When hiring senior executives, highly skilled professionals, or expatriates, compensation packages often include more than just salary. In many cases, companies agree to pay the employee’s income tax on their behalf — a practice known as “cukai ditanggung oleh majikan” (employer-borne tax).

While this may seem like a straightforward benefit, the impact on payroll, HR documentation, and LHDN reporting is far more complex than it appears — especially after the latest guideline updates for Year of Assessment (YA) 2024.

This guide explains what employer-borne tax means, how the new rules affect employers, and the best practices HR teams must follow to stay compliant.

What Is “Cukai Ditanggung oleh Majikan”?

“Cukai ditanggung oleh majikan” refers to a situation where the company pays the employee’s personal income tax instead of the employee paying it themselves.

This benefit is commonly offered in cases such as:

• Expatriate or foreign talent who require tax equalisation

• C-level executives or top management

• Strategic hires where compensation needs to remain competitive

• Internal transfers between subsidiaries across different tax jurisdictions

Although useful from a talent acquisition standpoint, this practice comes with strict reporting requirements.

Tax Treatment: It Is Considered a Benefit-in-Kind (BIK)

When the employer pays the employee’s tax, LHDN treats that amount as taxable income for the employee.
This means:

• The tax paid increases the employee’s gross income

• It must be accurately recorded in payroll

• It must be declared to LHDN through EA and E forms

This benefit is not invisible or tax-free — it is trackable and fully taxable.

Latest LHDN Guideline (Effective YA 2024)

Starting YA 2024, LHDN has introduced stricter rules regarding employer-borne taxes. Employers must now ensure the following:

1. Employer-paid tax is treated as part of the employee’s gross income

The amount of tax you cover increases the employee’s taxable remuneration under Section 13(1)(a).

2. Gross-up calculation is compulsory

You must calculate the tax on the tax you are paying, creating a compounded figure.
This “grossing-up” formula is mandatory and must be done accurately to avoid penalties.

3. Clear reporting is required in EA Form and Form E

Employers must declare:

• The total employer-paid tax amount

• The grossed-up taxable value

• The correct income classification

Incorrect reporting may trigger audits, discrepancies, or fines.

Why this matters

Paying an employee’s tax is no longer just a simple benefit — it directly affects:

• Payroll cost

• Employee taxable income

• Company declarations to LHDN

• Future-year tax exposure

Impact on Employers and HR

Offering employer-borne tax can be highly attractive, but it comes with substantial administrative responsibilities.

1. Higher Payroll Costs

You are not only covering the employee’s income tax — you are also paying the additional tax created after gross-up.
This causes the total compensation package to increase significantly.

2. More Complicated Payroll Calculations

The gross-up method involves circular calculations.
Any mistake can lead to:

• Underpayment or overpayment of tax

• Incorrect PCB

• Mismatches between EA, E forms, and CP8D

• Penalties from LHDN

HR must ensure every calculation is accurate and well-documented.

3. Higher Compliance Risk

LHDN requires precise reporting.
Errors can result in:

• Audits

• Fines

• Reconciliation delays, especially when employees resign or leave Malaysia

• Disputes on taxable benefits

4. Employment Contracts Must Be Clear

HR should update:

• Offer letters

• Compensation structures

• Assignment letters (for expatriates)

• Corporate policies

These documents must specify:

• Whether tax is fully or partially covered

• Whether equalisation rules apply

• How gross-up is handled

Clarity prevents disputes and ensures aligned expectations.

When Employers Usually Cover Employee Taxes

Employer-borne tax is typically offered to:

1. Expatriates

Many expatriates expect tax equalisation, ensuring their net pay remains consistent regardless of country.

2. C-Level Executives / Senior Management

Companies use tax-paid packages to attract and retain top leadership without inflating the base salary.

3. Specific Incentive Programs

Such as:

• Retention bonuses

• Project-based allowances

• Inter-company transfers across jurisdictions

This ensures competitiveness and fairness in cross-border compensation.

Best Practices for Employers

If your company offers tax-paid benefits, HR and payroll teams should follow these practices:

1. Update Employment Contracts

Clearly state:

• Whether tax is borne by the company

• The scope (full or partial)

• Applicability for expatriates or top management

• Gross-up responsibilities

2. Use the Correct Gross-Up Formula

Gross-up calculations are complex. Many companies rely on:

• In-house payroll software

• Tax advisors

• Automated gross-up calculators

Accuracy is essential to avoid future penalties.

3. Ensure Payroll Systems Can Handle Employer-Borne Tax

A proper HRMS like Pandahrms helps ensure:

• Correct classification of employer-paid tax

• Automatic gross-up calculations

• Accurate EA & Form E reporting

• Audit-ready documentation

4. Educate Employees

Employees must understand:

• This benefit increases their taxable income

• Their CP500/CP204 installments may change

• Their tax filing obligations if they leave Malaysia

Transparent communication prevents disputes.

FAQs: Employer-Borne Tax in Malaysia

1. What should employers consider before offering employer-paid tax?

You must understand that:

• It increases the employee’s gross income

• Payroll cost will increase due to gross-up

• It affects both employer and employee tax filings

2. How should HR report employer-paid tax in Form EA and Form E?

It must be declared as income under Section 13(1)(a) of the Income Tax Act, reflecting the full grossed-up amount.

3. Can employer-borne taxes be offered only to certain employee levels?

Yes.
It is commonly provided only to:

• Expatriates

• C-suite roles

• Key specialists

Just ensure this is clearly stated in the employment contract.

How Pandahrms Helps Employers Stay Compliant

Pandahrms simplifies complex benefits like employer-borne tax by providing:

• Accurate gross-up calculations

• Automated EA & Form E generation

• Payroll categories for BIK and perquisites

• Error-free monthly PCB deductions

• Audit-ready records for 7 years

• Seamless reporting for expatriate payroll

With Pandahrms, HR teams avoid manual errors, reduce compliance risks, and ensure full alignment with LHDN’s YA 2024 requirements.