Payroll Withholding
for Internationally Mobile Employees
APA Carolinas
November 8, 2014
Presenters
• Paul Rubino, CPA
– Director at Global Mobility Tax
– Specializes in global tax mitigation for companies & their
international employees, international payroll delivery &
structuring, tax equalization policy design global equity
planning
• Anupam Singhal
– Co-founder of Monaeo
– Formerly Tech Investor at Silver Lake and General Atlantic
– MBA, Harvard. BS, Carnegie Mellon
© Copyright Global Mobility Tax LLP and Monaeo Inc.
All rights reserved.
Global Mobility Tax, LLP
• Founded in 2003
• 6 U.S. Locations and over 70 network locations globally
• We are a CPA firm providing strategy, consulting, and
individual tax services to organizations that relocate
employees on domestic and international assignments
• Our network of international affiliates enables our firm
to serve companies globally
• We provide up-front payroll and tax advice, as well as
income tax preparation support, and year-end payroll
services.
© Copyright Global Mobility Tax, LLP. All rights reserved.
Monaeo, Inc.
• Technology firm founded in 2011
• Leverages location data analytics to help companies
and individuals make smarter business decisions
• Helps companies identify and reduce tax exposures
from employee travel
• Solution has been taken to 150+ countries, all 50 states
• 5-10x ROI on PE/nexus, payroll withholding and income
allocation issues
© Copyright Global Mobility Tax, LLP. All rights reserved.
Agenda & Objectives
• Identifying global employees and their payroll options
• Expatriates on U.S. payroll
– Shadow Payroll - how and when to apply
– Social Taxes for the Expatriate
– Methods to Reduce/Eliminate US Withholding
– Simplifying Tax Treaties for payroll purposes
• Inpatriates on U.S. Payroll
• State Taxation and Withholding- NC/SC specific
• Solutions- Tax gross-ups and Year End Comp Review
• Audit Climate
• Process enhancements and technology options
© Copyright Global Mobility Tax, LLP. All rights reserved.
Assignee Types
• Expatriate (Expat)
– U.S. citizen or permanent resident outside the U.S.
• Inpatriate (Inpat)
– Non-U.S. national working in the U.S.
• Third-Country National (TCN)
– Non-U.S. national working outside of home country
© Copyright Global Mobility Tax, LLP. All rights reserved.
Assignment & Payroll Types
•
•
•
•
Rotational / Commuter / Business Traveler
Short-term (Up to 1 year)
Long-term (Greater than 1 year)
Permanent Transfer/Localized/Tax Equalized
•
•
•
•
Home country payroll
Host country payroll
Split payroll
Shadow Payroll
© Copyright Global Mobility Tax, LLP. All rights reserved.
Expat Tax – Reporting Requirements
Wage reporting (U.S. centric):
-Worldwide income must be reported
• Cash payouts in home and host countries
• Benefits-in-kind in home and host countries
• Non-taxable items in home and host countries
© Copyright Global Mobility Tax, LLP. All rights reserved.
Compensation Subject to Tax
•
Typical expatriate compensation components (in addition to base, bonus,
commissions, 401(k), etc.):
–
–
–
–
–
–
–
–
–
–
–
–
–
Relocation allowance
Hypothetical retained tax (pre-tax deduction)
Home leave
Taxable relocation
Temporary housing
Housing & Utilities (housing norm > pre-tax deduction)
Goods & Services Allowance (COLA)
Local Transportation & Auto
Equalization settlement
Foreign/US taxes paid
Visa & Immunizations
Tax Gross-ups – home & host
Miscellaneous foreign benefits--could include lease-break, maid services, etc.
© Copyright Global Mobility Tax, LLP. All rights reserved.
Compensation Subject to Tax (cont’d)
• Payments by the foreign entity and/or
external third parties (Relo Company):
– All taxable payments made in the foreign location on behalf of
the employee must also be captured in the Company’s reporting
process.
