference to the individual by means of a resolution based on the report from the former employer as mentioned above. Naturally, the relevant lines in the monthly tax and social security contribution returns must be adjusted in a self-revision.

The accurate calculation and deduction of individual social security contributions and the early identification of related shortcomings by the employer is vital, because if such errors are discovered in the course of a tax inspection, the tax authority will impose not only a tax penalty and default penalty on the employer, but as of 2012, the tax shortfall must be paid too. For personal income tax the tax shortfall is still payable by the individual if the employer assessed, deducted and declared the advance tax in an amount that was lower than necessary. In the case of personal income tax, the tax shortfall is only charged to the employer if they had already deducted the tax advance but failed to declare it. However, if the employer identifies the error he will be exempted from further legal consequences arising from the failed deduction once the self-revision penalty has been assessed and declared and the required report submitted.

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