TAXATION OF EMPLOYMENT INCOME

Employment is defined as any appointment or office whether public or otherwise for which
remuneration is payable.
Contract of employment is defined as “any agreement whether written or verbal, expressed or
implied, whereby one person agrees to serve another as a worker”
A contract for employment is an agreement whereby a person is engaged as an independent
contractor, such as a self-employed person or vendor engaged for a fee to carry out an
assignment or a project for another.
In a contract for employment, there is no employer-employee relationship in the contract.
An individual under a contract of employment is commonly referred to as an employee, while an
individual under a contract for employment is referred to as a contractor or self-employed
person.
The following distinctions can be drawn between a contract of employment and a contract for
employment:
(a) An individual under a contract of employment earns salary, while an individual under a
contract for employment earns profit;
(b) An individual under a contract of employment is assessed to tax on actual year basis, while an
individual under a contract for employment is assessed to tax on preceding year basis;
(c) A self-employed person is required to register for value added tax, while an employee is not
required to do so
(d) An employee has the right not to be unlawfully dismissed and to receive redundancy payment
and other employment rights, while a self-employed person does not have such rights.

Types of employment
There are basically two types of employment as follows:
(a) Nigerian employment- not being in a foreign employment, the duties of which are wholly or
partly performed in Nigeria. An individual who holds a Nigerian employment on the first
day of January in a year of assessment, or who first becomes liable to income tax in Nigeria
for that year by reason of his entering that employment during that year.
(b) Foreign employment means an employment the duties of which are wholly performed
outside Nigeria save during any temporary visit of the employee to Nigeria. An individual
who holds a foreign employment on the first day of January in a year of assessment, or who
first becomes liable to income tax in Nigeria for that year by reason of his entering that
employment during that year.

Employment, vocation and profession distinguished

The differences btw employment, vocation and profession can easily be established from the
definition of employment, vocation and profession as follows:
(a) Employment
Employment is an agreement between an employer and an employee whereby employee
is expected to provide certain services on the job and in the employer’s designated
workplace, in order to fulfill the employer organization’s goals and mission, in return for
compensation.
The agreement can be verbal, implied, or an official employment contract.
Employment ends at the prerogative of the employer or the employee.

(b) Vocation
A vocation is a specified profession or trade to which a person is specially drawn or for
which he or she is trained, or qualified. Vocation can either be an activity that serves as an
individual’s regular source of income or as an activity engaged in especially as a means
of passing time.

(c) Profession
A profession refers to an occupation that requires specialised education, knowledge,
training and ethics. Although professionals make their living in what they do, this paid
work is often more than just a job or occupation alone. Whether the occupation is law,
medicine, Accountancy, plumbing, writing, interior design, those who are in it are
expected to meet and maintain common standards. Professions are, ideally, made up of
people with high ethical standards who have special knowledge and skills.A professional
is expected to maintain high standard in its operation. For example, if a homeowner hires
a non-licensed plumber to save money, he or she wouldn’t be able to hold this person to
the same standards as a licensed professional in the same industry.
Itinerant worker
(a) Itinerant worker is an individual irrespective of his status, who works at any time in
any state during a year of assessment (other than as a member of the armed forces)
 for wages, salaries or livelihood by working in more than one state and work for a
minimum of twenty (20) days in at least three (3) months of every assessment year.
(b) Imposition of tax
In the case of an itinerant worker, tax may be imposed for any year by any state in
which the itinerant worker works for a minimum of twenty (20) days in at least three
(3) months of every assessment year.

Employment income
Employment income includes salary, wages, fee, allowance or other gain or profit from
employment including compensations, bonuses, benefits or other perquisites allowed,
given or granted by any person to any temporary or permanent employee other than so
much of any sums as or expenses incurred by him in the performance of his duties, and
from which it is not intended that the employee should make any profit or gain.

Cash emoluments
Cash emoluments are the remuneration an employee receives from the employer in cash.
Cash emoluments include salary, wages, fee, allowance or other gain or profit from
employment including compensations, bonuses, benefits, share of profits received by an
employee.
Benefits-in-kind (BIK)
Benefits-in-kind mean those expenses incurred by an employer in the provision of
benefits to the employee. Such benefits often include:
1. furnished living accommodation,
2. gardener /stewards (domestic servants),
3. use of official car for private purpose by employees,
4. installation of air conditioners or generator in employees’ residences.
These benefits are regarded as part of the employee’s taxable income if these relate to
services rendered by the employee.
Benefits-in kind will also include such benefits which are actually provided to the spouse,
family, servant, dependent or guest of the employee.

