2024 year-end employment tax compliance

We are approaching the end of year which means holidays, Christmas and New Year. It also means the end of the payroll year in multiple locations. Payroll teams will be busy closing their payroll processing and reporting for the year and this activity will continue into January and beyond. Once the work is complete, adjustments or late additions to report will generate extra work and can result in non-compliance.

Cross-border remote working arrangements continue to gain traction among employers of all shapes and sizes. At the same time, the more classic cross-border secondment and transfer of staff within multinational organisations continues to grow steadily. It is important to note that both cases can create potentially unexpected payroll obligations for employers. Not meeting these obligations can expose the employer to significant payroll compliance risks (including penalties and interest). The approach of the end of the year should focus the mind on what payments and expenses need to be reported before the payroll closes.

In several jurisdictions, the fiscal authorities understand the complexity around mobile employees and target this population for review in payroll and compliance audits. Review and action are essential. Having gaps in this area is a red flag to fiscal authorities, which suggest other areas of compliance may also not be correct, leading to more scrutiny overall. Those managing and overseeing employee mobility are often uniquely placed in organisations to spot the issue (as they are aware of where employees are working) and enable compliance (as they will have access to the data and information required).

There is, of course, no substitute for real time compliance. Payroll is usually a monthly or bi-monthly process, so the ideal process is to have already reviewed the reporting throughout the year. That said, in some circumstances, this isn’t always possible. A fresh review at year-end is a critical minimum risk management action. Action may be required in more than one country – the home and the host country location or in the case of remote workers, the employment and work locations.

What are the key issues?

1. Worker identification: There can be many sources of globally mobile workers. For example, international project workers (e.g. secondments) and business travellers, these can also include cross-border commuters (frontier workers) and cross-border home workers (whether employee or contractor). It’s important to pause and think through which internal stakeholders and management would be aware of each type of worker. Despite having different internal triggers or process owners, differing types of works who have been globally mobile, require a consistent core global process to assess the year-end actions in the countries they have worked in. Missing out a key group can lead to unmanaged risk, but also give reason to fiscal authorities to question the robustness of the worker identification process, leading to further scrutiny.

2. US taxpayers: One group of employees requiring special attention in the worker identification process are US taxpayers. Correct payroll reporting and payroll tax payments are absolutely key from a cross-border perspective for US nationals or US tax filers (permanent residents or green card holders). The issue here is all about double taxation. As the US does not really stop taxing US tax filers, foreign tax credits, which prevent double taxation, are absolutely vital. If the taxes due in the other country involved (not the US) are underpaid, then there is a real likelihood that cash flow challenges will arise, resulting in costly and complex tax return compliance. It is advisable to check that the taxes paid in the other country are sufficient, and if not, then calculate and pay the additional amounts by 31 December (i.e. before the end of the US tax year).

3. Payroll obligation assessment: It is not always the case that payroll taxes are triggered in every globally mobile employee work arrangement. Depending on the exact nature of the arrangement there may, or may not be, a local payroll obligation. It is important to review this as it is a key step in terms of establishing the scope of the actions required by the end of the year. One thing to watch carefully is that even if a payroll obligation is not triggered, this does not necessarily mean that no taxes are due. It may be necessary for the employee to file a tax return to settle income taxes that become due.

4. Payroll processing: Payroll systems around the world differ by location and software provider. After all, each country will have different payroll tax rules and regulations. Added to this is some extra processing complexity. It could be that new payroll wage codes or types, are required to report compensation or calculate payroll taxes and social security. The key difference is usually that the compensation being reviewed at year-end has already been paid. As a result, the aim of the year-end payroll is no longer about paying employees but rather about reporting and accounting for payroll taxes. This may need a new type of payroll wage type/ code/ functionality that may not have been previously used. Checking capability, set-up and testing of the payroll early on is therefore key.

5. Establishing global compensation: Globally mobile employees usually be paid (or have expenses borne) from a number of sources. Benefits, relocation, destination services and other support services will have been enabled and these along with any payments made by the employer need careful review. There can often be a misunderstanding that if payments, or expenses, are not made directly by the employer then they do not need to be considered for payroll – this is not true. Collecting global compensation (from all sources) is a critical to enable compliance. Collecting this in a common, easy to use format is also essential.

6. Wage reporting: Once a payroll assessment has been completed and global compensation collected, the next step is to review what compensation should be reported and subject to wage taxes. Most payrolls around the world have a concept of ‘reportable’ wages, this is how the fiscal authority understands what payments were made to the employee. There is a need to review global compensation and specifically check the compensation types that are subject to wage reporting. It could be that the compensation should be reported in a different way outside of the payroll – for example under separate benefits and expenses reporting (Form P11D in the UK).

7. Wage taxes: Wage taxes, or withholding taxes, are taxes generated by the reportable wages. Each country will have their own payroll tax rules and tables that need to be applied. In simple terms it will be necessary to review the global compensation in the context of the employee’s local tax profile and residency to then determine what is reportable and taxable. Special exemptions such as expatriate tax concessions and relocation exemptions may well exist, and should be factored in, where allowed to ensure that taxes are not overpaid.

8. Tax reimbursement approach: A key question to clarify at this stage is who is responsible for the wage taxes? Will it be the employee or the employer? Determining this is key to ensuring the right payroll tax calculation is performed and taxes are settled by the right party (employer or employee). This is a tricky area where the employee is already paying taxes in another country, which is often the case in the case of secondees posted from one country to another.

9. Social Security: Life would be more straightforward if payroll and income tax and social security taxes followed the same principles. With any cross-border work arrangement it is important to understand whether any cross-border social security agreements apply. These agreements often determine which of the two countries involved have the right to levy social security. It can also be the case that social security is due in both countries, although this is rare and clearly costly for the employer. Year-end is a good time to check whether any social security certificates have been obtained or need to be renewed. These certificates provide official confirmation of the applicable social security regime for the work arrangement in question and should be kept and retained by the host payroll.

10. Think two-country: It is important to check whether any year-end payroll reporting adjustments are required in both the home and host location. Adjustments may be required in one or both locations.

Conclusion

The prevalence of cross-border remote working has meant that complex payroll tax and reporting issues, typically associated with expats of large multinational organisations, are now impacting employers and organisations that may have no international footprint at all. With increasing audit focus from tax authorities around the world, dedicating time and attention to this area will be increasingly important in order to manage risk and costs. Please get in touch with your usual Crowe team member to help manage these risks.