Remote work has exploded during the pandemic, and it’s likely to continue. However, many payroll services are still trying to grasp the tax and withholding requirements that come with this rapid shift in work. If you don’t plan to mitigate the risks quickly, your telecommuters could cause your business major headaches in the near future.
According to Gallup, 45% of all full-time employees were working remotely last September. Today, although many other companies have brought their employees back to the office, remote work trends are expected to continue to grow. In fact, an Upwork survey estimates that 73% of all departments will include remote workers by 2028.
Unfortunately, remote workers can complicate global payroll issues. When employees travel and work remotely across national or international borders, they can accrue tax reporting and withholding obligations that employers are required to meet. With employees dispersed across more borders than ever before, the risk of misrepresentation or under-declaration of wages is growing rapidly.
Want to avoid tax and compliance issues? Here’s what you need to know about managing global payroll for mobile workers.
Companies need to know where employees are.
Whether we like it or not, the responsibility for reporting wages and tax deductions rests entirely with employers. This can be intimidating for companies that don’t know where their employees work and where they have worked in the recent past. Here are some risks that payroll services face if the company does not track employee whereabouts:
Penalties of social charges. If employees work remotely from a new state or country unknown to their employer, employees could trigger reporting obligations that the company is unaware of. The tax authorities will usually come after the company to collect payroll taxes, even if the company does not know that the employee was working in that jurisdiction.
Exposure to corporation tax. Having employees work remotely in another state or country may cause the company to owe corporate taxes or file corporate tax returns. In corporate tax jargon, it is referred to as a corporation establishing a nexus in another U.S. state (i.e. the corporation has an active presence in the tax jurisdiction) or establishing a permanent establishment in another country. . Either way, the risk is that there could be nasty tax surprises related to remote workers.
Damage to reputation. In addition to potential fines and penalties, corporate reporting violations can also damage a company’s reputation with tax and compliance authorities. Payroll departments that fail to stay ahead of their employees’ global payroll reporting responsibilities could end up being hit with more frequent audits or additional action by tax authorities.
The 183 day rule is not always reliable.
There’s a long-held myth that many business owners often adhere to called the 183-day rule. Executives often mistakenly believe that their employees can work in any jurisdiction for 183 days without any additional payroll, tax filing or withholding obligations. In reality, reporting and withholding requirements can vary significantly from country to country or state to state, regardless of how many days an employee works there.
In some situations, employees may trigger tax liabilities after a relatively short period in a new jurisdiction. For example, if a US employee wishes to work remotely in Canada, Canada’s Income Tax Act would require the company to report wages and withhold Canadian income tax even for a single day of work. remotely there. It may be possible to alleviate some of the Canadian payroll and tax reporting obligations, but only if the company requests a waiver or exemption. Overall, the 183-day rule is unreliable in many situations, and applying it indiscriminately can expose payroll departments to the risk of underdeductions or misreporting.
Follow-up obligations could follow your workers.
Even if employees move from one jurisdiction to another, this does not mean that they are free and relieved of the reporting responsibilities associated with their previous location. They may incur tracking obligations, which are tax and reporting requirements that follow an employee when they move. Simply put, if the employee receives a bonus or equity related to the previous location, the previous jurisdiction may still want tax on that incentive, even if it is paid in the new location. The only way to plan for and account for follow-up obligations is to understand where employees have worked and know the rules in that jurisdiction.
Businesses need to know how to avoid global breaches.
Even though remote work complicates global payrolls, there are a few steps your department and organization can take to prevent violations and reduce the risk of global payroll incidents.
Create a global centralized remote work policy. To avoid global payroll issues, it’s important to have standard practices in place for remote employees. Of course, your policy will vary depending on your company’s needs and culture. The most effective policies define who remote employees are, establish where they can and cannot work, and establish travel approval processes. It’s also important to establish clear procedures to help your company track the whereabouts of employees. Whatever final form it takes, make sure your policy is centralized and runs through a central body, such as your payroll department.
Build transversal processes. Even though companies need a centralized policy, your remote work processes should include expert input from as many related departments as possible. Remember that payroll isn’t the only department affected by the actions of remote employees. Managing remote employees effectively may require input from various departments, including corporate tax, social security, inventory administration, immigration, legal, and more. If your company has an international mobility department, leveraging their expertise with remote employees can be invaluable. Creating processes for multiple departments will distribute responsibilities and prevent an employee from being overwhelmed with tasks that fall outside their area of expertise.
Use technology and third parties to fill in the gaps. Technology alone won’t solve all your mobile payroll problems, but you can use it to pick up the slack. Once you have established policies and processes, you will know what resources you have at your fingertips and where you need third parties and technology to help you.
Plan now to protect your payroll.
Going forward, remote employees will continue to work across borders. The more frequently employees work in other jurisdictions, the greater the risk of payroll and tax-related errors. By taking the time now to encourage your company to revamp its remote work program, your team will be well positioned to avoid major tax and compliance headaches in the future.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Brett Sipes is the Managing Director of the Pacific Region of the Global Tax Network and has over 20 years of experience providing international tax services. He is responsible for ensuring global mobility tax compliance and providing guidance to mobile employees and their employers.
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