Taxable and tax–exempt incomes

The following are the general rules for quantifying benefits-in-kind:
(i) The use of assets
• Owned or acquired by the employer:
Where assets (e.g. motor vehicles, furniture and fittings, plant and machinery,
etc.) acquired and owned by an employer are provided for the exclusive use
of the employee, the employee is deemed to have derived an income equal to:
5% of the assets cost if known; or 5% of the market value at date of
acquisition where cost is not known (to be determined by the tax authorities).
• Rented or hired by the employer
If an employee is provided with asset for which the employer pays a hire or
rental charges, the employee is deemed to have derived an income equal to
the annual amount of the rent or hire expended by the employer on the asset.
Note, where an employee has made any refund in respect of the asset rented
or hired by the employer for the employee’s benefit, the employee shall be
deemed to have derived income equal to the difference between the amount
incurred by the employer and any amount refunded by the employee.
(ii) Provision of residential accommodation
If an employer provides residential accommodation for the benefit of an
employee anywhere in Nigeria and the employee pays no rent for the
premises, or pays a rent which is less than the annual value of the premises,
the employee is deemed to have derived income each year equal to the annual
rateable value of the premises.

(iii) Domestic staff paid by the employer

Where an employer engages the service of domestic staff (such as driver,
steward, washman, housemaid, gardener, etc) for the exclusive benefit of an
employee, the cost incurred in form of salary by the employer for the use of
the domestic staff by the employee shall be deemed as income in the hands of
the employee and taxed accordingly.
(iv) Benefits to employees exempted from tax
The following expenses of the employer for the benefit of the employee are
not regarded as BIK and are therefore not taxable in the hands of the
employee:
• Expenses in connection with the provision of meal in any canteen for all
staff or provision of non-assignable luncheon voucher;
• Expenses connected with the provision of uniforms, overalls and other
protective clothing; and
• Expenses connected with employee’s change of residence as a result of
change in his employment (e.g. transfer)
Format for the computation of taxpayer’s tax liability N ₦
Total income less non-taxable incomes and incomes on
which no further tax is payable xxx
Less Tax-exempt items:
(a) Pension contribution xxx
(b) National Housing Fund (NHF) xxx
(c) National Health Insurance Scheme (NHIS) xxx
(d) Life assurance premium xxx
(e) Gratuity xxx xxx
Gross income xxx
Less consolidated relief allowance (N200,000 or 1% of gross income,
whichever is higher plus 20% of gross income) xxx
Chargeable income xxx
₦
1st ₦300,000 @ 7% 21,000
Next ₦300,000 @ 11% 33,000
Next ₦500,000 @ 15% 75,000
Next ₦500,000 @ 19% 95,000
Next ₦1,600,000 @ 21% 336,000
Balance @ 24% xxx
Tax payable xxx
Less: Withholding tax xxx
Final tax liability payable xxx

Exemption of minimum wage earners from the payment of personal income tax
By the provision of Section 37 of PITA, 2004, and amendments of the Finance Act, 2020,
employees earning the national minimum wage or less from any employment are no longer liable
to pay tax or monthly PAYE deduction.

Determination and importance of residence

In personal taxation, determination of residence is vital, for the purpose of identifying the
relevant tax authority of a taxpayer.
Determination of residence.

(a) Resident individual

An individual is regarded as resident in Nigeria in an assessment year if he: (i) Is
domiciled in Nigeria;
 (ii) Sojourns in Nigeria for a period or periods in all amounting to 183 days or more in a
12-month period;
(iii) and Serve as a diplomat or diplomatic agent of Nigeria in a country other than
Nigeria.
(b) Non-resident individual
A non-resident individual is a person who is not domiciled in Nigeria or who stays in
Nigeria for less than 183 days in a 12-month period but derives income or profit from
Nigeria.
A non-resident individual becomes liable to tax in Nigeria from the day he commences to
carry on trade, business, vocation or profession in Nigeria. In the case of employment
income, he is liable to tax in Nigeria when he becomes a resident.

