How is an allowance treated in the payroll?

An allowance is a monetary form of compensation, paid out regularly, and forms part of the employee’s total compensation.

By default, it will be treated in the payroll as a gross payment which may or may not incur taxes not only for the employee but also for the employer.

 It should not be confused with non-taxable income. Only in specific situations, the purpose of its use, and the tax legislation of the country of employment, an allowance can be treated as non-taxable or partially taxable.

Therefore, if you wish to guarantee a net amount you will need to clearly specify the purpose of the allowance so we are able to verify with the local partner if:

  1. The allowance can be paid out without incurring additional taxes for the employee and employer, otherwise, a gross-up will be needed.

  2. Alternative options: if the purpose of the allowance is to support costs with the co-working space (and if accepted by the partner) instead of applying for an allowance, the employee can claim the cost as an expense request (tax-free if requirements are met).