Taxable expenses paid on an employee’s behalf, such as a company car for personal use or individual tax preparation services, must be reported in payroll even though there’s no cash disbursement. These benefits-in-kind or items of imputed income are challenging to comply with. This is further complicated when employees work internationally and have items paid on their behalf outside of the normal realm of wages and bonuses, says Diane Moore, JD, experienced manager of expatriate tax services at BDO USA, LLP.
“It’s worth having a specialist come in to look at your globally mobile workforce,” Moore says. “We look to see where they’re going, if there’s a treaty, if there’s a recharge and what types of expenses are being paid. Many companies make the mistake of thinking that if an employee spends less than 183 days in a country, there is no tax requirement. That can be a dangerous assumption as it assumes a treaty exists and also does not consider some of the other requirements where a treaty does exist, such as a recharge.
“Once you know your risk, you can decide whether it’s worth it to you to invest in becoming compliant. It’s more expensive when somebody comes to us because they’re under payroll audit and need help cleaning up a mess,” she says.
Smart Business spoke with Moore about the biggest pitfalls of payroll compliance for a globally mobile workforce.
What is a globally mobile workforce?
A globally mobile workforce falls under the umbrella term ‘expatriate,’ which can mean either a U.S. citizen going to work outside the U.S. or an inbound, foreign national coming here to work. They each have different payroll challenges.
How do U.S. citizens going overseas need to be treated for payroll compliance?
When U.S. citizens work internationally, companies often pay for housing, children’s schooling, home leave and individual foreign tax. These must be captured in U.S. payroll. In China, for example, housing paid by an employer is tax-free, but it’s taxable here and needs to be reported on a W-2 Form. The U.S. employer needs that information, but Chinese entities may not be used to gathering it.
When companies cover expenses, W-2 wages will look very high. A lot of that income can be mitigated by the foreign earned income exclusion and foreign tax credits, but Social Security and Medicare are still due on those allowances. That’s why it’s so important to run these items through payroll; employers have a responsibility to withhold and remit those taxes. Otherwise, there is exposure of negligent or fraudulent reporting for the company and individual.
Tax jurisdictions trying to raise revenue have increased scrutiny in this area. Border agents are becoming more empowered to ask specifics of an international entry. If you say business is the reason for your visit and there’s no tax remittance mechanism set up, you could be stopped. There is a global move toward nationalism in many countries that is fueling this.
What are the challenges with foreign employees inbound to the U.S.?
Foreign employees coming into the U.S. may often stay on their home country payroll. However, if they earn more than $600, a Form W-2 needs to be filed. The U.S. entity should run what’s called a shadow payroll, which mirrors all items of compensation or benefits that are paid out of the foreign country and ensures the foreign national’s W-2 is properly reported.
A French national, for example, working in the U.S. might be paid by the French parent company. Income tax gross up has to be calculated as part of the shadow payroll so the French employer pays the required U.S. tax withholding every pay period. Otherwise, when the French national reports their income, the employer is exposed for not properly reporting payroll, which again can be classified as fraudulent reporting.
The initial setup for shadow payrolls and year-end adjustments for U.S. citizens or foreign nationals can be complicated and difficult, but once it’s set up and your employees understand it, it’s easy to keep it going.
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