What withholding should be applied to the wage differentials per judgment? Avoid mistakes!

As a human resources manager, your daily work includes managing payroll and salary adjustments. But what happens when a former employee receives payments for salary differences under a court ruling? This scenario may occur more than we think, and applying the IRPF withholding correctly is fundamental. The Directorate General of Taxes (DGT) has given a clear answer in its binding consultation V1817-24, and today we are going to comment on it so that you have all the keys.

In what period are these wage differences imputed?

Imagine this situation: an employee leaves the company and after a judicial process it is determined that he/she was entitled to certain salary differences. The ruling is issued in 2024 but the amounts recognized correspond to previous years. As a human resources professional, you are faced with the question of how to allocate these payments for personal income tax purposes.

The general rule indicates that earned income is imputed to the period in which it is payable by the recipient. Normally, salaries are allocated to the year in which they are earned, however, when it comes to salary differences recognized by court ruling there is a specific rule. Article 14.2.a) of the Personal Income Tax Law (LIRPF) establishes that, if the amounts were pending judicial resolution, they must be allocated to the period in which the sentence becomes final.

The firmness of the sentence – the key moment!

The DGT specifies that the salary differences recognized by judgment must be imputed to the year in which the judgment becomes final. For example, if a judgment is issued in 2024 and becomes final that same year, the salary differences will be imputed to 2024 even if they correspond to previous years. This information is essential to determine the correct imputation period and, consequently, the withholding to be applied.

If you have ever been in this situation, you will know that the lack of clarity can generate withholding errors and, ultimately, problems for both the company and the employee.

How is withholding calculated?

Once you have determined the imputation period, the next question is: what withholding rate to apply to those payments? This is where the regulations are specific.

The Directorate General of Taxes points out that, in principle, the withholding should be calculated following the general procedure set out in article 80.1.1.1.ª of the IRPF Regulation (RIRPF). This means using the standard procedure of Article 82 of the RIRPF, the same that applies to regular salaries. It may also be necessary to consider the quantitative limit that excludes the obligation to withhold, according to article 81.1 of the RIRPF.

However, there is a crucial detail: since it is income paid in a fiscal year subsequent to that of its temporary imputation, a special rule comes into play. According to article 80.1.5.º of the RIRPF, a fixed withholding rate of 15% is applied for arrears attributed to previous years. This means that, although the standard calculation might indicate a different percentage, these retroactive payments must be subject to this fixed rate.

Why is the fixed rate of 15% applied?

The reason is that these payments correspond to prior fiscal years and, therefore, their withholding should reflect their retroactive nature. Applying an incorrect rate could cause inconsistencies in the tax returns of the former employee and possible penalties for the company.

Practical example:

Suppose that in 2024 a former employee receives an amount for salary differences corresponding to the years 2021 and 2022, due to a judgment that became final in 2024. The IRPF rule indicates that this income is imputed to 2024, the year in which the sentence becomes final. Here, instead of calculating the withholding according to the general procedure, you must apply the fixed rate of 15%. Thus, retroactive payments are treated appropriately for tax purposes.

Conclusion

As a human resources manager, it is essential to be aware of these tax specificities in order to avoid errors in personal income tax withholdings. When it comes to salary differences recognized by a court ruling, remember: the imputation is made in the year in which the ruling becomes final, and the withholding is calculated by applying the fixed rate of 15%.

Knowing and correctly applying these regulations will allow you to efficiently manage payments to former employees, avoid conflicts with the Tax Agency and ensure the correct application of withholdings.

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