Public Ruling 1384-6 published on the Ministry of Finance website gives a clear overview of the term “salary and wages” and what benefits should be considered part of taxable salary and wages.
What is salary and wages?
The terms “salary” and “wages” are not defined in the Income Tax Law, but Public Ruling 1384-6 of the Ministry of Finance defines the terms as follows: “All types of payments and benefits that are a reward for services provided.” All benefits from an employer to an employee subject to the requirements that the benefits must be provided as a “reward for services.”
When is a benefit a reward for services?
For a benefit received by an employee to be salary or wages, the benefit must be a reward for services. Not all the benefits provided by an employer to an employee will be taxable benefits. To identify these taxable benefits, the following factors must be considered:
- Connection between the benefit received and service provided. A one-time payment (such as a wedding gift) from an employer to an employee in a personal capacity is not a reward for services because it was not paid as compensation for services provided.
- One-time vs. repetitive. A one-time payment (such as a wedding or graduation gift) is more likely to be considered a personal transaction, whereas a repetitive gift (such as annual EID payments) are likely to be seen as a consequence of the ongoing employment relationship.
- Employer accounting treatment. If the employer recorded the payment to her/his business accounting books as a business expense, the payment is more likely to be remuneration for services and will be taxable benefit.
- Is the benefit actually a reward? Not all benefits received are considered to be a reward for services. For example, if an employer provides tools, protective gloves, and boots to an employee to carry out employment tasks, this is not considered to be a reward for services even if it benefits the employee.
Taxable benefits included in the salary
Some types of benefits received by the employee in consequence of employment will be a “reward” or payment for services, while other types will not. The term “reward” implies a gain to the recipient; a payment that leaves the person in a better economic position because of the employment. The reward can be salary, wages, allowances, bonuses and other gratuity. Examples of personal gain are, transportation allowance, cash paid during special events like Eid, lunch allowances, clothing and accommodation benefits that might be or might not be included in the employment contract.
Examples of taxable and non-taxable benefits
| Taxable benefits | Non-taxable benefits |
| All allowances (for food, transportation, phone credit, cash paid as Eidi, accommodation, etc.) are taxable even if there is a business purpose to the allowance. Per diems are also a type of allowance and are taxable. | Reimbursement of business expenses (assuming full receipts/documentation is provided) to an employee, such as travel costs, food and accommodation during travel, phone credit for business use, etc. |
| Gifts from entities to employees are taxable | Gifts from entities’ owners to employees (personal relationship between employee and the employer) which are not expenses to the company is non-taxable (like wedding gift that owner pays to his/her employee). |
| Payment of personal expenses from entities to employees. For example, if an entity pays for food, clothing, or accommodation on behalf of an employee (apart from business expenses that the employee would not have suffered if not employed by the entity), such payments would be considered a taxable benefit to the employee. | Employers may directly provide one meal per day to employees which will be considered a non-taxable benefit up to USD $2/day. Employers may directly provide transportation to employees between their homes and the office which will be considered a non-taxable benefit as long as the cost does not exceed USD $1/day. |
| Severance, bonuses, etc. |