When it comes to equity reporting and withholding, companies do not always realize they may be non-compliant if they have a mobile workforce. These companies may not understand the rules or have processes in place to allow for the tracking of employees. For these reasons, the payroll reporting and withholding, related to equity income, may be handled as if the individual had only worked in one location. However, this approach is often not appropriate for mobile employees working in multiple locations. Here, reporting and withholding rules can vary for each jurisdiction.
To illustrate the payroll challenges for mobile employees with equity compensation, consider the following common scenario:
- The company grants restricted stock units (RSUs) to an employee who is a tax resident in Jurisdiction A.
- After the grant and before vesting, the employee relocated to Jurisdiction B.
- The RSUs vest while the employee is a tax resident in Jurisdiction B.
In this scenario, an employer may face trailing reporting and withholding obligations in Jurisdiction A in addition to reporting in Jurisdiction B. The employee may be taxed in Jurisdiction A on the portion of the equity income that was earned there, generally based on the time worked in that location during the earnings period. This example could involve employees with international or state-to-state travel.
To help you identify if you have an equity non-compliance issue due to a mobile workforce, first ask yourself these questions:
- Do you have any international permanent relocations?
- Do you have state-to-state transfers?
- Do you have any business travelers?
- Do you have any remote workers or employees who are working from “anywhere”?
If the answer is yes to any of those questions, you may have a tax withholding issue. Companies should work to ensure they are following the rules for equity awards in the jurisdiction(s) where the employee has been working over the life of the award to determine when and how much is subject to employer reporting and withholding obligations. The employee will also need to understand where they may have individual tax filing and payment requirements.
Why does it matter if you are compliant?
The US, along with a number of other countries, have enacted new oversight and accounting rules that focus on stock-based compensation. These rule changes have been driven by technological developments which allow for improved tracking of financial accounts, executives working in multiple locations, and a desire for increased tax revenue. As a result, any company with employees on the move should conduct a thorough review of the company’s tax obligations in the countries and states where their employees are working. Failure to proactively address company and employee compliance requirements could lead to increased audits and increased financial, reputational, and legal risks for your organization and your mobile employees.
Factors that contribute to a company and employee needing to report equity compensation
Due to complex tax laws, many companies are unsure of what, where, and when to report equity compensation. Additionally, it is a time-consuming process to ensure equity is reported correctly, taking significant time and effort by internal teams. It can be difficult to track and manage where all your employees are located, what actions are taking place that are creating taxable events, and when you need to report on the equity compensation. Many factors come into play, including:
- Award type – different types of awards can cause different reporting requirements.
- Company issues – plan rules, recharge arrangements, and private rulings all must be considered.
- Country-specific rules – some countries require full withholding, partial withholding, or do not require withholding.
- Employee factors – citizenship, residency in each jurisdiction, and immigration status can impact the reporting requirements.
- Event timing – different tax jurisdictions may have different laws to determine when the reporting and/or withholding is due.
- Social Taxes – for international scenarios, the rules for social tax reporting and withholding may not mirror the rules in effect for income tax purposes. Is there relief available to mitigate double taxation (e.g., such as a totalization agreement between the Home and Host locations)?
International scenarios can have many other complexities. For example, employees may be subject to double withholding or even double taxation if event timing rules are unfavorable between two locations. In some instances, this can make the equity income an actual disincentive for the employee. Some countries may have an exit tax on unvested equity that can lead to cash flow and other reporting complexities for your mobile employee.
A mobility tax firm can assist in identifying domestic country tax and payroll rules and highlight the impact of any available tax treaties for your international scenarios. By understanding the rules before the travel occurs, planning may be available to address unfavorable tax or cash flow issues for your employees. It is also important to consult with your legal advisors as labor laws in each country can also impact the reporting requirements.
State-to-state moves will also have special considerations:
- From an administrative perspective, will you report only to the employee’s current state or will you consider reporting and withholding for any state where the employee worked during the equity earnings period (e.g., grant to vest for restricted stock)?
- Does your payroll process allow reporting in multiple states?
- Are there local (e.g., city) withholding requirements?
- Are there reciprocity agreements between states that would impact the need to withhold in all locations?
- Does a state allow a credit for taxes paid to another state, such that the withholding could be reduced for the state providing the credit?
How to address the equity reporting and withholding issue
As you look to review your current processes and policies related to the reporting and withholding of equity income, here are some key considerations to keep in mind:
- Which state-to-state and country-to-country mobility scenarios does your organization currently have and are there new combinations on the horizon? What types of rules and potential challenges will need to be addressed?
- Do you have appropriate tools and processes to handle cross-border compliance requirements? Do you know where your employees are working and traveling on business?
- If your employees need to report and pay tax on equity income in multiple locations, what type of support will your company provide? Will you provide tax compliance support, education, and/or tax equalization or other financial support?
Once you determine that you have a compliance issue, the next step will be to make an implementation plan:
- Break the project down into realistic pieces and adopt a phased approach—the first step in creating your plan should be in determining where your compliance risks lay.
- As appropriate, focus on becoming compliant for groups with the highest risk or challenges.
- Define what “compliance” will look like for your company. For some companies, compliance is a continuum, while for others it is an absolute. It will depend on factors such as your company culture, your risk tolerance, and your industry. Choose the path that best suits your culture and business needs.
- How many equity staff members do you have internally and what are their roles versus what is outsourced? There likely will be a need for extensive coordination between business units to ensure all stakeholders have the information they need. This includes the equity team, stock plan administrators, global payroll teams, global mobility team, as well as the individual employees. Do you have enough staff to fully implement your plan, do you need to hire more staff, or do you need to make plans to outsource more?
- Evaluate which tasks are best handled internally vs. those that are better to outsource.
- Reach out to trusted advisors to learn what outsourcing capabilities and services they offer. Then review those service offerings and select those that will best suit your needs.
- Finally, define the implementation phases and outline an ideal timeline. Then, coordinate with the selected vendors and assign tasks to your internal team.
Equity compensation and its related reporting and withholding is a complex area which often requires significant analysis—we are here to help. Schedule a free consultation with one of our equity experts. We will discuss your specific situation and help you outline a plan of action that will best fit your company and employee needs.
Author: Matt Yadamiec
Matt joined GTN in 2015 and serves as Senior Manager in GTN’s Atlantic region. He has over 13 years of expatriate tax experience, advising companies on matters such as Home and Host country tax filing requirements, global compensation and equity reporting, and cross border tax compliance and consulting. He enjoys collaborating with his clients, offering responsive and personalized assistance for their global mobility needs and providing explanations to issues in a clear and concise manner for both program managers and mobile employees. +1.484.615.7107 | firstname.lastname@example.org