– Exchange rates--If taxable relocation payments are made by
foreign entities or third parties, all payments must be converted
to U.S. dollars at the exchange rate that applies on the date of
payment. Average exchange rates are allowed for amounts paid
evenly over a period of time.
© Copyright Global Mobility Tax, LLP. All rights reserved.
Negative Comp (Pre-Tax Deduction)
• Hypothetical tax
– A compensation reduction retained by employer
(generally replaces actual home country withholding)
– Most commonly based on home country tax laws (in
US, might include Fed, State, FICA/Med)
• Housing norm
– Hypothetical cost of home country housing retained
monthly by employer
– Generally a function of base salary, family size, and
maintenance of primary residence in home country
© Copyright Global Mobility Tax, LLP. All rights reserved.
Tax Reimbursements
• Common tax reimbursement methods
Tax loans / Tax advances:
• Employer pays the required actual home/host country taxes;
• Loans/Advances are generally added to compensation;
• If not added to compensation, loan agreement with employee
needs to be executed and imputed interest added to
compensation for interest-free loan;
• Loans should never be executed for executive employees (Section
402 of Sarbanes-Oxley Act).
Tax gross up:
• Employer pays the additional tax due on assignment
compensation, plus the tax on the tax;
• Tax gross ups are added to compensation.
© Copyright Global Mobility Tax, LLP. All rights reserved.
Compensation Subject to W-2 Reporting
• All wages and any other compensation for
services performed in the United States are
U.S. sourced.
• Location of service performance or delivery
location of payroll determines the source of
the income for W-2 purposes.
© Copyright Global Mobility Tax, LLP. All rights reserved.
Compensation Not Subject to W-2
Reporting
• Permanent transfers to foreign entities on
foreign payroll
• If no U.S. Employee Sourced Services Income
(ECI) + no U.S. Payroll delivery + no U.S.
Employer control, then no U.S. W-2 Income!
© Copyright Global Mobility Tax, LLP. All rights reserved.
Foreign Country Shadow Payroll
• Many countries have reporting and withholding
requirements
• Such countries will require a “shadow payroll”
implementation
– Pay delivery still initially in U.S., 100% reporting in U.S.
– Secondary reporting mechanism in host country;
– Enables remittance of foreign taxes and required local
compensation reporting
© Copyright Global Mobility Tax, LLP. All rights reserved.
Social Security, Medicare and State
Disability
• FICA taxes must be currently withheld – no exemption from
withholding for expatriates on US payroll.
• The expatriate may be exempt from the foreign country’s social
taxes based on a Totalization Agreement (Social Tax Treaty) that
the U.S. has with that country.
• State Disability Insurance should continue as usual.
© Copyright Global Mobility Tax, LLP. All rights reserved.
What about Foreign Social Tax?
• The expatriate may be exempt from the foreign country’s
social taxes based on a Totalization Agreement (social tax
treaty) that the U.S. has with that country.
– The employee must remain an employee of the Home country and pay
Home country social taxes.
– The Company must apply for a “Certificate of Coverage” in the Home
country.
– The Certificate of Coverage must be kept with the Host country payroll
file to substantiate non-withholding in the event of a payroll audit.
http://www.ssa.gov/international/agreement_descriptions.html
© Copyright Global Mobility Tax, LLP. All rights reserved.
Methods Used to Reduce or Eliminate U.S.
Tax Withholding
– IRS Form W-4 with attachment(s)
– IRS Form 673
– Foreign earned income exclusion
– Foreign housing exclusion
– Mandatory foreign income tax withholding
– Treaty exceptions
© Copyright Global Mobility Tax, LLP. All rights reserved.
IRS Form 673
• Foreign Earned Income Exclusion
– Up to $99,200 (2014) of foreign source income earned
during the assignment period is excludable from
taxable income
– One of two tests must be met
• Bona Fide Residence
• Physical Presence Test
• Foreign Housing Exclusion
– Cost of foreign housing in excess of a base amount
determined by the IRS annually is excludable from
taxable income
© Copyright Global Mobility Tax, LLP. All rights reserved.
