Can a company pay a net salary?

Question

I have been approached by a start-up which said that the monthly salary I would earn is a net salary, with no taxes to report on my side, because all taxes are paid and reported by the company.

A company must pay company taxes, but can a company enter into the personal taxes domain and provide tax-free money? I'm not speaking about not paying taxes, but shifting the tax burden from the worker to the company, so that the employee doesn't ever need to report any income at all from this employer.

Legislation is Singapore but it would be interesting to know whether this is possible in any other jurisdiction.

Answer 1

In Singapore, this is sufficiently common that the Singapore IRS has a page on their website dedicated to informing employers of how to properly pay this under Responsibilites of an Employer.

Specifically, tax paid by employer is taxable income for the employee (as it's really the employee's responsibility), so they must pay tax for that tax. A tax-on-tax is computed for the tax paid, which also would be owed by the employer if they were paying the full tax rate for the employee.

As a clarification, this is not the employer being truly responsible for the employee's income; this is the employer compensating the employee further to offset their taxable income. This is effectively a fringe benefit, although it may be particularly useful in countries where either tax evasion is common (and thus an employer must compete with employers willing to pay under the table) or where employers are competing with others in nearby countries with lower tax rates. It is not the same thing as the employer making your income nontaxable, though, and has implications for your tax filing.

Significantly, it is likely that if you have additional income beyond income from that employer, it is likely to be taxed at your highest tax rate, as the employer will likely calculate the tax due based on their income being the only income you have in that year.

*Edit based on emphasis in question: I'm not from Singapore nor am I a lawyer, but based on my reading of the IRAS website, it looks like you do not have to file if you have no other source of income, because they have a No-Filing Service which takes income information from your employer automatically and generates a tax bill, which presumably would be fully paid in your case. This only aplies if you have no other sources of income, however; you still have to file if you have other sources of income since your employer would not know about them.

If you are eligible for this service, you should get a letter informing you as such. They also have a tool to check your filing status on their website.

Answer 2

If a country had a genuine completely flat income tax system, then it wouldn't matter who paid the tax since it doesn't depend on the employee's other income. Since not many countries run this, it doesn't really make sense for the employee to "take the burden" of the tax, as opposed to merely doing the administration and paying the (probable) amount of tax at payroll, leaving the employee to use their personal tax calculation to correct the payment if necessary.

Your prospective employer is probably saying that your tax calculation in Singapore is so simple they can do it for you. They may or may not need to know a lot of information about you in order to do this calculation, depending what the Singapore tax authorities say.

If you're not a Singapore national, they may or may not be relying on bilateral tax agreements with your country to assert that you won't have to pay any further tax on the income in your own country. It's possible they're merely asserting that you won't owe anything else in Singapore, and in fact you will have taxes to report (even if it's just reporting to your home tax authority that you've already paid the tax). Still, for a foreign worker a guarantee you won't have to deal with the local tax authority is a good thing to have even if that's all it is.

Since there doesn't appear to be any specific allowance for "tax free money" in the Singapore tax system, it looks like what you have here is "just" the employer agreeing to do something that will normally result in the correct tax being paid in your behalf. This isn't uncommon, but it's also not exactly what you asked for. And in particular if you have two jobs in Singapore then they can't both be doing this, since tax is not flat. The example calculation includes varying tax rates for the first X amount of income that (I assume without checking) are per person, not per employment. Joe's answer has the link.

In practice in the UK (for example), there are plenty of UK nationals working in the UK who don't need to do a full tax return and whose tax is collected entirely at source (between PAYE and deductions on bank interest and suchlike). In this sense the employer is required by law to take the responsibility for doing the admin and making the tax payments to HMRC.

Note that a UK employer doesn't need to know your circumstances in detail to make the correct payroll deductions: all they need is a so-called "tax code", which is calculated by HMRC and communicated to the employer, and which basically encodes how much they can pay you at zero rate before the various tax rate tiers kick in. That's all the employer needs to know here for the typical employee: they don't need to know precisely what credits and liabilities resulted in the figure.

However, these employers still don't offer empoyees a net salary (that is, they don't take on the tax burden), because different employees will have different tax codes, which the employer would in effect be cancelling out by offering to pay two people the same net salary regardless of their individual circumstances.

The indications seem to be that the same applies in Singapore: this offer is really a net salary subject to certain assumptions (the main one being that you have no other tax liabilities in Singapore). If you're a Singapore millionaire taking that job for fun, you might find that the employer doesn't/can't take on your non-standard tax liability on this marginal income.

Answer 3

Everyone pays their personal income tax with funds from their employer; some of it through withholding, and the rest through the balance due at the time of filing.

All that is happening here is that the company is calculating your personal tax return for you, and fiddling retroactively with the gross salary to yield a specific after-tax salary.

One problem is that there is a lot of information I put in my return to earn deductions, that I would not care to tell my employer.

The system would also appear to be contrary to public policy. Governments create tax deductions to give a larger income to those with socially acceptable expenses: health care, dependents, etc. The system you describe would give employees with such deductions a lower gross salary.

Answer 4

In Canada, the majority of your taxes are remitted by the employer on your behalf after the employer deducts the calculated amount from your pay. Then when you file your income tax return you pay (or get reimbursed) the difference stemming from your particular social situation.

Note that this is optional. The employer has to pay its own part of some deductions, but the employee can opt out from getting the standard amount of income tax deducted at source. It is his responsibility alone to pay for his taxes.

So in this context, it's entirely possible to advertise an approximate net salary. Most of the accounting over here is done by way of accounting software, and those that support payroll go through a testing and acceptance phase for each revision to the tax tables, so the amount calculated is usually pretty exact (I got reimbursed 120$ last year).

Answer 5

In Sri Lanka, this is the normal practice. We, employees are free from the burden of paying tax for the income we get as a salary. Because that part is been taken care of by the company/employer.

Answer 6

Just a real-world counterpoint, in the UK, we negotiate the "before tax" salary as some number of pounds per period of time. Out of this amount, income tax is typically deducted and this calculation is quoted on the payslip. (Like most of the rest of the world.)

However, there's another grade of income tax called "Employer’s National Insurance". This is calculated just like the other forms of income tax, paid by the employer directly, but the employee never sees this on their payslip and it is not part of the negotiated salary.

https://www.gov.uk/national-insurance-rates-letters/contribution-rates

So say you're an employer and you've budgeted £1000/month for a potential employee's salary. You'd have to offer that person £878.73/month salary to bring the amount you'd actually be paying to the £1000 you've budgeted.

Why they do this, I have no idea.
https://politics.stackexchange.com/questions/4917/what-is-the-rationale-for-employers-national-insurance-in-the-uk

Answer 7

Many countries have employers report their employees' salaries and withhold some money for income tax purposes (it's called “pay as you earn”, “withholding taxes” or taxing “at the source”). Often the system is designed in such a way that most people actually pay too much and can get money back at the end of the year. In that case, the salary you receive can certainly be considered a “net salary”.

Depending on the tax system, individuals might need to file a separate tax returns to report any other income (investments, rents, whatever) or benefit from tax incentives but it can also be optional. If you live in such a country and your situation is simple enough that there are no applicable deductibles, you might simply choose to forgo it and let your employer take care of everything.