When the tax auditor conducts a spot check

Tax auditors in the Rhineland were recently trained in how to use payroll calculations to verify the plausibility of reported revenue.

The tax authorities must accept the submitted accounting records as a basis if there is no reason to question their accuracy. The accounting records are verified by examining individual business transactions or through cross-checking. Wage calculations are one of the possible methods for verifying revenue.

Wage-based revenue

By multiplying the total number of productive working hours by the respective hourly billing rate, it is possible to determine whether the revenue actually reported to the tax authorities is plausible. To do this, the billable hours must first be determined. From the theoretically available working hours, those that cannot be billed—such as vacation, sick leave, training, and other downtime—must be excluded. Here, the varying productivity levels of employees must be taken into account. As a rule of thumb, trainees should only be included in this calculation at 25 to 50%. Additionally, owners and master craftsmen cannot be counted at 100% due to their administrative duties. Experience shows that the proportion of non-billable time resulting from this increases as the size of the business grows. A very rough rule of thumb assumes an 80% capacity utilization with no employees, 75% with up to two, 50% with up to four, and 25% with more than five employees. It is also important to consider the degree to which the business is operating at full capacity—that is, whether productive work could not be carried out continuously due to weather conditions or a partially poor order situation.

Retail Sales

If the business also sells merchandise, this figure must be taken from the accounting records or calculated. In the latter case, the portion used for resale must be determined from the purchase of materials. Therefore, pure consumables, product samples, or goods still in stock must be excluded. Adding the internal or estimated profit margin yields the retail sales.

Result: If the revenue reported for tax purposes differs from the result of the cost calculation, the auditor will make an additional assessment of income. However, this is not legally required for every discrepancy, but only in cases of gross disproportion.