Marco Pasqualin leads Global Payroll at Boundless and has learned the ropes of payroll operations over the past 13 years working for the likes of Apple and Aldi. He has picked up unique insights on the complexity of global multi-country payroll, juggling dozens of inputs to produce correct payslips and compliance with local rules and laws. He shares the steps to set up international payroll in this post.
In the first post of this series, we explained what the differences are between benefits that are part of the salary (such as extra vacation days or additional parental leave) and benefits in kind or fringe benefits (private health insurance, pension contributions or book reimbursements) for payroll purposes. We looked into different categories of benefits in kind and offered our humble opinion on the perks most valuable to your employees.
In this post, we get into the nitty-gritty of what is arguably the trickier part of benefits in kind – how employees are taxed on — or exempted of — them depending on jurisdictions, and how to file them accurately for your employees. As you will discover below, the differences can sometimes be quite significant.
Conditions for taxing Benefits in Kind
Since benefits in kind have monetary value, they are treated as taxable income on most occasions, and employees need to pay taxes on them just as they do on their salaries. While most countries will treat what constitutes a benefit in kind similarly, the conditions under which they are taxed varies significantly from country to country. In most cases, the full or partial monetary value of the benefit in kind is “added” to the salary, and the total is taxed according to local employment tax laws.
In Ireland for example, an employer must deduct Income Tax, Pay Related Social Insurance (PRSI) and Universal Social Charge (USC) from an employee’s pay on the value of a benefit through Pay As You Earn (PAYE) system for collecting taxes. If the beneficiary of a benefit in kind such as health insurance policy is an employee’s husband, wife, civil partner, family member, or dependent, the employee still needs to pay a tax on the benefit, unless it’s exempt. (For an overview of all benefits in Ireland, download this infographic.)
However, there are many differences country by country, and it’s essential for the people responsible for employee payroll to very carefully study the local employment and tax law.
Notable employee tax exemption for benefits in kind
Many countries have exemptions in some instances for the tax that employees pay for the monetary value of benefits in kind they receive.
- In Australia and New Zealand, the Fringe Benefits Tax (FBT) is paid by the employer and not by the employee, therefore, fringe benefits do not have a direct impact on employee’s income tax or Medicare levy liability.
- In Italy benefits in kind are tax exempt for up to €258.23 per year, regardless of what the perks are.
- In Ireland, employees are exempted from paying tax on one-off benefits in kind that are up to €500 per year.
There are specific tax exemptions for certain benefits in kind that we will get to in more detail below.
Is there a way not to tax employees on the benefits in kind?
We are often asked if, when the local legislation doesn’t offer any substantial tax exemption, there is a way to spare employees from having to sacrifice parts of their salary over receiving a benefit. While we understand why someone would ask this question, the law requires that benefits in kind are taxed in all countries.
However, there is a mechanism called a “gross-up”, which is available in many countries, through which the company covers the tax instead of the employee. It’s applied by taking the value of the benefit in kind, calculating the impact it will have on the net pay, and adding it to the salary of the employee to cover the difference.
Let me explain with an example: my company pays for my annual gym subscription, which costs €600. In my country of residence, this benefit in kind is fully taxable, which means that my taxable income has to increase by €600. To gross-up this amount, my employer would need to:
- Calculate how much the net payment without including the €600 notional amount in the payslip would have been;
- Recalculate the payslip, including the value of my gym membership;
- Add the amount of tax I would be charged for the €600 to my gross salary (i.e. by using a bonus wage-type).
This way, after my usual monthly tax charges and the additional one for the fringe benefit, are subtracted, I would get the same net pay I usually have. Thankfully, payroll software helps in this calculation.
Even if an employer is doing a gross-up, they still need to indicate the benefit on the employee payslip, to be compliant.
How to ensure compliance about benefit in kind tax
It’s important to understand that if a benefit is taxable, it has to be indicated in the payslip, regardless if the tax is grossed-up by the employer or the employee is exempt. Failing to do so may be seen as a way to avoid taxation (an exception is for trivial benefits in kind, which we cover below) in some jurisdictions.
To be compliant, keep detailed backup documentation of all of the employee related expenses. This way, you will be able to provide an adequate response in case of an audit, even if these expenses do not represent a taxable benefit in kind. As an employer, you should be able to demonstrate every work-related sum, service or good you provide to the employee. It’s the employer’s responsibility to then file the tax with the relevant tax authority within the given period.
