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We'll use the statutory CPF (Central Provident Fund) contribution and SDL (Skill Development Levy) as examples later because most businesses need to pay them.
Breaking down payroll-related expenses
First, let's start with a breakdown of what you need to do before paying your employees.
You'll see that you have three things to consider before arriving at the net salary figure, as follows:
- Levies: For example, SDL and FWL (Foreign Workers' Levy).
- Deductions: These are the employees' own expenses that you're obligated to pay on their behalf, e.g., contributions to self-help groups like CDAC, SINDA, Yayasan Mendaki Fund, and Community Chest.
- CPF: This is a hybrid of the above two, comprising an employer cost (the employer's contribution) and an employee deduction (the employee's contribution).
SDL and CPF, however, have specific rules to comply with.
Before that, you need to know the different rounding methods...
This is important: a summary of rounding methods
You'll be surprised that the terms used are not universal, so we'll standardise them here:
- Normal rounding or simply "round (off)": This means that anything "5" and above is rounded upwards and anything below "5" is rounded downwards. Sometimes, normal rounding is also known as "round up" which should not be confused with "round upwards" to be explained next.
- "Round upwards": This means that amounts are always rounded upwards to the next HIGHER amount.
- "Round down" or truncate: This is the situation where figures are always rounded downwards to the next SMALLER amount.
To understand how SDL and CPF are rounded, we'll need to use the "round (off)/ round up" and "round downwards" methods.
How to round SDL?
SDL is computed at both the organisational and employee levels. What do I mean?
Let's suppose that the SDL rates are stipulated as follows:
Every employer shall pay SDL at the rate of 0.25% of the first $4,500 of each of their employees’ monthly remunerations subject to:
- a minimum of $2 (for employee earning $800 or less a month)
- a maximum of $11.25 (for employee earning $4,500 or more a month)
So you see, for SDL, you use the normal rounding for each tier. When you get the total, you then drop all cents.
How about CPF?
CPF is calculated at the employee level only and the rounding is unique for each component: employer CPF, employee CPF, and total CPF. You can get interesting results here...
Assuming that the CPF rates are as follows for a particular employee (for illustration only):
CPF - employer
CPF - employee
Employee salary subject to above CPF rates
Calculate the CPF in 3 steps:
If you use the CPF tables provided by the CPF Board, the amounts are already properly rounded. Do not be surprised, therefore, if you find the rounding for your employer CPF "out" by a dollar, as demonstrated above.
Conclusion - use your knowledge for other statutory obligations
Even if you do not manually calculate your payroll and related liabilities, understanding the rounding principles makes you more confident when you read government regulations on various employer obligations. Consult your accountant and tax agent for clarifications.
Your homework: Now, let's look at a topic not related to payroll. Read this letter by IRAS (Inland Revenue Authority of Singapore) on GST (Goods and Services Tax) rounding:
GST on receipts are allowed to be rounded off to a whole cent
Is it easier now to understand IRAS' message?
A.B.U.S.E. Takeaway for QuickBooks Users
- Use General Journals to record your liabilities
- Use Write Cheques to pay your liabilities