Foreign Income Tax Withholding
• In accordance with IRS Sec. 3401
• Used when compensation is foreign source and subject to a
mandatory foreign country tax withholding
• Home country payroll should document the mandatory
foreign withholding and maintain a copy in the employee file
– Countries with mandatory withholding
• Canada, UK, China
– Countries with no mandatory withholding
• Hong Kong, Singapore (assessment in following year)
© Copyright Global Mobility Tax, LLP. All rights reserved.
Tax Treaties
• If treaty is in force and employee is in country less than 183
days, then not taxable in foreign country- Calendar vs. Fiscal
vs. “Rolling” tax years
• Same true for employees in the US for less than 183 days
under a treaty
• Compensation charges must be borne by home country
© Copyright Global Mobility Tax, LLP. All rights reserved.
Impact of Income Tax Treaties
• The U.S. has tax treaties with many countries under which U.S.
citizens or residents may be able to receive favorable tax treatment.
The purpose of a tax treaty is to ensure that citizens or residents of
the two treaty countries are not taxed by both countries on the
same income.
• Tax treaties often provide relief to expatriates on short-term
assignments / business trips under three general conditions.
• The wording of each treaty is slightly different and must be
reviewed before relying on general rules.
© Copyright Global Mobility Tax, LLP. All rights reserved.
Inpatriate – Tax Classification
• Tax classification is important as it determines:
– US tax filing status and related requirements for an individual.
– US Employer payroll reporting requirements.
• For US tax purposes, there are 2 alternatives
– US Resident
– US Nonresident
• Individuals are resident aliens if they pass either the ‘Green
Card’ test or the ‘substantial presence test’.
– Individuals who do not pass either of these tests are nonresident
aliens.
© Copyright Global Mobility Tax, LLP. All rights reserved.
Payroll Withholding – U.S. Resident
• U.S. resident aliens are generally subject to same federal
employment taxes, and withholding on their worldwide
income as US Citizens.
• Withholding procedures should follow same rules /
procedures for U.S. employees (working in the U.S.)
• Form W4 required to reduce, adjust withholding
© Copyright Global Mobility Tax, LLP. All rights reserved.
Payroll Withholding – U.S. Non-Resident
• Only U.S.-source income is subject to federal
employment taxes and withholding.
– No withholding on wages paid for work done outside the U.S.
– Required withholding for wages paid for work inside the U.S.,
unless exempt under tax code or tax treaty
© Copyright Global Mobility Tax, LLP. All rights reserved.
Inpatriate & US Non-Resident – Payroll
Withholding – Special IRC Exemption
• Exemption from tax withholding via the tax
code:
– Present in the US not more than 90 days
– Compensation not greater than $3,000
– Employed by foreign employer
© Copyright Global Mobility Tax, LLP. All rights reserved.
Inpatriate & U.S. Non-Resident – Payroll
Withholding - Exemptions
• Exemption from tax withholding via Tax Treaty include
the following:
– F- and J- visa holders if employed by a foreign
employer. (This does not apply to US employers)
– Employees of foreign governments and international
organizations
– Employees under Dependent Personal Services clause
•
Specific country treaty provisions / interpretations must
be reviewed!
© Copyright Global Mobility Tax, LLP. All rights reserved.
Inpatriates and Social Security Tax
• In general, Social Security and Medicare tax
(FICA) apply to wages paid for work done in
the U.S.
– Regardless of employee or employer’s citizenship
or residence.
• Temporary exemptions offered:
– Totalization Agreements (usually up to 5 years and
if paid from foreign payroll)
– Nonresident aliens with F, J or M visas
© Copyright Global Mobility Tax, LLP. All rights reserved.
Non-U.S. Employees Working in the U.S.
What are the alternatives for employer and payroll compliance?
