Generally, when a non-Singapore Citizen employee (i.e. foreign or Singapore Permanent Resident employee) ceases employment with the company in Singapore, goes on an overseas posting or plans to leave Singapore for more than three months, the employer is required to seek tax clearance for him/her.
As an employer, you have the responsibility to file the Form IR21 and withhold all monies due to the employee for tax clearance purpose. This applies to all work pass holders including Personalised Employment Pass (PEP) holders.
How to have IR21 Withholding Amounts Auto-Included into Payroll as a Deduction?
If you would like to have eligible employee's salaries' automatically withheld for tax clearance, you'll have to follow the steps below to learn how to do so:
1) Tick the 'Create IR21 Withholding item' checkbox in Step 1 - Select Employees of payroll processing.
This will ensure that the system auto-creates the "IR21 Tax Withholding" pay item under the Monthly Payment/Deduction tab for eligible employees.
NOTE: The IR21 Tax Withholding pay item is only auto-created for employees who qualify for IR21 generation. This means that if the checkbox is ticked in the first step but the employee is not eligible for IR21, the item will not be auto-created in payroll for them.
2) Process payroll till Step 3 - Select Pay Item, you will be able to view the "IR21 Tax Withholding" pay item created under the Monthly Payment/Deduction tab.
NOTE: The "IR21 Tax Withholding" pay item is always open/available for Admins to key in manually into the system under both the Monthly Payment/Deduction tab and the Ad Hoc Payment/Deduction tab, just in case.
3) Tax Withholding Amounts are automatically mapped to Form IR21 for eligible employees.
Once this tax withholding pay item has been processed in payroll, we'll automatically pull this amount into your employee's IR21 form under "Amount of monies withheld pending Tax Clearance" section:
Having trouble understanding this auto-creation flow? View this GIF below to help you along:
Example of Tax Withholding Calculations
Here is a scenario of how the system calculates an employee’s net salary and withholding amounts for tax clearance based on a $5000 basic salary:
Initial Net Salary
Final Net Salary
**By IRAS' definition, you are required to withhold all monies (overtime pay, leave pay, allowances, reimbursements, gratuities, lump sum payments, etc.) due to your employee from the date you are aware of the employee's impending cessation of employment or departure from Singapore.
We recommend for the amount of Tax Withheld to be the the Initial Net Salary after CPF deductions so that the Final Net Salary showing in payslips to employees will be a non-negative value.
How to Release Withheld Monies to your Employee after Tax Clearance is Processed?
Upon tax clearance, you will receive either of the following directives from IRAS:
Directive to Pay Tax
Notification to Release Monies from IRAS to inform you to release the withheld monies to your employee
If you receive the Notification to Release Monies withheld to your employee, you can use the "Reimbursement" pay item under the Ad Hoc Payment/Deduction tab to key this amount into payroll for payment to your employee:
To know more about tax clearance, head over to the IRAS website for more info. Do refer to this link on the applicable withholding tax rates as well.😀