Expatriate Payrolls Require Careful Reporting of Income, Benefits

A successful year-end reporting process for global payroll operations requires work throughout the year, a consultant said July 10.

“Year-end payroll is managed from Jan. 1 to Dec. 31,” said Jon Stone, a managing director for employment tax at KPMG. He used a business’s policy about international assignments as a starting point for how the business manages its international employees.

Stone divided assignments into long-term, short-term, and permanent transfers. Long-term assignments last one to three years, short-term assignments last less than a year, and permanent transfers involve making an employee a local employee in the host country. He also included conventional business trips and commuting, particularly cross-border commuting, as a fourth category.

Employers need a written policy for assignments and reimbursements to promote consistency and formalize their procedures, Stone said. “Typically when we talk about these assignments, it is something that payroll is going to be managing, but HR and the global mobility team have to have a hand in it to make sure that there is consistency,” he said.

General expatriate payrolls can be divided into the home or host payroll, corresponding to the country in which an assigned employee is paid, or can be split across both countries’ payrolls, Stone said. In all cases, a shadow payroll would be operated in the opposite country from where the employee is paid unless there is a split payroll, which would likely require shadow payrolls for both countries, he said. For that reason, Stone recommended against using split payrolls unless it is necessary because of, for example, the employer’s industry and accompanying required payments.

The goal of a shadow payroll is that “what we’re doing in one country is being captured in that other country,” he said. He used a shadow payroll for the UK and US as an example and said employers should start by identifying every part of an employee’s compensation reported on the UK payslip and bringing that into the US payroll, as well as making a calendar for the shadow payroll with the input of both payrolls’ processors. The next consideration is what taxes should be withheld and what conversion rate should be used, he said.

Stone said that he often sees employers waiting until the end of a month or quarter, or less frequently year-end, to determine what must be taxed and convert currencies using an average rate over that period, and said that US jurisdictions are flexible in that they have withholding tables for all those periods. However, depositing on time to US jurisdictions when an employee receives compensation is a bigger deal, he said.

Monthly shadow payrolls are generally most common, Stone said. “It’s never bad to do it more frequently” but it should not be done less frequently than monthly, Stone said.

Other considerations related to shadow payrolls should include the employee’s tax status, such as whether they are a tax resident of the other country and how that impacts their US filing obligations or those for the other country, Stone said. Whether an employee can legally work in the host country is also an important consideration. “When you stop and think about it, employment law has a big piece of the table here,” not just payroll, Stone said.

Costs paid by an employer to secure a visa for an employee, for example, are among those payments made by the employer to a third party that end up being considered taxable income for the employee in the US, Stone said. Other such payments could include tax preparers who help employees with their filing obligations and “destination services vendors,” which might provide cultural training, who help to move the employee’s family, or pay for a school, he said.

Stone described those types of payments as “all of those services that are considered taxable that may be going to an outside vendor that need to be picked up.”

Preparing year-end reporting should start with putting together a calendar around the start of the fourth quarter, Stone said. Employers should check whether there is a requirement to issue an employee a Form W-2, Wage and Tax Statement, or to file Form 1042, Annual Withholding Tax Return for US Source Income of Foreign Persons, he said.

Stone also emphasized remembering to convert amounts in other currencies to US dollars when filing returns. “I’ve had so many companies that I’ve worked with that have just taken amounts from a foreign country and have just processed them in the US without converting them to USD,” he said. “It sounds silly, but it has happened, and it’s created big problems in having to go back and amend things.”

The year-end for employees on assignment still has the goal of accurate reporting and taxation, according to Stone. “At the end of the day, that’s what we’re managing toward: Is the W-2 accurate, did we capture all of the wages, did we get all of the taxation correct?”

Stone spoke at PayrollOrg’s Virtual Congress.