With Thanksgiving just passed and Christmas around the corner, the end of the US tax year can easily creep up on us. With just over a month to go, now is a great time to review your tax and payroll obligations to ensure compliance with the law and to avoid costly mistakes. Whether you’re a UK business operating in the US or a US business tax and payroll compliance is so important.
There can often seem an endless list of things to consider, so we have summarised some of the more important but often overlooked areas that you may wish to consider before the new year.
The increase in the number of businesses introducing flexible and hybrid working policies is widely considered to be a positive move, however this can result in additional complexities for employers, with employees relocating or working from multiple locations that may be different from their registered place of work. This can affect both domestic and internationally mobile workforces, but the key to managing the added complexity starts with good recordkeeping. For example:
- Do you know where your employees are? Maintaining accurate travel and location records will help you know where taxes are legally due.
- Are your tax registrations correct? Many businesses are still operating in a pre-pandemic model and withholding taxes based on office location, which may no longer be fit for purpose.
- Are your systems set up correctly? Ensuring that pre-tax deduction limits are not exceeded is vital, for example with 401k plans and HSAs. Many systems are still not automated in this regard.
- Have you considered social security requirements for internationally mobile employees, including exemptions such as certificates of coverage, and are you tracking expiry dates?
- Are you accurately tracking earnings periods for supplemental income, such as for bonuses or share awards that span multiple years? Historical work locations can still give rise to tax obligations many years later in these cases.
- Have you captured tax payments in overseas locations for your employees who work internationally, particularly where international tax years are not coterminous?
Ideally accurate records will be kept and updated in real time, but with year-end approaching there is an opportunity to perform a thorough review to identify any gaps in data, and to ensure compliance before the new year.
A FOCUS ON YEAR-END
Whilst most employees will be comfortable paying salaries and reporting taxes, fringe benefits can often be overlooked, especially where there are no cash payments being made, or where there are interactions with a foreign country. Some commonly missed benefits that are likely to require payroll reporting are:
- The personal use of a company car, which can result in a taxable benefit.
- Certain employee gifts or staff events, which can be reportable.
- The payment of tax on behalf of an employee, such as an overseas tax payment for mobile workers.
- Payments made under a tax equalisation agreement.
- Foreign pension contributions.
- Benefits reported and/or paid in a foreign country, especially where these are not reported in the foreign payroll.
- Third party benefits for or on behalf of the employee, such as relocation fees, or housing and utility costs.
It is important to ensure that a process is in place to both gather the relevant information and ensure that the correct treatment is applied. Whilst it can be beneficial to do this periodically, year-end provides a timely opportunity to ensure that your payroll reporting is accurate and to avoid any corrections being necessary in the new year.
NEW YEAR, NEW YOU
Combining your year-end review with planning for the new tax year will ensure compliance from the outset. It is a great time to review your current processes and put into place some ‘best practice’ objectives for the coming year.
A soft audit of your employees and processes is a great starting point to ensure that earnings, deductions, tax rates and paperwork are all up to date before the first pay run. Some items to consider include:
- Form W-4 and state equivalents should be reviewed by an employee on an annual basis, so it is good practice for employers to use the start of the tax year as a reminder. With the prevalence of hybrid/remote working and the complexities at a state level that this brings, this review is more important than ever.
- Are your HR and payroll systems aligned, for example do changes of address or remote work agreements accurately feed into the correct tax registrations and withholdings?
- Have you reviewed the circumstances around your globally mobile employees, for example certificates of coverage to mitigate dual social security withholding or Form 8233 to exempt inbound business travellers from US tax?
- Do your policies need reviewing and renewing? Reflecting on the previous year, it is important to ensure that tax policy is up to date and compliant, but also aligns with other policy changes within the business. For example, is there a corresponding tax policy or payroll/tax consideration, if your company has an HR policy to support flexible or hybrid working.
A self-service option has been a successful route for many employers to ensure employees maintain their own personal details, often resulting in more accurate data and less of an administrative burden for employers, however it is important that the various sources of information align in order to support collective compliance as opposed to creating additional confusion.
Creating a timetable for the new tax year between an in-house payroll team and any outsourced vendor can help set expectations and accountability ahead of time.
The above covers some of the high-level considerations for your business but is by no means an exhaustive list. There is always a lot to think about and there is never enough time, but if you would like to discuss any of the matters covered or to have a broader conversation about your US tax and payroll related obligations, please contact one of our US specialists – Douglas Michael, Jessica Hodgson & Michael Smith, and we would be happy to assist.