Traditionally, French residents automatically paid social security contributions every month via their paychecks. And at the end of the year, they filed tax returns to pay income tax. However, to facilitate income tax collection, the French government is implementing a monthly “real-time” income tax payment.
What is the primary motivation behind this switch from a yearly income tax return to a monthly (or trimesterly) income tax payment system?
The goal of this change is to eliminate the time interval between when a resident earns income and when he or she pays income tax. The idea is to adapt income tax collection so it matches current income and is applied throughout the year all the while avoiding any changes to the actual amount of tax that will be paid overall.
What are the consequences for businesses?
Companies will be responsible for withholding a portion of employee salaries in order to pay their income tax every month (much like they already do for social security contributions). The impact is not the same depending on the size of the company. Implementing this change requires new software, new financial processes, training for staff and sometimes hiring an expert. Major companies and mid caps have generally already digitalized their accounting processes and can reduce the cost of this change thanks to their size (estimated cost per employee of 8 euros for mid caps and 6 euros for major corporations). On the other hand, SMEs must implement this change on a smaller scale and therefore pay more per employee (between 26 and 50 euros per employee).
What advice can we share with businesses to implement this change?
The primary piece of advice is to communicate about this change with employees in order for them to understand how this change will impact their paycheck every month. There are many details that can be difficult to understand (e.g., the tax rate can be neutral, individualized or personalized…). Also this change does not eliminate the requirement for filing tax returns. The government will simply adjust end of year taxes according to what was paid throughout the year. Companies also have to remember to authorize payment for income taxes as they will be collected in the form of an automatic debit.
And advice for employees?
Make sure you ask questions and understand what your paycheck will be at the end of the month. It’s also important to remember that the primary source of information is the French tax administration and not your employer.
What are the benefits of this change for the government, companies and employees?
The government will be able to optimize income tax collection and ensure regular cash infusions throughout the year. For companies, this change simply creates an extra cost and possible difficulties with employees. For employees, there are few benefits as monthly income tax payments were already an option and employees still have to file tax returns. In fact for workers entering the workforce their first year, it will be disadvantageous. Previously, they were able to work a year before paying income tax, which was nice for those just starting out. Now taxes will be paid immediately.