Tax equalization is a compensation approach used to neutralize the effect of a global assignment on an employee’s personal tax liability. Tax equalization ensures that an employee is no better nor worse off financially, from a tax perspective, for having accepted an international assignment. More specifically, an employee will pay no more in taxes while on an international assignment than would have been paid had he or she remained working at the home or base location.
Employers determine tax liability based on the home country compensation which would have been paid to the employee had the employee remained local. The resulting figure is called a “hypothetical tax” and is then withheld from the employee’s compensation on a per pay-period basis throughout the duration of the employee’s assignment. The tax equalization policy may continue for a year or more after the assignment end date due to trailing tax liabilities.
The employee remains liable for the taxes associated with any non-employer income received from other sources, such as spousal income or rental property income.
You may contact your employer or a professional tax services preparer to discuss tax equalization and its impact on your specific situation.