Is it legal for an employer to pay an employee’s income taxes in lieu of a compensation increase?

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Is it legal for an employer to pay an employee’s income taxes in lieu of a compensation increase?

Asked on October 14, 2015 under Employment Labor Law, Pennsylvania

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 6 years ago | Contributor

It is legal, but is potentially problematic.
An employer may pay an employee's income taxes for him or her as part of or in lieu of other compensation or receiving a raise. Unless, that is, there is a written employment contract requiring raises, etc. if so, the employer must compensate the employee as set out in the contract.
But the taxes paid for the employee are themselves compensation--compensation is any payment or thing of value given to an employee, or any payment made for him/her to pay one of his/her obligations or debts--including taxes. Therefore, in paying the employee's taxes, the employer gives the employee more compensation, which is taxable income, thereby increasing the employee's taxes. 
This can be done legally and properly, but the accounting has to be done carefully so as to make sure that the proper amounts are paid and accounted for, and the employee's tax liability is not increased by this.


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