Hypothetical tax estimates what an employee would owe if they had not taken an international assignment. This stay-at-home tax calculation forms the basis for tax equalization, determining the employee's contribution while the employer handles actual taxes.
Calculation Method
Hypothetical tax calculates home country tax on hypothetical income, which is typically base salary and normal bonuses minus assignment-specific elements. The calculation applies home country tax rates and rules to this income as if the employee were still working there.
Deduction from Pay
Employees on tax equalization typically have hypothetical tax deducted from their pay. This replaces actual tax withholding. The deduction represents what the employee would have paid at home. Actual taxes, which may be higher or lower, become the employer's responsibility.
Reconciliation
Year-end reconciliation compares hypothetical tax to actual amounts deducted and actual tax obligations. Adjustments settle any differences. The process ensures employees pay their hypothetical share while employers bear the assignment-related tax impact.