Tax Borne by Employer: Accounting Guide for Businesses

Normally, when an employee’s salary is taxed before it reaches their bank account. But under a tax-borne arrangement, the employer pays the tax on top of the employee’s salary.

Example: Let’s say an employee earns RM100,000. Instead of taking out tax from their salary, the company will be the one who pays it to LHDN. While the employee happily brings home the full RM100,000.

This is often called a net-of-tax salary package, and it makes employee income look cleaner, but it makes the company’s costs bigger.

Why Do Employers Pay Income Tax on Behalf of Employees?

Employer-borne tax is a strategic tool to attract, retain, or deploy employees.

Based on our years of accounting firm experiences, businesses mainly use this tactic for talent acquisition purposes:

1. Attracting Top Talent

High-level professionals often care about net pay, not gross pay. If Malaysia’s tax looks higher than Singapore’s or Dubai’s, companies here sometimes agree to cover the tax so the offer stays competitive.

2. Fairness for Expats

When staff are sent overseas (or brought into Malaysia), tax equalisation policies are common. This means employees won’t lose out if the host country has higher taxes. The company steps in to even things out.

3. Smarter Salary Packages

Sometimes it’s cheaper to cover the tax than to bump up gross salary. For example, giving someone an RM18k raise to cover RM10k of net tax is inefficient. Just paying the tax directly can cost less overall.

Comparison: Normal Salary Tax vs. Tax Borne by Employer

How Does Gross-Up Work for Employer-Borne Tax?

When a business covers an employee’s income tax, LHDN treats that tax payment as an additional benefit. In other words, the amount paid on the employee’s behalf becomes part of their taxable income.

This creates a tax-on-tax effect, which is why the gross-up calculation is required.

Malaysia Individual Income Tax Rates (YA 2025)

Example: Employee with RM100,000 Salary

Let’s assume RM100,000 chargeable income.

Step 1: Tax on RM100,000 (normal situation)

0–5,000 @0% = RM0

5,001–20,000 @1% = RM150

20,001–35,000 @3% = RM450

35,001–50,000 @6% = RM900

50,001–70,000 @11% = RM2,200

70,001–100,000 @19% = RM5,700

Total tax = RM9,400.

Step 2: Employer Borne Tax – First Add-On

Because the company pays the employee’s tax, that payment is treated as a taxable perquisite and is added back into taxable income. 

For income above RM100,000 and up to RM400,000, the marginal rate is 25%. Let T be the final tax amount:

T = 9,400 + 25% × T ⇒ T = RM12,533.

So, instead of RM9,400, the employer pays about RM12,533 after gross-up. 

Why This Matters for Businesses

• In this RM100,000 example, gross-up increases the employer’s tax outlay by 33% 

• For senior executives or expatriates, the gross-up effect can substantially increase payroll budgets. 
• Most payroll software systems in Malaysia include a gross-up function. Still, finance and HR teams should understand the logic to avoid surprises in year-end reporting or when negotiating contracts.

How Accounts Teams Handle Employer-Borne Tax

When an employer takes on the employee’s tax liability, it is not simply a payroll adjustment. It creates additional accounting entries and compliance steps that must be handled correctly to avoid mismatches with LHDN.

Accounting Treatment

Employer-borne tax is treated as part of the employee’s remuneration, which means:

• Staff Costs (Expense): Recorded in the company’s profit and loss statement as an additional employment cost.
• Tax Payable (Liability): Booked on the balance sheet until the payment is remitted to LHDN.
• Disclosure: Reflected in the employee’s EA form and in the company’s annual employer filing, since the tax is considered taxable income.

In practice, this turns into a real cost to the business that goes beyond the employee’s base salary.

Compliance Requirements in Malaysia

Beyond the accounting entries, businesses must meet specific payroll and tax compliance obligations:

• PCB/MTD: If the employer bears tax, PCB should reflect the higher taxable amount during the year so monthly deductions align with the grossed-up income.
• EA & Form E: Employer-borne tax is taxable perquisite and should be included in the employee’s EA (issued by end-February) and the employer’s annual Form E reporting.
• Tax clearance (CP forms): For inbound/outbound or cessation cases, ensure the remuneration reported in CP21/CP22/CP22A/CP22B reflects any employer-borne tax so clearances aren’t delayed.

Read more: Contract of Service vs Contract for Service in Malaysia Explained

Risks and Costs Businesses Need to Watch Out For

Covering employee taxes may look like a smart benefit on paper, but in practice it can introduce significant financial and compliance risks. Employers should be aware of the following challenges:

1. Bigger Payroll Costs

Employer-borne tax almost always costs more than the initial estimate.

• Once gross-up is applied, the company is not just paying the first tax bill but also the tax on that tax.
• In our RM100,000 example, gross-up raises the employer’s tax cost by 33%/
• Without proper planning, budgets for senior hires or expatriates can easily be exceeded.

2. Bracket Surprises

Adding employer-borne tax to income can change the employee’s position in Malaysia’s progressive tax brackets.

• A package that starts in a mid-tier bracket can quickly spill over into a higher one.
• This means the company bears not only more tax, but also a higher effective rate on part of the income.
• Employers that don’t model this risk upfront may find themselves with unexpected liabilities.

3. Reporting and Compliance Errors

If the tax borne is not disclosed properly, the business risks issues with the LHDN.

• Under-reporting can trigger penalties, interest, and back-tax assessments.
• Discrepancies between the company’s filings and the employee’s personal return can delay tax clearance for expatriates.
• The extra tax must be reflected in EA forms, Form E, and PCB deductions to stay compliant.

4. Ambiguity in Contracts

Unclear wording in contracts is one of the most common sources of disputes.

• If the contract does not spell out whether the company is covering all tax or only the excess under equalisation, disagreements can arise.
• For international assignments, ambiguity can lead to double coverage or missed obligations across jurisdictions.
• Clear clauses on “who bears what” protect both the employer and the employee.

Employer-Borne Tax in: Balancing Talent and Compliance

Covering employee taxes can be a smart strategy to attract talent and manage international mobility, but it’s also a serious financial and compliance commitment.

Businesses that adopt this approach must:

• Understand how gross-up works (tax on tax effect)
• Record the additional cost correctly in accounting systems
• Stay on top of LHDN / regulatory requirements

Instead of managing these layers internally, why not outsource to us at Accounting.my? We offer accounting services that include compliance, reporting, and payroll accuracy so you can focus on growing your business.

With over 13 years of experience,  we can handle the headache of compliance, while you continue to focus on your business.