# Tax Equalization ? - Owe $ to Employer



## mikeinmadrid

Greetings all, first post here so I look forward to reading the forum in more detail. I have a question that I am hoping to get some opinions on. I am a US expat living in Spain. I work for a mid-size company but am the only American expat so my company does not have a lot of expat experience. We use KPMG to handle my payroll, taxes, etc…I finally got my 2011 taxes done after extensions and was told by KPMG that I owed the IRS ~$3K and that due to tax equalization, I owed my company ~$10K. They basically under withheld on my federal and I received a tax bill that was less than what I would have paid if I were still based in the US due to my expat status.

So KPMG tells my company and me I owe my company $10K. I did not have $13K set aside for an unexpected tax bills so I agreed with my company that we would deduct the $10K from any future bonus or commission. Last month I was told I will be getting a commission payment of $1737 so I tell accounting to hold the commission payment and deduct $1737 from the $10K I owe them. However, they are insisting that the $10K needs to come from after tax $ so they added the commission to my paycheck and then only counted the after tax net of $1168 towards the $10K I owe them. My after tax net is ~33% less than pretax. So now I am looking at what I thought was $10K pretax which turns into $14925 pretax. Please keep in mind that this is a “hypo” payment we are talking about, I already am closed out with tax authorities in both countries.

Does this make any sense? I spoke with KPMG and they said they do not see an issue with my company reducing my debt to them by withholding commission/bonus pretax. To me it seems like I am being taxed on a hypo tax? I am not an accountant but to me it just seems wrong. Am I missing something? Thanks for your feedback!


----------



## BBCWatcher

Yes, it makes sense. Let's go through a simple example.

Let's suppose your tax rate is 20% but your employer only withheld 10% in 2011. So you have an underpayment of 10% of each paycheck in 2011.

Starting at the beginning of 2012 your employer increases withholding to 20%, and you have no tax due for 2012. (Withholding perfectly equals your tax liability.)

But you still have unpaid tax for 2011. How do you pay it? Well, one way is from savings. But instead you've asked your employer to pay the 2011 tax from your 2012 compensation. _But you still have to pay 2012 taxes_ -- that doesn't change. So your employer withholds at 20%, and then any balance left over goes to pay your 2011 taxes.

Hypo tax/tax equalization really doesn't change this basic principle.


----------



## Bevdeforges

The tax equalization calculations are mind numbingly complicated. Basically, if your company agrees to keep you whole (i.e. reimburse you for any taxes over and above what you would have owed had you remained back in the US), you still have to pay tax on any sums used to reimburse you for the "excess" taxes - including those on a company car, housing allowance, anything they're paying to send your kids to international school, home visit allowances, etc. Basically, anything your company "gives" you - cash, services, etc. - winds up being taxable income to you.

But KPMG should be able to sit down with you and show you how they got that $10,000 figure. That's what they get paid for.
Cheers,
Bev


----------



## mikeinmadrid

BBCWatcher - thanks for the example.

Bev - yes, it is complicated. I have gone through the numbers and all the fringe benefits do add up to a big number but this is a fixed # for me and was taken into account in the hypo so that was not the problem. It appears that KPMG and my accounting/payroll dept majorily screwed up my hypo withholding. They had all my info and my tax situation is not complex (zero capital gains, zero real estate transactions, no secondary income, etc...) and they were still way off. KPMG is blaming my company payroll and my company is blaming KPMG and unfortunately I am the one left holding the bag. 2011 was my first year being an expat so I had no idea what proper withholdings were and just trusted my team of $500 per hour accountants, big mistake on my part.

I understand if I under withheld on Federal tax owed you need to pay out of savings, I already did this for the $3K. I still don't totally get why me and my company could not just agree to wipe out the debt owed to my company pretax. Hypothetically, if my company decided that they were not going to collect the $10-$15K from me is there any type of tax consequence where this money would be considered a "gift" or earned income for 2013 tax purposes? Thanks and forgive me if I am asking stupid questions, this is all new to me.


----------



## Bevdeforges

I think you hit the nail on the head: 



> Hypothetically, if my company decided that they were not going to collect the $10-$15K from me is there any type of tax consequence where this money would be considered a "gift" or earned income for 2013 tax purposes?


It's probably precisely that, though I admit I can't quite get my head around it all, either. (And I am an accountant by trade.) When I was overseas on an "expat" assignment, I found that the accountants tended to put the "simple" clients on the back burner in favor of those with complex tax situations. I was darned lucky to get my returns the day before they absolutely HAD to be sent in - with, of course, the advice that I should look them over carefully before signing and sending them in.
Cheers,
Bev


----------

