Top 5 insights for mobile employees for the 2022 tax season

US tax season: global mobility considerations

Mobile employees may be loosely defined as employees working in more than one tax jurisdiction; for purposes of this article, we’ll focus on mobile employees working in a country other than their country of employment where one of the countries is the US.

If you employed mobile employees in 2022, you should be aware of the risks involved.

US 2022 federal tax returns are due April 17, 2023. While the tax deadline is rapidly approaching, there’s still time to adjust 2022.

5 things to know if you employ mobile employees

1. Workforce risks

Employing mobile employees results in several risks for both the employee and employer. Here are two to consider:

• Permanent establishment risk – Employers with employees in countries in which they don’t have a permanent establishment may be at risk for additional obligations in the country.
• Income tax, Social Security, payroll risks – Nonresident employees may accrue income or Social Security tax obligations while temporarily working in the US; it’s important to report this income and remit the appropriate income/Social Security tax via US payroll.

2. Assess home/host country compliance needs

Mobile employees based in the US who relocate temporarily to other countries may have tax return filing requirements in both the US and the other country. The employer may also have payroll reporting and withholding obligations in the non-US country, depending upon the country and the specific facts and circumstances of the relocation. In addition to income tax considerations, the employee may be subject to Social Security tax in the non-US country; if a totalization agreement is in place between the two countries being considered and are not subject to host country social tax, a certificate of coverage must be obtained in the US.

3. Policy positions

Review of policies impacting mobile employees may include the following:

• Business travel – Review policies supporting business travel, including procedures for managing the population (e.g., an understanding of corporate permanent establishment, payroll and income tax risks associated with business travelers). Questions to ask: Is our business travel data maintained? If so, how? Is the information easily accessible and understandable? Do we have policies in place effectively managing our risk as a company?
• Tax equalization/protection –Employers often will implement tax equalization or protection policies that offer support to mobile employees. Benefits paid to employees as part of a tax equalization or protection policy are generally taxable to employees in the US and should be included in their annual federal tax return. If you’re paying relocation-related benefits to employees working in the US, be sure to report them properly in payroll.
• Remote work – The pandemic changed how we work, permanently. While a return to the office is underway, there are still employees working remotely (i.e., not in an office location/from home). These employees may be hired to work in their home location and not be authorized to work remotely in other states or countries. Ensure appropriate policies are in place to support remote work and maintain an understanding of your remote workers.

4. Equity reporting and obligations

Employees’ may receive equity compensation in the form of restricted stock units (RSU), an employee stock purchase plan (ESPP) or stock options. This compensation is treated differently for tax purposes than normal wages. For example, RSU income is “sourced” to the country in which it’s earned, from the grant to vest date based on workdays. The rules for reporting and taxation of RSU income differ by country. Individuals inbound to the US as nonresidents may accrue federal and state income tax liabilities as a result of their time in the US, even if the vest occurs while they’re no longer in the US.

5. Trailing liabilities

Often resulting from equity compensation, trailing liabilities refer to the situation in point four above; as RSU income is sourced for US tax purposes from the grant to vest date, there may be trailing liabilities. RSU income paid to mobile employees may result in tax return or tax payment obligations in the host country for years after an assignment ends. These costs should be considered when estimating costs related to assignments.

Hiring mobile employees allows flexibility for employers in hiring talent and allows employees to have the opportunity to work in any given location, however, there are several risks for both parties to be considered. The list includes, but is not limited to:

• Income and Social Security tax
• Payroll reporting and withholding
• Permanent establishment
• Potential reputational risks on the non-US country if obligations aren’t completed

Nonresident employees inbound to the US may have US individual tax return obligations for 2022, but there’s still time to adjust and prepare for the 2022 tax season and execute new plans for 2023 and beyond. Please reach out to your Mazars professional to begin implementing change.

Authors

Andrew Engaldo, Senior

David Livitt, Principal