How to handle withholding tax correctly as an employer

With withholding tax, your role changes: you don't just deduct the tax, you also determine the tariff, register the employee, settle with the canton – and you are liable if anything is missing. That is why the law doesn't call you the employer but the «debtor of the taxable benefit». This guide covers who is subject to withholding tax, how to find the right tariff code, what you have to report and by when, and where the calculation tends to go wrong in practice.

Who is subject to withholding tax

Two groups are affected, and they follow different logic.

Among residents of Switzerland, withholding tax applies to foreign employees without a C settlement permit – typically people with a B or L permit (Art. 83 of the Federal Direct Tax Act, DBG). What counts is the permit, not the nationality. There is one exception for married couples who are not separated: if one of the spouses is a Swiss citizen or holds a C permit, withholding tax does not apply to either of them.

Among people living abroad, cross-border commuters, weekly residents and short-term residents are subject to withholding tax on the employment income they earn in Switzerland (Art. 91 DBG) – regardless of nationality and permit. Even a Swiss citizen living in Germany is taxed at source.

Tax liability starts when the person takes up work, including for minors. And it only applies if there is a debtor of the taxable benefit in Switzerland in the first place: if an employer without a registered office, permanent establishment or fixed place of business in Switzerland pays the salary, the person is assessed in the ordinary way instead of being taxed at source. The exceptions are de facto employment within a group of companies and staff leased from abroad – in both cases, the Swiss company where the work is performed counts as the debtor (Art. 4 of the Withholding Tax Ordinance, QStV). The details are set out in Circular No. 45 of the Federal Tax Administration (FTA).

Determining the right tariff code

The tariff code depends on the person's circumstances at the time of payment. The codes are listed exhaustively in Art. 1 QStV.

Two additions go with the letter: a digit for the number of child deductions and a Y or N for church tax liability. A0N therefore means single, no child deductions, not liable for church tax.

For cross-border commuters from Italy under the CH-IT cross-border commuter agreement, withholding tax amounts to 80 percent of the amount under the corresponding ordinary tariff code. For the German cross-border tariffs L to Q, you need a certificate of residence from the German tax authorities on form Gre-1 or Gre-2 for each calendar year. Without it, the ordinary tariff codes apply.

Two rules for everyday use: if a person cannot reliably document their circumstances, apply tariff code A0Y for single people and for unknown marital status, and C0Y for married people. And changes such as marriage, divorce, the birth of a child or leaving the church always take effect from the following month, never retroactively.

Register, deduct, settle

Four obligations rest with you, and the first has a short deadline.

• Register within eight days: If you employ a person subject to withholding tax, you must report this to the competent tax authority on the designated form within eight days of the start of employment (Art. 5 QStV). If you settle electronically, you may report new hires with the monthly settlement instead – a good reason to go electronic from the start.
• Pass on changes: Your employees must tell you about changes that are relevant for withholding tax. You forward them to the tax authority within the same deadline.
• Deduct without debate: The deduction is due at the time of payment. You must make it regardless of any objections from the person concerned and regardless of a wage garnishment (Art. 2 QStV).
• Settle with the right canton: For employees living in Switzerland, that is the canton of residence or stay. For people living abroad without weekly residence, it is the canton of your registered office or permanent establishment. The settlement period, deadlines and payment terms are set by each canton.

The payslip itself must show the tariff code and the rate-determining income. How the rest of the payslip has to be structured is explained in the guide to payslips. At the end of the year, the deduction also appears under item 12 of the salary statement.

Monthly model or annual model

Switzerland does not settle uniformly. Twenty-one cantons use the monthly model, five the annual model: Fribourg, Geneva, Ticino, Vaud and Valais. What matters is the canton you settle with, not the canton of your registered office. The full allocation is in Annex III to Circular No. 45.

In the monthly model, the tax period is the month. You multiply the month's gross income by the rate from the applicable tariff, and that's it.

In the annual model, the tax period is the calendar year, but deductions and settlements are still made monthly. The difference lies in the tax rate: it is based on the rate-determining annual income. If the salary changes, a bonus is added or a 13th monthly salary is paid, the rate shifts for the whole year – and the amounts already deducted have to be corrected. At the latest at the end of the year or when someone leaves, you have to recalculate and settle the difference.

