Employer-borne tax in Malaysia sounds complex at first, but once you break it down, it becomes much easier to understand. If you run a business or manage payroll, this topic matters more than you think.
Many employers choose to bear part or all of an employee’s tax to stay competitive, attract talent, or simplify compensation packages. Think of it like picking up the bill at dinner—it’s still a cost, but it builds goodwill and clarity. This guide walks you through everything step by step, without jargon or confusion.
Understanding Employer-Borne Tax in Simple Words
In plain English, employer-borne tax means the employer pays the income tax on behalf of the employee. Instead of deducting tax from the employee’s salary, the company absorbs that cost. From the employee’s point of view, their take-home pay looks clean and predictable. From the employer’s side, it becomes an additional employment cost that must be calculated and reported correctly.
This approach is common for senior management, expatriates, or special compensation agreements. It’s not mandatory, but when used wisely, it can be a smart business decision.
What Is Tax Borne by Employer and Why It Exists
Many business owners ask, what is tax borne by employer and why would anyone do this voluntarily? The answer is simple. It exists to give flexibility in compensation structures. Some roles require net salary guarantees, meaning the employee receives a fixed amount after tax. In such cases, the employer bears the tax so the promise stays intact regardless of tax rates.
It also helps companies stand out in competitive hiring markets. Offering tax-borne salaries feels like a premium benefit, even though it’s essentially a financial calculation behind the scenes.
Legal Background of Employer-Borne Tax in Malaysia
In Malaysia, employer-borne tax is governed under the Income Tax Act 1967 and regulated by LHDN (Lembaga Hasil Dalam Negeri). The law allows employers to bear employees’ tax, but it treats the tax paid by the employer as part of the employee’s taxable income. This is where many businesses get confused.
The tax paid becomes a “benefit in kind,” which increases the employee’s gross income. That increase then affects the total tax payable, creating a gross-up effect that must be calculated carefully.
When Employers Choose to Bear Employee Tax
Not every employee will have tax borne by the employer. Usually, this arrangement is used in specific situations. Companies often apply it to expatriates who expect a net salary, executives with contractual guarantees, or short-term project staff where simplicity is key.
Some startups also use this strategy to attract top talent without raising headline salary numbers. It’s like offering free shipping instead of lowering the product price—it feels better to the receiver.
Types of Income Covered Under Employer-Borne Tax
Employer-borne tax typically applies to employment income such as basic salary, bonuses, allowances, and incentives. It can also extend to benefits like housing allowances, relocation packages, or special awards.
However, not all benefits are treated equally. Certain exemptions and thresholds still apply under Malaysian tax law. Employers must know exactly which income components are included to avoid underreporting or overpaying.
How Employer-Borne Tax Is Calculated
This is the heart of the process and where accuracy matters most. When an employer bears tax, the tax itself becomes taxable income. This creates a loop where tax is charged on tax. To solve this, employers use a gross-up formula.
In simple terms, you calculate the employee’s tax as if the employer didn’t bear it, then adjust the income upward until the tax paid by the employer fully covers the employee’s liability. Payroll software usually handles this automatically, but understanding the logic helps you spot errors early.
Step-by-Step Process to Apply Employer-Borne Tax
First, agree clearly in writing that the employer will bear the tax. This is usually stated in the employment contract or offer letter. Second, determine which income components are covered. Third, calculate the grossed-up income using the applicable tax rates.
Next, process payroll with the tax shown as employer-paid, not deducted from salary. Finally, report the correct figures in the employee’s EA Form and submit accurate data to LHDN. Skipping any of these steps is like building a house without measuring—it may stand for a while, but problems will appear.
Employer-Borne Tax vs Normal Employee Tax
Under normal tax arrangements, the employee pays tax through monthly PCB deductions. The employer simply withholds and remits it. With employer-borne tax, the responsibility shifts financially, but not legally. The income is still the employee’s, and reporting obligations remain strict.
The key difference is cost and complexity. Employer-borne tax increases employment costs and requires careful calculations, while normal tax is simpler but less attractive as a benefit.
Reporting Employer-Borne Tax to LHDN
Reporting is non-negotiable. Employer-borne tax must be declared as part of the employee’s gross income in the EA Form. LHDN expects transparency, and mismatches between PCB records and EA Forms can trigger audits.
Good record-keeping is essential. Keep payroll reports, tax calculations, and contracts ready. Think of it as keeping receipts for a big purchase—you may not need them today, but you’ll be glad you have them tomorrow.
Common Mistakes Businesses Make
One common mistake is forgetting to gross up the income properly. Another is assuming employer-paid tax is not taxable. Some employers also fail to update payroll systems or misunderstand exemption rules.
These errors can lead to penalties, back taxes, and damaged trust with employees. Avoiding them is less about advanced knowledge and more about careful attention to detail.
Impact on Payroll and Cash Flow
Employer-borne tax affects cash flow because the company pays more upfront. Monthly payroll costs increase, and budgeting must account for tax fluctuations. However, when planned properly, this impact is predictable.
Smart businesses treat employer-borne tax as part of total compensation cost, not an unexpected expense. This mindset helps maintain financial stability.
Tax Planning Benefits for Employers
When used strategically, employer-borne tax can support tax planning. It allows businesses to design attractive packages without constantly renegotiating salaries. It also simplifies net pay promises and reduces employee confusion about deductions.
For companies scaling quickly, this clarity can save time, reduce disputes, and improve retention.
Compliance Tips to Avoid Penalties
Always document agreements, update payroll systems, and review tax calculations annually. Stay updated with LHDN guidelines, as tax rules evolve. When in doubt, consult professionals rather than guessing.
Compliance is like seatbelts—you may not notice them daily, but they protect you when something goes wrong.
Role of Professional Support and Expert SEO Team
Handling employer-borne tax isn’t just about payroll; it’s also about communicating policies clearly. Many businesses rely on consultants for tax compliance and an expert SEO team to explain these benefits transparently on their websites.
Clear content builds trust with employees and stakeholders, while accurate tax handling keeps regulators satisfied. When both work together, businesses operate smoothly and confidently.
Conclusion
Employer-borne tax in Malaysia doesn’t have to be confusing. Once you understand the concept, calculations, and reporting steps, it becomes a powerful tool in your compensation strategy. By planning carefully, documenting clearly, and staying compliant, businesses can use employer-borne tax to attract talent, simplify payroll, and avoid costly mistakes. Like any good tool, its value depends on how well you use it.
FAQs
Is employer-borne tax mandatory in Malaysia?
No, it is optional. Employers choose it as part of a compensation strategy, not because the law requires it.
Does employer-borne tax increase total tax payable?
Yes, because the tax paid by the employer is treated as taxable income, leading to a gross-up effect.
Can small businesses use employer-borne tax?
Yes, as long as they understand the cost and comply with reporting rules, small businesses can use it effectively.
Is employer-borne tax reported in the EA Form?
Yes, it must be included as part of the employee’s gross income in the EA Form submitted to LHDN.
Should employers get professional help for employer-borne tax?
Absolutely. Professional advice helps avoid errors, penalties, and misunderstandings, especially as tax rules change.
