The provision of long-term incentives, such as stock options and other equity compensation, to employees who work in multiple locations has always been challenging. Because not all jurisdictions treat equity income in the same manner for tax purposes, companies can face many uncertainties when trying to understand their reporting and withholding obligations. Mobile employees can face complex tax filings and even double taxation.
Now, with the explosion in non-traditional mobility, including remote, hybrid, and commuter situations, the volume of potential cross-border scenarios has increased. This has resulted in growing intricacies for companies who provide long-term incentive compensation. To make sure the employer and employee understand the tax implications and to avoid future complications, it is important to understand how such income will be treated in all locations an employee is working.
Before offering equity awards (i.e., stock options, restricted stock, restricted stock units, stock appreciation rights, phantom stock, and employee stock purchase plans) to a mobile workforce, your company should consider the following questions.
Where will the equity award be subject to tax?
Many organizations experienced an increase in mobile and remote employees because of the pandemic. This included changes to work location expectations and policies.
Payroll and withholding rules can vary by taxing jurisdiction. If an employee was a resident of a Host country when the equity award was made, but not a resident at the time of the relevant taxation event, an employer may face trailing reporting and withholding obligations in the Host location. This is because the employee may be taxed in the Host country on the portion of the equity income that was earned there, generally based on time worked in the location.
An employee’s location at each relevant date, such as the date the award is granted, date vested, and the date exercised, has important compliance implications. For example, if an employee receives an equity award while in one country, but exercises the award while residing in another, your company needs to determine if it has reporting and withholding obligations in both jurisdictions—and potentially others if the employee had business travel to other locations during the earnings period.
Companies must ensure they are following the rules for equity awards in the location(s) where the employee has been working over the life of the award to determine when it becomes subject to employer reporting and withholding obligations. The employee will also need to understand where they may have individual tax filing and payment requirements. It is also important to consider any remote employees who may be working outside of their Home jurisdiction.
A recent white paper, Equity Compensation Outlook (Outlook), was written by the National Association of Stock Plan Professionals (NASPP) and Fidelity Investments. The white paper contained a great overview of how changing workforce expectations are placing unprecedented pressure on talent management, resulting in an urgent need for companies to evolve their equity programs. Per the Outlook white paper, with 61% of organizations experiencing an increase in employee mobility because of the pandemic, it is critically important to understand the payroll reporting and withholding rules and educate business leaders and mobile employees.
Does the timing of the equity award matter?
As noted, the location of the employee’s tax residence at key potential taxation points (i.e., grant, vest, exercise, and sale of shares) can have a direct impact on the ultimate compliance requirements for both the company and employee. Here, payroll rules can vary by location, creating timing differences as to when the equity income becomes taxable to the employee, and when the employer has reporting and withholding obligations.
For example, the US generally subjects equity awards to ordinary income tax at the time the awards vest, as well as capital gains tax at the time they are sold. State tax treatment can vary based on the employee’s state residency status and location of workdays during the earnings period for the award (i.e., time between grant and vest for restricted stock units). Other countries may have different taxation points for treating awards as employee compensation and for the imposition of capital gains tax when they are sold.
By understanding the rules in advance, planning can be initiated to potentially avoid future complexities. For example, a change in the relocation timing could allow an employee to receive an equity award prior to establishing tax residency in another country. Depending on the locations involved, this may subsequently reduce complexity and filing requirements in future years.
Does the award create social security obligations?
Most countries have some type of social assistance program that finances benefits through a levy on the payrolls of companies operating there. The US has entered into totalization agreements to limit double taxation for social security taxes with 30 other countries so there may be an exemption from this social security component for US employees working temporarily in these locations.
It is important for your company to review and determine potential risk and compliance obligations associated with the social security tax related to equity awards for its cross-border international workforce.
Do your employees work in multiple states?
Your company should conduct a review to ensure that it is fulfilling its tax and withholding obligations in each state where employees are working—this includes remote workers who may be working across state borders. This also means ensuring that employees are aware of their individual tax return filing obligations in a non-resident state. It is important to:
- Assess whether employees present a risk for possible non-resident reporting and withholding obligations
- Develop appropriate procedures to identify and handle any compliance requirements
- Consider policies and communications to address employee concerns and provide education on individual tax filing responsibilities
Companies may need to consider providing additional support for their employees, such as provision of tax gross-ups or offer company paid tax return preparation filing assistance, to make sure that the equity awards remain a viable employee performance incentive.
Is your company’s payroll system up to the challenge?
When employees are mobile, a company’s payroll system needs to address reporting in multiple jurisdictions on a domestic and global basis. If current systems do not meet your needs when it comes to reporting for mobile employees, it is important for stakeholders to understand the risks of being non-compliant, due to system constraints.
Your payroll and tax service providers can be great resources in helping to identify requirements and potential options if your organization needs to upgrade its technology or procedures to meet its compliance obligations.
What is the trend in global compliance for equity compensation?
The US and other countries have recently enacted new oversight and accounting rules that focus on stock-based compensation. Those rule changes have been driven by technological developments allowing for improved tracking of financial accounts, tracking of executives working in multiple locations, and a desire for increased tax revenue. As a result, any company with executives on the move should conduct a thorough review of the company’s tax obligations in the countries and states where its employees are working.
Failure to proactively address company and employee compliance requirements can lead to increased financial, reputational, and legal risks for your organization and your mobile employees.
If your company is awarding equity compensation to employees whose roles are mobile, consider retaining a mobility tax specialist to help with the employer reporting obligations of changing legislative and regulatory requirements. This is a complicated area that can have significant negative financial consequences to the company and the mobile employee if not properly reviewed.