If you employ people in cantons with both models, you are effectively running two calculation methods in parallel. This is where certified payroll software makes the difference.

Rate-determining income: where it goes wrong in practice

The deduction is calculated on the gross salary actually paid. The rate, on the other hand, depends on the rate-determining income – and the two diverge more often than you might think.

For the 13th monthly salary: if it is not paid monthly, you add a pro-rata share for determining the rate. With quarterly payment that is 25 percent, with half-yearly payment 50 percent and with annual payment 100 percent of a full 13th monthly salary. Smoothing it out by notionally allocating it on a monthly basis is expressly not permitted.

Part-time work and multiple employers are trickier. If someone works part-time only for you and has no other income, nothing is converted. If they have further employment income or replacement income, you convert to their actual total level of employment. If the person does not disclose it, you extrapolate to 100 percent – which noticeably increases the rate. Your employees are legally obliged to tell you about other jobs.

For hourly or daily wages without monthly salary payments, you always determine a rate-determining monthly income: for hourly wages by converting to 180 hours, for daily wages to 21.667 days. The tax is still remitted monthly.

When someone joins or leaves mid-month, the periodic salary components are extrapolated to 30 calendar days for determining the rate. Non-periodic components are not converted but only added afterwards – these include overtime pay, paid-out holiday entitlements, bonuses, gratuities, severance payments and monetary benefits from employee share plans.

When withholding tax liability ends

Two events end it, and both take effect from the following month (Art. 12 QStV): being granted a C settlement permit and marrying a person with Swiss citizenship or a C permit. From then on, the person is assessed in the ordinary way for the entire tax period, and the withholding tax already deducted is credited without interest.

It works the same way in reverse: divorce or separation from a person with Swiss citizenship or a C permit triggers taxation at source again from the following month (Art. 13 QStV). You only find out about either if your employees tell you – one reason to raise the reporting obligation actively when they join.

What your employees can apply for themselves

These procedures take place between the taxpayer and the tax authority. You don't submit anything, but you will regularly be asked about them.

From a gross income from employment of CHF 120'000 in the tax year, people resident in Switzerland are automatically subject to a subsequent ordinary assessment, without having to apply (Art. 9 QStV). For married couples, it is enough if one of the spouses reaches the threshold. Once triggered, the ordinary assessment continues until withholding tax liability ends, even if the income later falls below the threshold again.

Below that threshold, the person can voluntarily request a subsequent ordinary assessment by 31 March of the following year. The request is irrevocable and then also applies until withholding tax liability ends. Anyone who lives abroad and pays tax in Switzerland on at least 90 percent of their worldwide gross income counts as quasi-resident and can make the same request – but has to do so again every year. Annex II to Circular No. 45 gives an overview of all variants.

31 March is also the deadline for simply having the withholding tax recalculated, for example if the tariff code was wrong or working days abroad were not excluded. The forms for registration, changes, settlement and applications are on the FTA's circulars page.

Withholding tax in payroll accounting

Withholding tax is the part of payroll that works least well by hand: 26 cantonal jurisdictions, two calculation models, new tariffs every year and a rate determination with half a dozen special cases.

If you keep your accounts in Infinity, you can run payroll in the same system. Infinity Payroll calculates old-age and survivors' insurance (AHV), unemployment insurance (ALV), occupational pension (BVG), accident insurance (UVG) and withholding tax to Swiss standards and posts the payroll entries to your accounts automatically. All processes run through a Swissdec-certified partner, which means the ELM 5.0 standard is supported as well – the withholding tax settlement goes electronically to the competent canton, and you can report new hires with the same submission.

Two points belong in an honest assessment. Infinity Payroll is an add-on and requires an active Infinity subscription; it costs CHF 9 per employee per month excl. VAT. And it covers the usual salary models but is not designed for very complex industries such as staff leasing – which is exactly where withholding tax is particularly demanding.

Frequently asked questions about withholding tax

Payroll and accounting in one system

Try Infinity free for 14 days, no credit card required, and see how payroll and accounting work together. What the payroll add-on costs on top of your subscription is shown on the pricing page.