How to Prevent Global Payroll Disasters in the Remote Work Era
Remote work has exploded during the pandemic and is likely to continue. However, many payroll departments are still trying to understand the tax and withholding requirements that result from this rapid shift in work. If you don’t plan to limit the risks soon, your remote workers could become a massive headache for your company in the near future.
According to Gallup, as recently as September, 45% of all full-time employees were working remotely. Although many more companies have now brought employees back to the office, remote working trends are likely to continue to grow. In fact, an Upwork survey estimates that 73% of all departments will employ remote workers by 2028.
Unfortunately, remote employees can complicate global payroll processing. When employees travel across national or international borders and work remotely, they may incur tax returns and withholding obligations, which employers are responsible for complying with. With employees scattered across more borders than ever before, the risk of incorrect or underreporting of payslips increases.
Do you want to avoid tax and compliance problems? Here’s what you need to know about managing global payroll for mobile workers.
Companies need to know the whereabouts of employees.
Like it or not, the responsibility for reporting wages and withholding taxes rests squarely on the shoulders of employers. This can be daunting for companies that don’t know where their employees work and where they have worked in the recent past. Here are some risks payroll departments face when the company doesn’t track employee location:
payroll tax fines. If employees are working from a new state or country unfamiliar to their employer, employees could waive reporting requirements of which the company is unaware. Tax authorities will usually come after the company first to collect payroll taxes, even if the company does not know the employee worked in that jurisdiction.
corporate tax burden. When employees in another state or country work remotely, the company may owe corporate taxes or file corporate income tax returns. In corporate tax lingo, this is referred to as a corporation establishing a connection in another US state (ie the corporation has an active presence in the tax jurisdiction) or establishing a permanent establishment in another country. In any case, there is a risk of unpleasant corporate tax surprises associated with teleworkers.
reputational damage. In addition to potential fines and penalties, corporate reporting violations can also damage the company’s reputation with tax and compliance authorities. Payroll departments that fail to stay ahead of their employees’ global payroll obligations could end up being hit with more frequent scrutiny or additional resistance from tax authorities.
The 183-day rule is not always reliable.
There’s a long-standing myth that many business leaders often believe, called the 183-day rule. Executives often mistakenly believe that their employees can work in any jurisdiction for 183 days without additional payroll, tax returns, or withholding obligations. In fact, reporting and withholding requirements can vary widely from one country or state to the next, regardless of how many days an employee works in that location.
In some situations, employees may trigger tax obligations within a new jurisdiction after a relatively short period of time. For example, if a US employee wants to work remotely in Canada, Canadian income tax law would require the company to report wages and withhold Canadian income taxes for just one day of remote work there. It may be possible to ease some of Canada’s wage and tax reporting obligations, but only if the company applies for a waiver or exemption. Overall, the 183-day rule is unreliable in many situations, and following it indiscriminately can leave payroll departments at risk of underwithholding or misreporting.
Subsequent obligations can follow your employees.
Even if employees move from one jurisdiction to another, it does not mean that they are free from obligations associated with their previous location. You may have trailing obligations, which are tax and reporting obligations that follow an employee’s relocation. Simply put, if the employee receives a bonus or royalty related to the previous location, the previous jurisdiction can still claim the tax on that incentive—even if it’s paid at the new location. The only way to plan for and account for trailing obligations is to understand where employees have worked and the rules in that jurisdiction.
Businesses should know how to avoid global violations.
While remote work complicates global payroll, there are some steps your department and company can take to prevent violations and reduce the risk of global payroll glitches.
Create a centralized global remote work policy. To avoid problems with global payroll, it’s important to establish standard procedures for remote workers. Of course, your policy will depend on the needs and culture of your organization. The most successful policies define who remote workers are, where they can and cannot work, and establish travel approval processes. It’s also important to establish clear procedures to help your organization track employee whereabouts. Whatever final form it takes, make sure your policy is centralized and run through one central body, such as: B. Your payroll department.
Build cross-departmental processes. While organizations need a centralized policy, your remote work processes should include input from experts in as many related departments as possible. Keep in mind that payroll isn’t the only department affected by remote employee actions. Effectively managing remote workers can require input from a number 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 workers can be invaluable. Creating processes for multiple departments distributes responsibilities and prevents one employee from being overwhelmed with tasks that are outside their area of expertise.
Use technology and third parties to fill in the gaps. Technology alone won’t solve all your mobile payroll woes, but you can use it to bridge the gap. Once you have policies and processes in place, you’ll know what resources are available to you and where you need third-party and technology support.
Plan now to protect your payroll.
Remote employees will only work across borders in the future. The more employees work in other jurisdictions, the greater your risk of payroll and tax errors. By taking the time now to encourage your company to revise its telecommuting program, your team will be well-positioned to avoid major tax and compliance issues in the future.
This article does not necessarily represent the opinion of the Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Information about the author
Brett Sipes is Managing Director of the Pacific Region of Global Tax Network and has over 20 years of experience providing international tax services. He is responsible for global mobility tax compliance and advising mobile workers and their employers.
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