EMPLOYERS are required to accurately report all forms of employee remuneration in Form EA and Form E.
This includes all types of income received by employees during the year, whether in cash or non-cash form, such as salaries, allowances, benefits-in-kind (BIK) and perquisites.
Form EA must be given to employees by Feb 28 and Form E needs to be filed with the Inland Revenue Board (IRB) by April 30.
Accuracy of information reported in Form EA is crucial, as it directly flows into an employee’s tax return (Form BE). Incorrect reporting in Form EA may result in misdeclaration of income and potential tax audits.
Common BIK and perquisites overlooked are director’s vehicle, employees’ discounts, awards, compensation for loss of income and gratuity or ex-gratia payments. Failure to report these items accurately may result in misdeclaration in their individual tax returns.
Common mistakes
Employers often assume that non-cash benefits are not taxable due to the absence of direct monetary payment. Benefits-in-kind such as company cars, fuel, accommodation, household servants and electronic devices, although not convertible into money, carry monetary value and must be valued in accordance with IRB guidelines using the prescribed or formula method. Partial disclosure or omission of BIK in Form EA is a common compliance issue and may result in additional taxes and penalties for employees.
Perquisites are cash benefits convertible into money, including credit card facilities, waiver of loan, school fees of child, loan interest, club memberships, scholarships, gift vouchers and life insurance. Despite being perceived as immaterial, perquisites are taxable employment income. Consistent omission of such items may signal tax audits.
Part F of Form EA requires employers to declare tax-exempt allowances, perquisites, gifts and benefits provided to employees even though they are exempted. Exempt items include petrol, travelling allowances and toll payments incurred for official duties up to RM6,000; childcare allowances of up to RM3,000 per year for children aged 12 years and below; and the provision of one unit of a communication device such as a fixed-line phone, mobile phone, pager, or PDA (personal digital assistant), whether registered in the employee’s or employer’s name.
Exemptions apply to monthly telephone and broadband bills limited to one line, although any fixed telephone allowance provided in cash is fully taxable. In addition, exemptions cover the purchase of a smartphone, tablet, or personal computer; awards and recognition perquisites up to RM2,000 for past achievements, service excellence, innovation, productivity, or long service of more than 10 years with the same employer; and parking rates or parking allowances based on the actual amount incurred, including payments made directly to parking operators. Meal allowances are exempt, provided they are given at the same rate to all employees.
Incorrectly treating taxable allowances as exempt in Form EA and Form E, can lead to under-declaration of employment income. The IRB identifies such errors when allowances reflected in payroll records do not reconcile with amounts reported for tax purposes.
Employers frequently omit leave encashment from EA forms, especially when paid upon resignation. Leave encashment such as annual leave encashment, contractual leave buyback schemes, leave encashment upon cessation of employment, director or senior management leave encashment, optional or flexible leave conversion.
Payroll and Form EA/E reconciliation – a critical compliance check
The most common triggers for IRB audits is a mismatch between EA forms issued to employees and the figures reported in the Employer’s Form E. The IRB cross-checks these submissions, comparing gross income, monthly tax deductions (MTD), and Employees Provident Fund contributions against payroll records. Discrepancies caused by incorrect MTD computation and omitted income can prompt audits. Employers should reconcile all payroll and tax figures before submission.
EA forms must be Issued by Feb 28
Employers are legally required to issue EA forms by Feb 28 each year. Meeting this deadline allows employees to file their Form BE in April. Late issuance is an offence which will result in penalties of RM200 to RM20,000 and imprisonment. Employers are obliged to issue EA forms to resigned employees. Failure to do so can result in penalties.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
