Sending business travelers on tax-equalized assignments around the globe often makes good business sense, but how to account for the tax costs associated with assignments can be challenging. To ensure incremental tax obligations don’t take you by surprise, it helps to have a process in place so you’ll be prepared for the additional expenses your mobile workers trigger along the way. To do this, many companies implement an accrual solution.
Why a Cost Accrual Solution Is Necessary
Mobile employees can, by their very nature, create risks and costs for an organization. It is common for mobile employees to be subject to income tax in multiple locations, based on factors such as citizenship, tax residency, and/or physical work location. In addition to national income tax, additional state, provincial, local, and social taxes may also apply. Employees may receive additional allowances, benefits, and incentives as a result of their cross-border employment. These layers of global tax applied to higher levels of income can result in expensive tax bills.
For companies who agree to cover their mobile employees’ additional tax burdens under a tax reimbursement policy, this additional tax cost can result in surprises and unexpected financial results. In addition, it is common to have situations where required worldwide tax payments are not known until after the completion of the Home and any final Host tax returns. Here, it is even possible that final payments are not known until years after the employee has returned from assignment.
Implementation of an appropriate accrual solution can help your company identify incremental tax costs, understand the likely timing of payments and, ultimately, track and account for these costs. In addition to avoiding surprises, this visibility can also help your organization understand the benefit of a proposed project or assignment, which can assist in setting up appropriate contracts or in avoiding scenarios that may not make sense financially for the organization or mobile employees.
Although establishing a cost accrual solution proactively and consistently helps you identify and anticipate the tax costs associated with your mobile employees, the process of implementing a new tax accrual process can be challenging. Here are some tips to help you get your accrual process up and running efficiently.
Five Tips for Establishing an Effective Tax Accrual Process
Tip #1: Determine the best type of accrual method for your company. Talking to a mobility tax specialist to discuss the different kinds of accrual methods and how each would impact your company, offers a good shortcut to arriving at the best options for your company.
Check out our recent blog to help you understand three common approaches to account for assignment-related tax costs.
Tip #2: Be consistent. Once you establish a tax accrual account, continue to record all tax payments related to the assignment to that account. Specifically, it helps to base the accounting entry for a tax accrual on the projected tax costs and not on the taxes paid. This ensures the tax accrual entry isn’t confused with an actual cash payment. Also, it helps to anticipate that there may be differences in the tax costs recorded as an expense in any given year as compared to the tax payments recorded as taxable wages.
Tip #3: Know that the process takes a team effort. Work with your finance and accounting teams to accurately anticipate the various types of tax payments that may occur during a tax-equalized assignment. Proper coding of the payments often takes a coordinated effort that involves payroll and accounts payable staff, relocation vendors, tax professionals, and others to ensure payments are routed to the right accrual account. Train these other teams regarding the different tax systems that each mobile employee may be subject to and how this will impact the timing of withholding and payments across jurisdictions.
Tip #4: Reconcile budgeted-to-actual tax costs at least annually. Taking this extra step will assist with the adjustments to the tax accrual accounts and add clarity for managing the costs. Many employers will complete this reconciliation after completing the final Host and Home country tax returns each year.
Tip #5: Keep employees updated. For W-2 wage reporting purposes, generally tax payments paid during the current year are recorded on the employee’s W-2 as income. It is important to make sure that your employees are kept up-to-date and understand any adjustments to their taxable compensation and how it will impact their tax filings. This communication is especially critical in years following repatriation. Here, employees will need to know of any anticipated trailing tax liabilities that may arise following the completion of their international assignment to ensure compliance in both their Home and Host locations.
Look for Guidance from Outside Sources
There is no need to reinvent the wheel when it comes to setting up and implementing a tax accrual process. A mobility tax specialist can provide guidance, prepare tax cost projections, and deliver tools to help you effectively track and report global incremental tax obligations.
Having this level of outside support can further improve the accuracy and efficiency of your payroll activities and compliance activities. It can also help your finance team fine-tune their forecasting for better cash flow management.
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.