There are some instances where including the amount of the benefit in kind in the payslip is not enough. In the UK, for example, employers need to present to HM Revenue & Customs (HMRC) a declaration with details of any benefits in kind given to each employee through the P11Db form, which lists the benefits and expenses eligible to pay the Class 1A National Insurance Contributions for the relevant tax year. The HMRC then calculates the Class 1A NIC contributions that the employer needs to bear on these amounts.
In instances where employers pay the taxes on behalf of the employee, the benefits and the grossed-up amount need to be included in both the employee’s payslip and tax return, as they have an impact on certain tax offsets eligibility (full list here). The employer files an annual FBT return to the Australian Taxation Office. (In response to the COVID-19 crisis, the due date to lodge 2020 FBT return and pay any associated liability for self-preparers and tax agent paper lodgings has been deferred from 21 May 2020 to 25 June 2020).
Below we look more specifically at how the benefits in kind we suggested you should offer in our previous article are treated differently based on the jurisdiction.
Benefit-specific regulations and tax exemptions
Private Pension and Health Insurance
Private healthcare and pension contributions are benefits in kind that employees often come to expect. The amount that a company contributes to an employee’s pension plan or healthcare plan is treated as income. However, when it comes to private pension contributions, they are often either not taxed at all or taxed after a certain amount.
- In Italy, the first €5,164.57 per year pension contribution (employee and employer combined) are tax-free
- In Canada, employees have a tax exemption on the contribution (employee+employer combined) to a Registered Retirement Saving Plan (RRSP) for up to 18% of their previous year’s income.
There are also regulations on the minimum that an employer should contribute to the private pension scheme.
- In Switzerland, the pension contributions could vary between 7% and 18% from eligible earnings, depending on the company scheme and the employee age. Employers need to contribute at least the equivalent amount as the employee.
- In the UK, the minimum amount an employer needs to pay into the employee’s company pension scheme for 2020 is 3% of eligible earnings.
Health insurance contributions, on the other hand, are generally taxed on the cost the employer pays to the provider.
Everyone needs to keep learning and to get better at what they do. Curious minds need lifelong learning to stay engaged and interested. That’s why educational perks are essential, and the good news is that for that very reason most of them are tax-exempt in most countries as long as they:
- directly link with the job a person is doing,
- Help facilitate a work that is needed in the company
- are directly connected to the business of the company.
This applies to countries such as Spain, Italy, Ireland, and Singapore. If a course doesn’t fulfil any of the above, then it will be subject to benefit in kind employee tax.
I will give you an example to help illustrate: If I request to go to a Tiramisu making class and Boundless pays for it, I will have to pay tax on the course. Even if I go and teach the rest of the team how to make tiramisu (I did 🍰), it still isn’t part of the core of what Boundless does. However, if I attend a coding class, even though engineering isn’t something required for my role as a Global Payroll Manager, as software development is a core activity for Boundless to build the company’s web-based platform, this training would be deemed tax-exempt.
A notable exception to the above rule exists in the US, where all training up to $5,250 per year on any education assistance program paid by the employer is tax-exempt.
In the case of a book reimbursement program, such as the one we illustrated in our article about how Shopify succeeds as a remote company, they are tax-free. That is because books are viewed as business-related educational support.
If, for some reason, the book isn’t business-related, it could be classified instead as a gift (for Christmas or other specific events). As such, it falls under different rules, such as the UK’s Trivial Benefit in Kind. According to that classification, a benefit in kind is considered ‘trivial’ and is not taxed if the following are true:
- It’s less than £50 in value
- not cash or a cash voucher (e.g. a gift card that can be used as cash)
- not a reward or bonus for doing well in the job
- not part of the employment contract
- not a ‘salary sacrifice.’
A salary sacrifice agreement is used mainly for pension contributions but also for the Cycle-to-Work schemes in countries such as Ireland and the UK. The way it works is that:
- The employee selects a service or a good (pension or bike)
- The employer pays the provider
- The employer then deducts the amount paid to the provider (pension, bike shop, etc.) from the employee’s GROSS salary.
- The employee is taxed less because of the lower taxable income.
Discounts for company products and services
Many companies offer discounts to employees for their products and services. In some countries, an employee availing of those discounts has to pay benefit in kind tax on them. In others, they don’t.
One thing that determines whether a particular discount is tax-deductible or not is whether the price that an employee pays after the discount is equal to, or higher than, the cost of production/service that they are purchasing. If it is, the employee does not have to pay tax on the discount, as is the case in the UK.
