Last updated for v.22.3
This interactive guide explains how hypothetical taxes are allocated between variable and fixed compensation in partial periods.
Purpose
This guide explains how the Tax Engine allocates annual hypothetical income and social taxes to partial periods, considering both variable and fixed compensation.
Overview of calculation approach
The Tax Engine calculates hypothetical tax on annual compensation using applicable marginal rates. For partial periods, this annual hypothetical tax is adjusted down to reflect the assignment period. This assignment related portion of hypothetical tax is then used in the tax grossup and total costs computations.
For the purposes of the adjustment, line items mapped to the Base Compensation category (e.g. Base Salary and Bonus) are assumed to be variable elements of income, meaning they are earned over the entire year. As a result, the annual hypothetical tax relating to these elements is adjusted by prorating the annual value using Host Months. Fixed compensation is excluded from the partial period proration.
Line items mapped to Bonus (Fixed) and Bonus (Pre-Assignment) are treated as fixed compensation on the assumption they are paid at a fixed date. Unlike variable compensation, the hypothetical tax relating to fixed compensation is not prorated using Host Months.