What if your boss says your “tax borne by employer”? It means: Company will pay for your employment taxes.
Usually, you will see this tax appearing in your payslip under the heading of “tax borne by employer”. Payroll staff will sometimes list the item together under the title of perquisites.
In a specialised tax term, “Perquisite” refers to perks you received from the company, whether in cash or non-cash. In cash would include things like petrol allowances, meal allowances, parking allowances, and bank loan interest subsidies (yup, some companies do subsidies interest; that’s a standard perk for bank employees).
Non-cash (or more professionally known as “benefits in kind”), will include things like a hostel, car, semi-furnished apartment, driver, and gardeners.
Tax is borne by the employer
Employment taxes are usually deducted from an employee’s salary every month. It is known as Scheduler Tax Deduction (STD) or Potongan Cukai Bulanan (PCB in malay).
When you receive the perk of “tax is borne by employer”, your tax will be paid entirely by your employer. It usually causes great confusion when you receive your salary slip to see this tax in your payslip. It is crucial to understand how this works.
Here’s how the “tax borne by employer” mechanism works
Malaysia’s government will tax you on the perks you receive from your employer. “Tax borne by an employer” is a form of such perks.
So it will need to go through the following tax mechanism. Say we are looking at a salary of RM10,000. Assuming the tax is 20%, your employment tax will be RM10,000 x 20% = RM2,000. The story doesn’t just end here.
Since you should have paid the tax, but now your employer is paying them for you, it is a perk you enjoy. So you will need to be taxed on the tax borne by the employer. So the RM2,000 (the tax) will need to be taxed at 20%. RM 2,000 x 20% = RM 400.
So the total tax is RM 2,000 + Rm 400 = RM2,400.
If you want to read more on this area, the public ruling issues by Lembaga Hasil (Public ruling No. 2/2006) would be an excellent place to start.