Certain employees might be subject to a tax clearance process and you will be required to submit Form IR21 to IRAS for such employees. For more information about the tax clearance process, please refer to:
If you have identified an employee as subject to the tax clearance process, you need to follow these steps:
Ending the Employee’s Service
- Ensure that the employee’s last payslip has not been finalised.
- Record the employee’s termination by going to their profile and clicking on End Service.
- Select their Last Day of Service and Reason for Termination.
- Check the box next to Requires Form IR21 (exclude from IR8A e-submission file) and Save.
Please note: Form IR21 cannot currently be downloaded from SimplePay. However, a transaction history report can be used to obtain the information needed to complete the form.
For more information about transaction history reports and ending an employee’s service, please refer to the respective articles:
Tax Clearance Scenarios
The additional steps to be followed, after having ended the employee’s service (as described above), will depend on the particular circumstances. There are potentially three different scenarios that could occur with regards to the tax clearance process:
- IRAS issues a Clearance Directive within a few days and the tax to be withheld can be deducted in the same month as the final payslip is issued (Scenario 1)
- Notification of the employee’s termination is given more than a month before the last day of service and the tax to be withheld according to the Clearance Directive can be deducted in the last payslips (Scenario 2)
- A Clearance Directive is received only after the last monthly payment was made (Scenario 3)
These three possible scenarios are discussed below:
Scenario 1
In this case, which is most likely for e-Filed cases, the Clearance Directive is received only a few days after submitting the IR21. Therefore, you will know how much tax to withhold before finalising the employee’s last payslip.
- Go to the employee’s profile and click on Add next to Payslip Inputs.
- Under Deduction click on Income Withheld (Tax Clearance).
- Enter the amount of tax to be withheld as it appears on the Clearance Directive. (The effect of this deduction is to reduce the employee’s nett pay by the amount of tax you have to pay over to IRAS on their behalf.)
- Finalise the last payslip*.
*In exceptional cases, where the tax deduction would cause the nett pay to be negative, you will not be able to finalise the payslip and you will have to adjust the deduction so that the nett pay is a minimum of $0.00. You should inform the employee that IRAS will then bill them directly for the outstanding tax.
Scenario 2
It could also happen that notification of the employee’s termination is received more than a month before their last day of service. In such a case, you should withhold all monies owing to the employee until IRAS issues a Clearance Directive.
If you withheld all monies on the second last payslip (as described in the first 4 steps under Scenario 3 below) but subsequently receive a Clearance Directive from IRAS before the last payslip, you might need to “pay out” to the employee some of the monies previously withheld.
You could pay out the money on the last payslip as follows:
- Go to the employee’s profile, where you are creating the last payslip.
- Click on Add next to Payslip Inputs.
- Under Income click on Income Paid Out After Tax Clearance.
- Enter the amount that the Clearance Directive from IRAS authorised you to release to the employee – unless the amount withheld was insufficient to pay all the employee’s taxes, in which case you might need to withhold additional income on the last payslip (as described in Scenario 1).
- Finalise the last payslip.
Scenario 3
This situation could occur when there are some delays with the processing of tax clearance; for example, if the information given in Form IR21 is incomplete or when IRAS needs to seek clarification on the employment details submitted.
The steps to withhold income are the same as in the other scenarios. However, in this scenario, there is an additional step – where the balance of the employee’s income is paid out on a once-off payslip.
In order to withhold the employee’s income while waiting for tax clearance from IRAS, you need to do the following:
- Go to the employee’s profile and click on Add next to Payslip Inputs.
- Under Deduction click on Income Withheld (Tax Clearance).
- Enter the amount of Nett Pay as it appears on the payslip before adding the once-off item. (The effect of this deduction will then be to bring the nett pay down to $0.00.)
- Finalise the last payslip.
After you received tax clearance from IRAS, you should then follow these additional steps:
- Click on the Inactive link at the bottom of the Employees section on the left-hand menu and go to the employee’s profile.
- Create a special once-off payslip by clicking on the date field next to Payslip and then selecting Manually Add Payslip.
- Click on Add next to Payslip Inputs.
- Under Income click on Income Paid Out After Tax Clearance.
- Enter the amount that the Clearance Directive from IRAS authorised you to release to the employee – unless the amount withheld was insufficient to pay all the employee’s taxes, in which case you should not pay / release any money to the employee.
- Finalise the once-off payslip.