(c) Residence and nationality

Residence should not be confused with nationality. The Nigerian tax laws attach
importance to residence and not nationality. Therefore, whether you are a citizen of
Nigeria or a citizen of another country, the same standards apply to you as far as you are
resident in Nigeria. The same condition will also apply to an individual who is not
resident in Nigeria whether he is a Nigerian or a foreign national.
(i) Place of residence
Place of residence in relation to an individual, means a place available for his domestic
use in Nigeria on a relevant day, and does not include any hotel, rest-house or other place
at which he is temporarily lodging, unless no more permanent place is available for his
use on that day.
(ii) Principal place of residence
Principal place of residence in relation to an individual with two or more places of
residence on a relevant day, not being both within any one territory means:
(i) In the case of an individual with no source of income other than a pension in
Nigeria, that place or those places in which he usually resides;
(ii) In the case of an individual who has a source of earned income other than a
pension in Nigeria, that place or those places which on a relevant day is nearest to
his usual place of work;
(iii) In the case of an individual who has a source or sources of unearned income in
Nigeria, that place or those places in which he usually resides;
(iv) In the case of an individual who works in an office or operational site of a
company or other body corporate, the place of which the branch office or
operational site is situate; provided the operational site shall include oil terminals,
oil platforms, flow stations, factories, quarries, construction sites with a minimum
of 50 workers etc.
Residence of different categories of individuals
Liability to income tax is often determined according to whether a person receiving
income is resident in a state for a particular year of assessment.
A taxpayer is therefore liable to the tax authority of the territory in which he is deemed to
be resident for a year of assessment. The following rules guide the determination of
residence:
(i) An individual whether in employment or whose only sources of income are
unearned income is deemed to be resident for a year of assessment in the
territory in which he has a place available for his domestic use in Nigeria on the
first day of January of the assessment year, and does not include any hotel, rest
house or other place at which he is temporarily lodging;
(ii) An executor is deemed to be resident in the territory in which the deceased
individual was last deemed to be resident or would have been deemed to be
resident if the law had been in force prior to the date of his death;
(iii) A trustee of any trust or settlement is deemed to be resident where all the income
of the settlement or trust for a year of assessment arises. Where the income arises
in more than one territory or where the tax authority cannot be determined, the
Federal Inland Revenue Service is the tax authority;
(iv) Partners in partnership are deemed to be resident where the principal office or
the place of the partnership is situated on the first day of that year or is first
established during the year;
(v) A village or an indigenous community is deemed to be resident in the territory in
which the community is found;
(vi) An itinerant worker is deemed to be resident where he is found in a year of
assessment;
(vii) An individual not being a person assessable by FIRS (S. 2, 1 (b) ) who holds a
foreign employment on the 1st day of January in a year of assessment or who
first becomes liable to income tax in Nigeria for that year by reason of his
entering that employment during that year, shall be deemed to be resident for that
year in the territory in which the principal office of his employer is situated on
that day or on the day his foreign employment commences as the case may be;
(viii) An individual whose only source of earned income arising in Nigeria on the 1st
day of January in a year of assessment was a pension, or who had a place or
principal place on that day shall be deemed to be resident for that year in the
territory in which that place or principal place or residence was situated on that
day.

Meaning of income
 Income chargeable to tax, is the aggregate amount, each of which is the income
of every taxable person, for the year, from a source inside or outside Nigeria,
including:
Gain or profit from any trade, business, profession or vocation for whatever
period of time such trade, business, profession or vocation may have been
carried on or exercised; and
Any salary, wage, fee, allowance or gain or profit from employment including
compensation, bonuses, premiums, benefits or other perquisites allowed, given
or granted by any entity to an employee, other than those specifically stated as
non- taxable.

For the purposes of personal income tax and place of residence, income is
classified into earned and unearned.
(l) Earned incomes
Earned incomes in relation to an individual, means income derived by him from
a trade, business, profession, vocation or employment carried on or exercised by
him and a pension derived by him in respect of a previous employment. It
includes profits, salaries, wages, commission, bonuses, etc.

Place of residence
(i) An individual who has a source of earned income in Nigeria, for
a year of assessment, other than from employment or a pension,
shall be deemed to be resident for that year in the territory in
which he had a place or principal place of residence on the 1st
day of January in that year.
(ii) If the source of the income is first acquired by the individual
during the year of assessment, and he had no place of residence
on the first day of that year, he shall be deemed to be resident for
that year, in the territory where he first establishes a place of
residence during that year.
(iii) In any other case, the individual shall be deemed to be resident
for that year, in any territory from which any part or the whole of
his earned income, arising in Nigeria is derived, if the income is
derived from more than one territory, in the Federal Capital
Territory.

Unearned Income
 These are incomes derived from sources other than employment,
business or reward for services rendered. It includes investment
incomes such as rental incomes, dividends, royalty, earnings from
trademark, patents, etc. Others are gifts, inheritance and
bequeathals.

Place of residence
(i) An individual who has no source of earned income in
Nigeria for a year of assessment, but has one or more
sources of unearned income in Nigeria for that year, shall
be deemed to be resident for that year, in the territory in
which he has a place or principal place of residence, on
the 1st day of January of that year.
(ii) If all the unearned income of the individual for that year,
arises in one territory, and he has no place of residence on
that day, he shall be deemed to be resident for that year in
that where the income arises.
(iii) If the unearned income of the individual arises for that
year, in more than one territory, and he has no place of
residence on that day, he shall be deemed to be resident
for that year, in the territory from which any part of the
unearned income arises.