• Add employees to U.S. payroll
– Social Security Number or ITIN required
– ITIN (Individual Tax ID number) may not be issued until tax return is filed
in some cases
– Prepare Form W2 at year-end to report US taxable wages
• Initiate Shadow or Dummy payroll
– Outsource or Insource
– Social Security or ITIN required
– Prepare Form W2 at year-end to report US taxable wages
© Copyright Global Mobility Tax, LLP. All rights reserved.
If Non-U.S. Employees Cannot Be Placed
on Payroll
• Employee reports wages on Form 1040 or
1040NR
• Employee will likely be subject to underwithholding penalties
• Employer penalties for failure to report and
withhold income tax and FICA are possible
© Copyright Global Mobility Tax, LLP. All rights reserved.
State Taxation and Withholding
• Whether an expatriate continues to be liable for
state income tax during the foreign assignment
period varies from state to state.
– Most states follow a residency or domicile
approach to taxation.
– Some states have “bright-line” laws that involve
time tests.
© Copyright Global Mobility Tax, LLP. All rights reserved.
State Withholding Rules
• State tax withholdings should continue during the
foreign assignment unless residency is broken.
• A liability in that state may exist for trailing liabilities
(stock options, bonuses, commissions, etc) or be
incurred for business trips back to the state.
• Each state has a minimum threshold for when nonresident taxpayers need to report their state-source
wages.
© Copyright Global Mobility Tax, LLP. All rights reserved.
State Tax Considerations
• Most states generally follow the U.S. Federal
definition of wages and tax withholding
• State filing / reporting requirement may exist even
when no such requirement for Federal
© Copyright Global Mobility Tax, LLP. All rights reserved.
North Carolina
• Generally cannot break residency during
foreign assignment.
• Accepts Foreign Tax Credit against state
income
• Recognizes the Foreign Earned Income
Exclusion
© Copyright Global Mobility Tax, LLP. All rights reserved.
South Carolina
• Can break residency if shown that a move to
foreign country is permanent.
• Does not accept the Foreign Tax Credit against
state income
• Recognizes the Foreign Earned Income
Exclusion
© Copyright Global Mobility Tax, LLP. All rights reserved.
Year-End Comp Review Service
• Year-End Compensation Review is a service that GMT
and other firms offer to ensure that the clients are in
compliance with the US reporting requirements.
• All income (salary, bonus, foreign allowances,
expenses and benefits) paid should be analyzed for
possible inclusion in the assignees’ W-2s.
© Copyright Global Mobility Tax, LLP. All rights reserved.
Benefits for the Client
• Minimize compliance-related financial risk.
• Minimize or eliminate potential tax underpayment
penalties due to untimely withholding and/or under
withholding of income and or social taxes.
• Ensure tax gross-ups made by the company are
properly credited to the company as well as paid and
included in the correct year’s compensation.
• Avoid time and resources needed to amend W-2’s.
• Reduce risk of receiving notices, especially from States
due to improper reporting or withholding.
© Copyright Global Mobility Tax, LLP. All rights reserved.
GMT Action Specifics
GMT reviews compensation, expense reimbursements & tax
payment details:
– Review assignment letters to ensure all compensation, expenses &
allowances are captured;
– Analyze Relocation & Expense details to determine taxability;
– Review Home/Host country tax payments to ensure they are
included in compensation if paid by Company;
– Calculate Tax Gross-ups for Final US payroll & Forms W2;
– Provide estimated W-2 adjustments to Client + any outstanding
issues for Client review and follow-up.
© Copyright Global Mobility Tax, LLP. All rights reserved.
Annual Spend
US TAXES
COMPLIANCE
COST
LOCATIONBASED
$4
$350
$10
trillion
billion
billion
Source: IRS Data, industry reports, Monaeo analysis
© Copyright Monaeo Inc. All rights reserved.
.
"Politically, who better to go after than those who do not even claim to
be residents of the state?”
