Attracting and retaining skilled workers in today’s tight labor market takes more than a competitive salary. Many companies find they can meet their employment needs and their employees’ incentive preferences by offering a portion of their compensation as equity.
Offering an opportunity for equity ownership in the form of stock options, restricted shares, or employee stock purchase plans is not new. It’s a time-tested way of helping employees build their wealth while more closely aligning their personal financial interests with those of your company. If some portion of compensation is equity-based, it means that as your company prospers, your stock-owning employees do as well.
In the US, employees control about 8% of corporate equity, with an estimated 32 million participating in some form of stock ownership.
National Center for Employee Ownership
However, when participants of your company’s equity-based compensation plans work in multiple locations, additional withholding and reporting challenges may arise. To avoid the potential taxation pitfalls equity awards can cause, you’ll need to develop a customized solution.
Understanding the Multi-Layered Impact Equity Income Has on Your Program
Before you can adequately address the additional challenges an equity incentive plan will have on your mobility tax program, it helps to understand the various ways it can impact your reporting requirements. After all, payroll reporting becomes more complicated when multiple jurisdictions have reporting and withholding obligations for taxable compensation. Also, offering stock options to mobile employees can be especially complex because they are granted, vested, and exercised over several years. During that time, an employee may work in multiple tax jurisdictions, each with its own rules.
Income taxes aren’t the only obligations impacted; so are the withholding and reporting requirements for social security obligations. To make matters more complex, these reporting requirements are not linked to just national or federal levels. In the US, for example, there may be state taxes for non-residents to consider.
When employees work in multiple states during a year, employers can incur additional tax reporting and withholding obligations. The employees may also need to file several state income tax returns instead of just one for their Home state. New York, for example, has separate reporting requirements for employers and employees, making tracking the data to accurately prepare W-2s even more challenging without the proper systems in place.
Legislative changes across countries also need to be monitored. For instance, in Belgium, new tax reporting and withholding obligations for companies with foreign equity plans now require a tax withholding obligation for equity incentives granted since the start of 2019. Also, in 2019, France introduced a new tax withholding system. Staying up to date across all the countries you do business in regarding the changes in securities law, foreign exchange, data privacy rules, and labor law is critical.
Creating a Customized Plan for Managing the Compliance Burdens of a Global Workforce
Before proceeding with an equity-based compensation plan, you’ll need to put a comprehensive and preferably technology-based process in place to cover your location exposures. Here are some things you’ll want to consider as you do.
#1: Determine what you need to report and withhold for each type of equity transaction.
#2: Capture and organize your data by:
- Mobile employee
- Relocation date(s)
- Workday data
#3: Share information by:
- Coordinating with payroll
- Explaining to employees that additional jurisdictions reporting may be required and withholding will reduce their gross award
#4: Review equity income as a compensation strategy to:
- Understand how a mobile workforce may create challenges
- Ensure that any tax equalization policies appropriately address and manage the complexities and risks associated with equity income
- Consider that equity-based compensation could be a disincentive for some globally mobile employees because of tax requirements
- Anticipate any mismatch between the additional tax return filing requirements your employees might face and your payroll tax reporting and withholding obligations
How a Global Mobility Tax Provider Can Help
Knowing the various implications associated with your mobile workforce will be essential for you and your employees to successfully navigate between the desire for equity compensation and the responsibility of fulfilling the resulting compliance obligations.
A global mobility tax provider can help alleviate the added challenges of offering equity compensation. Such a service will work with you to develop a policy for your firm to follow and share with assignment managers, HR business partners, mobile employees, and business travelers.
These firms can also keep you updated regarding country-specific guidance on payroll reporting and changes in withholding requirements for equity rewards. Additionally, global mobility tax experts can prepare calculations for the allocable amounts of reportable compensation, income tax, and social security withholding on equity income by state and by country.
For more information about how a specialist can help you customize a global mobility solution to your program’s unique set of risks, contact us.
The information provided in this article is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.