Calculate Deductions with Protected Earnings

Overview

When a Protected Earnings limit is set the system will ensure that the specified amount is reversed when determining whether a deduction will be taken from an employee's pay.

Deductions will be treated in one of four ways in Payroll > Process Payroll > Process Payroll:

• if a Protected Earnings requirement has not been configured for the deduction, then the deduction will be applied regardless;
• if the Protected Earnings limit will not be met by applying the deduction, then the deduction will be applied;
• if the Protected Earnings limit will be met or passed before a deduction is applied, then the deduction will not be applied;
• If the Protected Earnings limit will be crossed while a deduction is being applied, only a portion of the deduction will be applied until the limit is met.

A calculation summary will appear alongside each Deduction item in the employee pay in Process Payroll

The below examples outline how the system will process deductions that have been set up with a Protected Earnings limit.

Example 1: Protected Earnings and Pre-Tax Deductions

An employee's pay is processed with total Gross Wages of $1000.

If a pre-tax deduction with a Protected Earnings limit of $750 is included in the pay, the way that the deduction is applied will depend on its configuration and value, as in the below examples:

Protected Earnings configuration	Deduction Value	How is the deduction applied?
Protected Earnings limit on a Pre-Tax deduction as a Fixed Value	$200	The Protected Earnings limit ($750) is lower than the employee’s Gross Wages less the pre-tax deduction ($1000 - $200) so the full deduction amount will be applied to the pay.
	$400	The Protected Earnings limit will be crossed when the pre-tax deduction is applied, so a portion of the deduction will be applied to the pay. ie Total Gross Wages = $1000 and Protected Earnings limit = $750, so a maximum of $250 can be deducted.

If a Protected Earnings limit of 75% was configured for the above deduction item instead, the deduction would be calculated as: 

Protected Earnings configuration	Deduction Value	How is the deduction applied?
Protected Earnings limit on a Pre-Tax deduction as a Percentage	$200	The Protected Earnings limit (75% of $1000 = $750)  is lower than the employee’s Gross Wages less the pre-tax deduction ($1000 - $200) so the full deduction amount will be applied to the pay.
	$300	The Protected Earnings limit will be crossed when the pre-tax deduction is applied, so a portion of the deduction will be applied to the pay. Ie Total Gross Wages = $1000, Protected Earnings limit is 75% of $1000 = $750, so a maximum of $250 can be deducted.

Example 2: Protected Earnings and Post-Tax Deductions

An employee's pay is processed with total Gross Wages of $1000.

A pre-tax deduction of $320 with no protected earnings requirement is applied, so:

• Taxable Gross Wages are $680 (ie $1000 - $320)
• Tax is $76 (as per the ATO’s tax table)
• Net wages are $604

A post-tax deduction of $300 is also included in the pay. The post-tax deduction will calculate on based on how the Protected Earnings limit has been configured:

Protected Earnings configuration	Deduction Value	How is the deduction applied?
Protected Earnings limit with a fixed value	$300	The Protected Earnings limit ($300) is lower than the employee’s Net Wages less the post-tax deduction ($604-$300 = $304) so the full deduction amount will be applied to the pay.
	$400	The Protected Earnings limit will be crossed when the post-tax deduction is applied. A portion of the deduction will be applied to the pay. Ie Net Wages = $604, Protected Earnings limit = $400, so a maximum of $204 can be deducted.
	$650	The Protected Earnings limit is higher than the employee’s Net Wages so the deduction will not be applied.
Protected Earnings limit with a percentage	Below 40% of Net Wages	The Protected Earnings limit (40% o $604, or $241.60) is lower than the employee’s Net Wages less the post-tax deduction ($304) so the full deduction amount will be applied to the pay.
	Below 60% of Net Wages	The Protected Earnings limit will be crossed when the post-tax deduction is applied. A portion of the deduction will be applied to the pay. ie Net Wages = $604, Protected Earnings limit = $362.40 (60% of $604), so a maximum of $241.60 can be deducted

Example 3: Protected Earnings with Pre-Tax and Post-Tax Deductions

An employee's pay is processed with total Gross Wages of $1300.

The pay applies the following deductions, in processing order:

1. Pre-Tax Deduction A for $1000 with a Protected Earnings limit of below 80% of Gross Wages
2. Pre-Tax Deduction B for $220, with no Protected Earnings requirement
3. Post-Tax Deduction A for $300, with a Protected Earnings limit of below 60% of Net Wages
4. Post-Tax Deduction B for $200, with a Protected Earnings limit of below 70% of Net Wages

Applying the deductions in processing order and considering the Protected Earnings limits, the employee pay will calculate as follows:

Item	How is the deduction or item applied?
Pre-Tax Deduction A	The Protected Earnings limit (80% of $1300, or $1040) will be crossed when the deduction is being applied so a portion of the deduction will be applied. ie Total Gross Wages = $1300, Protected Earnings limit = $1040, so a maximum of $240 can be deducted for Pre-Tax Deduction A
Pre-Tax Deduction B	There is no Protected Earnings limit, so the deduction is fully applied.
Taxable Gross Wages	Taxable Gross Wages will calculate as: Gross Wages ($1300) - Pre-Tax Deduction A ($240) - Pre-Tax Deduction B ($220) = $820.
Tax	Using the ATO tax tables, tax will calculate as $120, leaving a Net Wages of $700.
Post-Tax Deduction A	The Protected Earnings limit (60% of Net Wages, or $420) will be crossed when the deduction is applied, so a portion of the deduction will be applied. ie Net Wages = $700, Protected Earnings limit = $420, so a maximum of $280 can be deducted for Post-Tax Deduction A
Post-Tax Deduction B	The Protected Earnings limit will factor in processing order and will calculate as 70% of Net Wages - Post-Tax Deduction A (ie 70% of $420 = $294). The Protected Earnings limit of $294 will be crossed when the deduction is applied, so a portion of the deduction will be applied.  ie Net Wages - Post-Tax Deduction A = $420, Protected Earnings limit = $294, so a maximum of $126 can be deducted for Post-Tax Deduction B.
Net Payable to Employee	Net Payable calculates as the Net Wages less any post-tax deductions. Once the deductions are applied, the Net Payable is $294.