- Brian Gordon, former NYC audit head, Dept. of Finance & Taxation
© Copyright Monaeo Inc. All rights reserved.
Odds Are Stacked Against Us
80%
Audit Rate
60%
Domestic
• NY
• CA
• PA
• OH
• MA
• NJ
• WA, TX, FL (corp)
Int’l
•
•
•
•
•
•
US
Canada
UK
India
China
…
1,300 of global 2,000
companies likely to be
audited this year
40%
63%
20%
31%
17%
21%
0%
$250-$500m
$500m-$1B
$1-5B
$5B+
Assets
Source: 2011 IRS Data Book
• Industry: Technology
A day in the
life of a
company…
• HQ: California, USA
• Employees: 1,000
• Travelers: 200 (active)
 New York
 Washington
 Texas
 UK
© Copyright Monaeo Inc. All rights reserved.
…FAST
FORWARD 3
YEARS
$1,400,000
audit exposure + costs
© Copyright Monaeo Inc. All rights reserved.
?
?
?
?
?
© Copyright Monaeo Inc. All rights reserved.
?
?
?
?
?
Audit Exposure
20%
$1,300,000
withholding misallocation
in payroll W/H exposure
© Copyright Monaeo Inc. All rights reserved.
Time and Resources Spent
Payroll and Tax Staff
Travelers
480
400
hours
hours
Tax Advisors
$40k
fees
© Copyright Monaeo Inc. All rights reserved.
$100,000
in audit costs
Current Process is Inadequate
Ad hoc
• No timely visibility
• Unknown exposures
• Manual, inefficient
• Inaccurate, incomplete
Costly | Painful | Risks Credibility
© Copyright Monaeo Inc. All rights reserved.
Where do you start? Have a process.
What?
DIAGNOSE
REBALANCE
PREVENT
periodically review
exposures
‘true-ups’ and ‘tuneups’
anticipate, avoid,
comply
- Payroll w/h
- Payroll w/h
- Nexus
- New jurisdictions
- Continuous (or
frequent) monitoring
of employee travel
- PE
- New legal entities
- Feedback to business
teams
© Copyright Monaeo Inc. All rights reserved.
- Extract actionable
insights for tax, payroll,
HR processes
Where do you start? Have a process.
How?
IDENTIFY STAKEHOLDERS
IDENTIFY DATA SOURCES
- Tax – domestic, international?
- Timesheets
- Payroll?
- Travel logs; travel authorizations
- HR – mobility, exec comp & benefits?
- T&E records
- At-risk traveler population
- Calendars
© Copyright Monaeo Inc. All rights reserved.
Leverage Technology
AUTOMATIC
TRAVEL LOGGING
© Copyright Monaeo Inc. All rights reserved.
DATA & REPORTS
FOR AUTOMATED
COMPLIANCE &
AUDITS
Increase Compliance
.
© Copyright Monaeo Inc. All rights reserved.
Save on Taxes
© Copyright Monaeo Inc. All rights reserved.
Cost-Benefit
SAVINGS
• Eliminate exposures
5-10x
ROI
- Employment tax (e.g., payroll w/h)
- Corporate tax (e.g., UBT in NYC,
apportionment)
• Optimize tax planning
- Real-time footprint views (nexus/PE)
- Early-warning alerts
• Minimize time, resource, and pain in an
audit
© Copyright Monaeo Inc. All rights reserved.
Questions?
© Copyright Global Mobility Tax LLP and Monaeo Inc.
All rights reserved.
Contact Info
Paul Rubino, Director at Global Mobility Tax, LLP
2023 N. Atlantic Ave, Suite 230, Cocoa Beach, FL 32931
321.613.3521
paul.rubino@glomotax.com
Anupam Singhal, Co-founder of Monaeo, Inc.
110 Fifth Avenue, 5th Floor, New York, NY 10011
307.504.2623
anupam@monaeo.com
© Copyright Global Mobility Tax LLP and
Monaeo Inc. All rights reserved.