Corporation sole
A Corporation sole or body of individuals other than a family or community, shall be deemed to
be resident for a year of assessment, in the territory in which its principal office in Nigeria is
situated, on the 1st day of January in that year or, if it has no office in Nigeria on that day, in a
territory in which any part or the whole of its income liable to tax in Nigeria, arises for that year.

Questions
[Link]. Ali Zakari was employed by Jalilo Limited as Director, Trade, Central & East Africa with
effect from March 1, 2011.
He entered Nigeria on the date his employment became effective and remained in Nigeria till
August 25, 2011.
He returned to Nigeria on January 15, 2012, and remained in Nigeria till July 31, 2012.
Required:
 Explain the basis for the taxation of the income earned by Mr. Ali Zakari in Nigeria for the
relevant tax years.
2. Mr. Dum works with Federal Ministry of Works, Abuja.
He lives in a self-contain flat in Gwagwalada and travel every weekend to see his first wife and
children in Jalingo.
He also visits and stays with his second wife and children in Lafia, on Thursdays and Fridays of
every week.
Required:
Determine the tax authority to which Mr. Dum would be liable to tax in a year of assessment.
3. Explain the following terms:
Resident individual
Non-resident individual
Residence and nationality
Place of residence
Principal place of residence
Suggested solutions to questions
The taxation of the income earned by Mr. Ali Zakari in Nigeria would be determined by the
period of his residence.
Under the Nigerian income tax laws, a person is deemed resident if he:
(a) Is domiciled in Nigeria;
(b) Sojourns in Nigeria for a period or periods in all amounting to 183 days or more in a 12
month period;
(c) Serves as a diplomat or diplomatic agent of Nigeria in a country other than Nigeria.

Based on the details provided, it can be established that in 2011, Mr. Ali Zakari stayed in
Nigeria for 178 days (i.e. 1/3/11 – 25/8/11).

Based on the rule of residence, Mr. Ali Zakari haven stayed for only 178 days, therefore,
he is not liable to Nigerian tax in 2011.

In 2012, Mr. Ali Zakari stayed in Nigeria 198 days (i.e. 15/1/12 – 31/7/12).
However, based on the current law, Mr. Ali Zakari is liable to Nigerian tax in 2012 after staying
in the country for more than 183 days.
2. Based on the above question, it is obvious that Mr. Dum has three places of residence that are
not within the same state, therefore, there would be the need to establish his principal place of
residence for tax.
Mr. Dum’s principal place of residence would be the place nearest to his place of employment
which in the case is Gwagwalada, FCT, Abuja.

3. (a) Resident individual:

An individual is regarded as resident in Nigeria in an assessment year if he:
(i) Sojourns in Nigeria for a period or periods in all amounting to 183 days or more in a
12 month period;
(ii) and Serves as a diplomat or diplomatic agent of Nigeria in a country other than
Nigeria.

(b)Non-resident individual:
A non-resident individual is a person who is not domiciled in Nigeria or who stays in Nigeria
for less than 183 days in a 12 month period but derives income or profit from Nigeria. A non-
resident individual becomes liable to tax in Nigeria from the day he commences to carry on
trade, business, vocation or profession in Nigeria.
In the case of employment income, he is liable to tax in Nigeria when he becomes a resident.
(c) Residence and nationality:
Residence should not be confused with nationality. The Nigerian tax laws attach
importance to residence and not nationality. Therefore, whether you are a citizen of
Nigeria or a citizen of another country the same standards apply to you as far as you are
resident in Nigeria. The same condition will also apply to an individual who is not
resident in Nigeria whether he is a Nigerian or a foreign national.

(d)Place of residence: Place of residence in relation to an individual, means a place

available for his domestic use in Nigeria on a relevant day, and does not include any
hotel, rest-house or other place at which he is temporarily lodging, unless no more
permanent place is available for his use on that day.
 (e) Principal place of residence: Principal place of residence in relation to an individual
with two or more places of residence on a relevant day, not being both within any one
territory means:
(i) In the case of an individual with no source of income other than a pension in Nigeria,
that place or those places in which he usually resides;
(ii) In the case of an individual who has a source of earned income other than a pension
in Nigeria, that place or those places which on a relevant day is nearest to his usual place
of work;
(iii) In the case of an individual who has a source or sources of unearned income in
Nigeria, that place or those places in which he usually resides.