Salary Withholding Strategies: A Comprehensive Guide to PPh 21 Calculation Methods and Corporate Tax Impact

In payroll administration, one of the crucial decisions an employer must make is determining who bears the Income Tax Article 21 (PPh 21) burden. This decision not only affects the employee's take-home pay but also directly impacts the company's operating expenses that can be claimed as deductible expenses in Corporate Income Tax (CIT) calculations.

Here are the four main methods applied in Indonesia, along with their latest tax implications.

1. Gross Method (Borne by Employee)

This is the standard method where PPh 21 is fully borne by the employee. The tax is deducted directly from the employee's salary, so the net salary received is reduced by the amount of tax payable.

2. Tax Allowance Method (Partial Gross Up)

In this method, the company provides an additional allowance specifically to help pay the tax. However, this allowance amount is usually fixed or does not exactly match the tax payable. Tax is calculated on the total salary plus the tax allowance.

3. Gross Up Method (Full Tax Allowance)

This method aims to provide a whole net salary to the employee by providing a tax allowance that equals exactly the PPh 21 payable. To achieve precise figures, companies use a specific mathematical formula (gross up) to calculate this tax allowance.

4. Net Method (Borne by Employer) - The New Paradigm

This method is often mistaken for Gross Up, though it differs conceptually. In this method, the employee receives a net salary, and the company bears/pays the tax without including it as an allowance component in the employee's payslip.

Previously (Before 2022):

PPh 21 borne by the company was considered non-taxable for the employee but was non-deductible for the company.

Current Regulation (Post PMK 66/2023):

Since the enactment of the Benefit in Kind (Natura dan Kenikmatan) regulations, PPh 21 facilities borne by the employer are categorized as remuneration in the form of Benefits in Kind (Kenikmatan).

Conclusion and Recommendation

With the regulatory changes on Benefits in Kind, the "Borne by Employer (Net)" and "Tax Allowance" methods now have similar tax treatments: both increase the employee's gross income, and both are deductible for the company.

However, the Gross Up Method remains the most administratively and financially efficient choice for companies wishing to provide net salaries. This is because the Gross Up calculation is done mathematically to ensure the tax deducted is exactly offset by the allowance, maximizing deductible expenses while ensuring employee tax compliance is neatly recorded in form 1721-A1.

Regulatory References:

1. Law Number 7 of 2021 concerning Harmonization of Tax Regulations (UU HPP).
2. Government Regulation Number 55 of 2022 concerning Adjustments to Regulations in the Field of Income Tax.
3. Minister of Finance Regulation Number 66 of 2023 concerning Income Tax Treatment on Reimbursement or Compensation in Connection with Work or Services Received or Obtained in the Form of In-Kind and/or Benefits.
4. Attachment to Regulation of the Director General of Taxes Number PER-2/PJ/2024.