Tax Borne by Employers: What is it and How to Calculate

In some cases, employers choose to cover the income tax liability of their employees as part of a competitive compensation package.

While this can be an attractive benefit for employees, it also has tax implications for both parties.

In this article, we’ll explore what tax borne by the employer means, how it is treated under Malaysian tax laws, and what happens when only part of the employee’s tax is covered by the employer.

We’ll also provide examples to help you compute tax-on-tax effectively, ensuring that you stay compliant while managing employee benefits efficiently.

What is Tax Borne by Employers?

When hiring employees in Malaysia, employers must consider various costs, including salaries, benefits, and taxes.

One such tax obligation that often raises questions is the "tax borne by employer."

Simply put, tax borne by employers means that the company takes responsibility for paying part or all of an employee’s income tax on their behalf.

Instead of deducting the tax from the employee’s salary, the employer absorbs this cost, making it a part of the employee’s compensation package.

This practice is common in cases where companies want to attract and retain high-level talent or provide additional perks to employees.

What is the Tax Treatment of Tax Paid by Employers?

If an employer pays an employee’s income tax for a specific year, that amount is considered part of the employee’s income for the next year.

This means the tax paid by the employer will also be taxed.

Example:

Year of Assessment (YA)	YA 2022	YA 2023	YA 2024
Chargeable Income (RM 5,000/month x 12 months)	60,000	60,000	60,000
Add: Tax Paid by Employer	–	2,300	3,000
Total Income	60,000	62,300	63,000
Tax Payable (First RM 60,000)	2,300	2,300	2,300
Next @ 8%	–	184	240
Total Tax Payable	2,300	2,484	2,540

If the employer pays the RM 2,300 tax in YA 2022, it will be considered part of the employee’s income in YA 2023 and taxed accordingly.

The tax-on-tax effect means employees pay tax on both their salary and the tax covered by the employer.

Please see detail of calculation on Public Ruling No. 3/2024

How to Calculate Tax Borne by Employers

Example 1: Tax is Fully Borne by Employer

When the employer fully covers the employee’s tax, this benefit is treated as taxable income.

Scenario:

Employee works for Company A from 1 Jan 2023 to 31 Dec 2023.
YA 2024 tax is fully borne by Company A.
Salary: RM60,000 (RM5,000 per month)
No other sources of income
Total personal reliefs: RM8,000

Tax Allowance Computation:

Calculation	Amount (RM)
Employment Income	60,000.00
Less: Personal Reliefs	(8,000.00)
Notional Chargeable Income	52,000.00
Tax on first RM35,000	600.00
Tax on next RM17,000 @ 8%	1,360.00
Notional Tax Payable	1,960.00

Tax-on-Tax Calculation:

Calculation	Amount (RM)
RM1,960 x [0.08/(1-0.08)]	170.43
Tax Allowance	2,130.43

Final Tax Computation:

Calculation	Amount (RM)
Employment Income	60,000.00
Tax Allowance	2,130.43
Total Income	62,130.43
Less: Personal Reliefs	(8,000.00)
Chargeable Income	54,130.43
Tax on first RM35,000	600.00
Tax on next RM19,130.43 @ 8%	1,530.43
Total Tax Payable	2,130.43

Company A will fully bear the employee’s RM2,130.43 tax liability.

Example 2(a): Tax is Partially Borne by Employer – An Amount of Income for Which Tax is Borne by Employer

Partial tax borne by employer either refers to:

(a) an amount of income for which tax is borne by employer, where the tax is calculated based on an aggregate basis i.e. notional tax × income for which tax is borne by employer / total income; or

(b) a fixed amount of tax is borne by the employee based on an employer-employee agreement, and any remaining tax is borne by the employer. The benefit derived from the tax borne by the employer is taxed as employment income.

Scenario:

Employee works for Company A from 1 Jan 2021 to 31 Dec 2021. YA 2022 tax on allowance of RM10,000 is borne by Company A.

Salary: RM60,000
Allowance: RM10,000
No other sources of income
Total personal reliefs: RM7,000

Tax Allowance Computation:

Calculation	Amount (RM)
Salary	60,000.00
Allowance - Tax Borne by Employer	10,000.00
Total Income	70,000.00
Less: Personal Reliefs	(7,000.00)
Notional Chargeable Income	63,000.00
Tax on first RM50,000	1,800.00
Tax on next RM13,000 @ 8%	1,040.00
Notional Tax Payable	2,840.00
Notional Tax Borne by Employer to Regross: RM2,840 × (RM10,000 / RM70,000)	405.71
Tax-on-Tax on Allowance: RM405.71 × [0.08/(1-0.08)]	35.27
Tax Allowance	440.98

Final Tax Computation:

Calculation	Amount (RM)
Salary	60,000.00
Allowance	10,000.00
Tax Allowance	440.98
Total Income	70,440.98
Less: Personal Reliefs	(7,000.00)
Chargeable Income	63,440.98
Tax on first RM50,000	1,800.00
Tax on next RM13,440.98 @ 8%	1,075.28
Total Tax Payable	2,875.28

The employee’s income tax of RM440.98 will be borne by Company A, while the remaining tax payable of RM2,434.30 (RM2,875.28 - RM440.98) will be borne by the employee.

Example 2(b): Tax is Partially Borne by Employer

A fixed amount of tax is borne by the employee, and the remaining tax is covered by the employer.

The employee was employed by Company A from 1 Jan 2021 to 31 Dec 2021.

For the Year of Assessment (YA) 2022, a private arrangement has been agreed upon where the tax borne by the employee will be RM3,000, while the remaining tax is borne by the employer:

Salary: RM60,000
No other sources of income
Total personal reliefs: RM7,000

Tax Allowance Computation

Description	Amount (RM)
Employment Income	60,000.00
Less: Personal Reliefs	-7,000.00
Notional Chargeable Income	53,000.00
Tax on first RM35,000	600.00
Tax on next RM18,000 @ 8%	1,440.00
Notional Tax Payable	2,040.00
Tax Borne by Employee based on Private Agreement	-3,000.00
Notional Tax Borne by Employer to Regross	0.00 (since tax owed is less than RM3,000)

Since the tax payable is lower than the RM3,000 borne by the employee, the employer does not need to bear any tax on behalf of the employee.

FAQs

1. What is the meaning of "borne" in tax?

The term "borne" in tax means that the responsibility for paying the tax falls on a particular party. If a tax is "borne by the employer," it means the employer pays it on behalf of the employee.

2. What does tax borne by the employer mean in Malaysia?

In Malaysia, tax borne by the employer refers to a situation where the company pays for an employee’s income tax instead of deducting it from their salary. This amount is considered part of the employee’s taxable income.

By ensuring compliance and proper tax planning, employers can optimize their tax strategies while maintaining a competitive compensation package for their employees.

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