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How to Prevent Global Payroll Disasters in the Remote Work Era

Aug. 19, 2022, 8:45 AM

Remote work exploded during the pandemic, and it’s likely to continue. However, many payroll departments are still trying to grasp the tax and withholding requirements that stem from this rapid shift in work. If you don’t plan to limit risks soon, your remote workers may cause your company massive headaches in the near future.

According to Gallup, 45% of all full-time employees were working remotely as late as last September. Now, although many more companies have brought employees back to the office, remote work trends are likely 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 matters. When employees travel and work remotely across domestic or international borders, they may be racking up tax reporting and withholding obligations that employers are responsible to uphold. With employees scattered across more borders than ever, the risk of misreporting or underreporting payrolls is rising quickly.

Want to avoid tax and compliance issues? Here is what you need to know about managing global payrolls for mobile employees.

Companies must know employees’ whereabouts.

Like it or not, the responsibility to report wages and withholding taxes falls squarely on the shoulders of employers. That can be daunting for companies that don’t know where their employees are working and where they have worked in the recent past. Here are a few risks that payroll departments face if the company isn’t keeping track of employee whereabouts:

Payroll tax penalties. If employees work remotely from a new state or country unknown to their employer, the employees could set off reporting obligations that the company is not aware of. Tax authorities will typically come after the company first to collect payroll taxes, even if the company is unaware that the employee was working in that jurisdiction.

Corporate tax exposure. Having employees working remotely in another state or country may cause the corporation to owe corporate taxes or file corporate income tax returns. In corporate tax lingo, this is known as a company establishing a nexus in another US state (i.e., the company has an active presence in the taxing jurisdiction) or establishing a permanent establishment in another country. Either way, the risk is that there may be some unpleasant corporate tax surprises related to remote workers.

Reputational damage. In addition to potential fines and penalties, corporate reporting violations also can damage the corporation’s reputation with tax and compliance authorities. Payroll departments that fail to stay ahead of their employees’ global payroll reporting responsibilities could end up getting hit by more frequent audits or additional pushback from tax authorities.

The 183-day rule is not always reliable.

There’s a long-standing myth that many corporate leaders often buy into called the 183-day rule. Leaders often wrongly believe that their employees can work in any jurisdiction for 183 days without any additional payroll, tax reporting, or withholding obligations. In reality, reporting and withholding obligations can vary dramatically from one country or state to the next, no matter the number of days an employee is working in that location.

In some situations, employees can trigger tax obligations after a relatively short period within a new jurisdiction. For instance, if a US employee would like to work remotely in Canada, the Canadian Income Tax Act would require the company to report wages and withhold Canadian income taxes for even just one day of remote work there. It can be possible to alleviate some of the Canadian payroll and tax reporting obligations, but only if the company applies for a waiver or exemption. Overall, the 183-day rule is not reliable in many situations, and following it indiscriminately can leave payroll departments in danger of underwithholding or misreporting.

Trailing obligations might follow your workers.

Even if employees move out of one jurisdiction into another, it doesn’t mean they’re free and clear from reporting responsibilities associated with their prior location. They may incur trailing obligations, which are tax and reporting requirements that follow an employee when they move. Simply put, if the employee receives a bonus or equity that’s related to the prior location, the prior jurisdiction may still want the tax on that incentive—even if it’s paid in the new location. The only way to plan and account for trailing obligations is to understand where employees have been working and to know the rules in that jurisdiction.

Companies should know how to avoid global violations.

Even though remote work is complicating global payrolls, there are a few steps your department and organization can take to prevent violations and reduce your risk of global payroll mishaps.

Create a centralized global remote work policy. To avoid global payroll issues, it’s important to set up standard practices for remote employees. Of course, your policy will vary depending on your company’s needs and culture. Most successful policies define who remote employees are, establish where they can and cannot work, and set up travel approval processes. It’s also important to lay out clear procedures to help your company track employee whereabouts. No matter what final shape it takes, make sure your policy is centralized and runs through a central body, such as your payroll department.

Build cross-departmental processes. Even though corporations need a centralized policy, your remote work processes should include input from experts in as many related departments as possible. Remember, payroll isn’t the only department that’s affected by remote employee actions. Managing remote employees effectively may take input from a range of departments, including corporate tax, social security, stock administration, immigration, legal, and more. If your company has a global mobility department, leveraging their expertise with remote employees can be invaluable. Creating processes for multiple departments will spread responsibilities and prevent any one employee from becoming overwhelmed with tasks that are outside their realm of expertise.

Use technology and third parties to fill in the gaps. Technology won’t by itself solve all your mobile payroll issues, but you can use it to pick up the slack. Once you’ve established policies and processes, you’ll be aware of what resources you have at your fingertips and where you need third parties and technology to help.

Plan now to protect your payroll.

Remote employees will only continue to work across borders in the future. The more often employees work in other jurisdictions, the higher your risk of payroll and tax mistakes climb. By taking time now to encourage your corporation 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 opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Brett Sipes is managing director of the Pacific region of Global Tax Network and has more than 20 years of experience in providing international tax services. He is responsible for providing global mobility tax compliance and consulting to mobile employees and their employers.

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