Another thing that will determine whether a discount as a benefit in kind is exempt from taxation is whether the discounts are available only to employees or whether they are extended to customers as well. If they are, then employees do not need to pay taxes.
- In Singapore, a staff discount is not taxable if the value of the goods or service does not exceed $500 and the staff discount scheme is available to all employees. If, however, the staff discount scheme is open to a small group of employees or if the value of the item of goods or service exceeds $500, the whole amount of staff discount is taxable.
- German law stipulates that staff discounts are tax-free for a sum of up to €1,080. That sum is calculated by taking the market price of the good (or service offered) and subtracting from it 4% of the market price as well as the price paid by the employee. Discounts which employers grant to both employees and external third parties are not considered taxable work wage of employees.
Fully catered lunch is becoming more and more a benefit in kind that companies offer as an office perk. Before that, they usually gave out meal tickets for restaurants. When it comes to those, many countries have regulations around the tax-exempt amount. This is how the most current legislation for both catered lunch and meal vouchers stand in several countries:
- In Ireland, if the free catered lunch in a canteen is available to all employees, it is not considered a taxable benefit. However, if it is provided to only part of the staff, catered lunch is seen as a taxable benefit. Meal vouchers are taxable for their full value.
- In the UK, if free catered lunch in a canteen or vouchers that cover that cost are available to all employees, this is not considered a taxable benefit. If the meals or vouchers fall under a salary sacrifice or flexible remuneration arrangements, these won´t be exempt.
- In Denmark, all food and accommodation that an employee receives from their employer are subject to tax, unless they are provided during travel or in connection with a temporary workplace. Coffee, tea, free fruit schemes and canteen contributions are tax-exempt up to DKK 3,412.50 per month (in 2020).
- In Spain, meal vouchers or meals in a company canteen are exempt up to €11 per day. The exceeding part is taxable.
- In Italy, catered lunch in a canteen is always exempt when offered to all employees. Meal vouchers or meal allowance are exempt for up to €4 (€8 if the coupon is lodged on a card and it’s not in cash).
If you are offering catering lunch for co-located employees but also have people working remotely, you will want to provide something for them, so they feel equally valued. The best solution that will have the least impact on their taxes (according to the regulations of each country, as shown above) will be to offer them meal vouchers for certain restaurants. Alternatives could be meal allowances (generally taxable) or expense reimbursement/per diem. Those options, however, represent a compliance risk in many countries.
Share-based compensation plans
Share-based compensation (whether through access to shares or stock options) may represent a benefit in kind and therefore have tax implications if a company offers them out for free or at a reduced price. That could be done through either Employee Share Options Plans (ESOPs), Employee’s Shares Purchase Plans (ESPP), or Restricted Stock Units (RSUs).
As we mentioned in our previous article on benefits in kind, shares are among the most sought after benefits by employees. Similarly to discounts, in most cases it is the difference between the price the employee is given and the market value that needs to be added to their gross pay and income tax paid.
Share-based compensation plans are a very complex area when it comes to taxation in different jurisdictions. We will be covering the topic more extensively in future articles.
We hope this article has given you a great foundational understanding of benefits in kind tax and how to think about it in a distributed team setting. The entire lifecycle of putting them in place for your employees is complicated, as you will need to procure suppliers for these benefits, and account for them on your employees’ payroll, month in and month out.
Ensuring compliance in terms of the correct application of taxes on these benefits according to the regulation of your employees’ home countries is essential. As you saw, there are handy mechanisms that minimise the impact of the taxable benefits on your employees’ paychecks (hint: gross-up). Handling benefit packages can require a lot of administration, but the upside of ensuring a happy, healthy, loyal workforce makes this an area worth investing in.
If you do not want to burden yourself with all the necessary work, an Employer of Record such as Boundless would be able to help you for the countries where you operate. We currently can support your employees in Ireland, the UK, Portugal, Denmark, and Australia and are adding more countries all the time. You can read more details and get started here.
The making available of information to you on this site by Boundless shall not create a legal, confidential or other relationship between you and Boundless and does not constitute the provision of legal, tax, commercial or other professional advice by Boundless. You acknowledge and agree that any information on this site has not been prepared with your specific circumstances in mind, may not be suitable for use in your business, and does not constitute advice intended for reliance. You assume all risk and liability that may result from any such reliance on the information and you should seek independent advice from a lawyer or tax professional in the relevant jurisdiction(s) before doing so.