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How to Apply the Non-Cash Benefit & Telephone Allowance Tax Workaround

This guide explains how payroll administrators can apply an offline calculation to correctly tax employee telephone and airtime allowances during monthly payroll processing.

Statutory Guidelines: Under Kenya Revenue Authority (KRA) PAYE rules, non-cash benefits and allowances are taxable once they exceed the statutory threshold of Ksh 5,000 per month (Ksh 60,000 annually). Specifically for employee telephone and airtime allowances, 30% is deemed a taxable benefit for personal use, while the remaining 70% is treated as tax-exempt business use. Because the current payroll engine taxes 100% of allowances exceeding the threshold, administrators must manually split the amounts offline prior to final payroll submission.

Step-by-Step Workaround for payroll admins: Telephone & Non-Cash Benefit Allowance

Step 1: Calculate the Taxable vs. Exempt Amounts Offline

Calculate the 30% taxable and 70% exempt split based on the employee's total monthly allowance:

  • Taxable Benefit (30%): Total Allowance × 0.30

  • Exempt Portion (70%): Total Allowance × 0.70

Working Example (KES 10,000 Total Allowance):

  • Taxable (30%): KES 10,000 × 0.30 = KES 3,000

  • Exempt (70%): KES 10,000 × 0.70 = KES 7,000

Step 2: Create the Exempt Allowance Category (One-Time Setup)

  1. Go to Run Payroll Module> Allowances> Allowance Settings>Categories

  2. Click Add New Allowance Category.

  3. Name it Telephone Allowance - Exempt, or whatever is easier to identify from your end.

  4. Set the tax configuration for this item to Non-Taxable /Exempt.

  5. Click Save.

Step 3: Apply the Split Amounts in the Payroll Draft

  1. Navigate to the Payroll module and convert your monthly payroll in Draft.

  2. Navigate to the Allowance module on the Payroll Module menu.

  3. Select the employee receiving the benefit:

    • Under the standard Telephone Allowance (taxable line item), enter the 30% portion (KES 3,000).

    • Under the newly created Exempt Communication/Aitime/Telephone/ Allowance category, enter the remaining 70% portion (KES 7,000).

  4. Click Save.

Step 4: Reprocess and Verify Payroll

  1. Click Reprocess Payroll on the draft run.

  2. Confirm the employee's gross package remains whole (full KES 10,000 accounted for).

  3. Review the payslip schedule to confirm PAYE is calculated only on the 30% portion (KES 3,000).

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