For most mobility program managers, year-end is a time to have calls with your various mobility providers to discuss the past year and plan for the next. Now, as we approach the end of 2020, the biggest reflection is likely the impact COVID-19 has had on the global mobility industry. The sudden shift in business, along with travel bans and employees working from anywhere has created never before seen tax situations, which now need additional consideration as companies handle year-end payroll reporting and decide on services and support for their employees.
While you set up your planning calls, be sure to have one with your mobility tax provider. Below we share best practices to help make year-end a little easier as you determine your authorization list for employee tax support, consider any policy adjustments, and handle year-end compensation collection and reporting.
Authorization list of mobile employees
The first step in starting a successful year-end process is understanding which employees may have tax complexities due to their mobility scenario and may require support from the company. In creating a list of employees who will be authorized for services, consider the following:
- Start with your authorization list from last year
- Identify mobile employees who no longer require services
- Add new authorized mobile employees
When identifying new employees to add to your authorization list, it is important to consider employees in the following categories:
Employees with trailing tax liabilities
If your repatriated employees have equity compensation, deferred compensation, or even bonus payments that correlate to the time they were on assignment, they will most likely have trailing tax liabilities in their Host location. This may mean the company could have reporting and withholding obligations in the Host location and the employee could have a tax filing obligation. If there are ongoing Host country requirements, there may also be additional complexities for the employee in handling their Home country tax filings, such that Home and Host country tax support will be required. Make sure to review any ongoing reporting and filing requirements for your repatriated employees with your mobility tax provider as you consider your authorization list.
Employees with foreign tax credit carryovers
The US, like many countries, will allow a tax credit against the tax liability on income earned in another country. This credit is generally limited to the amount of US tax (rather than foreign tax) on the income. So, if your globally mobile employee works in a location with a higher tax rate than the US, it may mean that all of the foreign tax paid will not be able to be used as a credit on the employee’s current US federal tax return.
The good news is that this excess tax can be carried either back one year or forward ten years to offset the US tax on similar foreign source income. It is often beneficial to keep tax equalized employees on your tax authorization list if they have foreign tax credit carryovers and may still have foreign source income (i.e., they have received bonus or equity income that was all or partially earned while working outside the US or if they continue to have business trips outside the US). These rules can be complicated, but your mobility tax provider can assist you in tracking the excess credits and determining if there may be a benefit to ongoing tax preparation services to recover the credits.
Short-term business travelers
Although business travel has been reduced due to travel restrictions relating to COVID-19, it is still important to understand where your employees are working so you can assess any individual or corporate tax implications relating to their work or physical presence in other taxing jurisdictions.
If you aren’t already doing so, consider implementing a policy and process to track your short-term business travelers. As countries continue to increase scrutiny on cross-border activity, this tracking is critical to allow your organization to assess risk in areas such as tax and immigration. Although international business travel has more complexity, don’t forget about domestic business travelers, as they can also create reporting, withholding, and tax filing complexities for both your organization and mobile employees.
Make sure to discuss any year-end reporting and withholding obligations with your mobility tax provider for both your international and domestic business traveler population.
Employees working in tax jurisdictions other than their Home location
Working remotely has become the new norm in the corporate world. Many companies have allowed their employees to work from anywhere during the ongoing pandemic. However, if employees opt to work remotely away from their usual state or country of residence, they may be opening the door for additional reporting and compliance requirements both for the company and the employee. If you have employees working remotely, talk to your mobility tax provider about the tax implications of your work anywhere arrangements.
Another population to consider is permanent transferees, including domestic transfers. Most relocation expenses are now considered taxable as a result of the Tax Cuts and Jobs Act which went into effect on January 1, 2018. Even though most international permanent transferees do receive at least one year of Home and Host country tax return preparation services due to complexities in their tax situations, it is less common for companies to provide tax compliance support for their domestic transferees. Instead, most companies will only provide their domestic transferees a tax gross-up on relocation expenses. However, if you opt to gross-up at a higher than needed tax rate, you might be leaving the employee with a significant windfall. If your company has transferred executives or has a large number of transfers, the tax gross-ups can create a significant tax cost for the company. Consider reviewing your policy and employee support for transfer cases with your mobility tax provider.
Policy considerations for US and global stimulus schemes
As part of the CARES Act of 2020, US taxpayers were provided with a credit against their 2020 income taxes, which was delivered to most taxpayers as a stimulus payment of $1,200 each. This credit can add up to $3,900 for a family with three children. However, assignees and transferees with taxable assignment or transfer allowances may have missed out on this payment as a result of their inflated taxable compensation and income limits established to qualify for the credit.
We recommend putting this issue on the table for discussion with your mobility tax provider to help you develop a company policy regarding US stimulus and other global stimulus schemes that employees would have received had their income not included assignment or transfer-related compensation.
Year-end compensation collection and reporting
Did you have a proper year-end compensation review process in place last year, or were you scrambling around trying to resolve W-2 corrections? Identify what went well in your previous compensation reporting process and what can be improved. Making the necessary adjustments to your processes will enable you to get your compensation reporting under control for the next filing season. Talk to your mobility tax provider and relocation management company to assign responsibilities and agree on a timeline around collecting and reviewing relocation expenses and reporting them as taxable compensation as applicable.
IRC Section 139
We recommend taking a closer look at relocation expenses in 2020 as some of your relocation expenses may be treated as non-taxable due to the ongoing national emergency relating to the COVID-19 pandemic. Soon after the events of September 11, 2001, Section 139 was added to the IRC as an instrument for private entities to provide disaster relief payments to individuals on a tax-free basis. The current pandemic is a “qualified disaster” for purposes of IRC Section 139 and will remain qualified until the President declares that the federally declared disaster condition has ended.
Qualified disaster relief payments are exempt from federal and most states’ personal income tax for the recipient and are exempt from federal tax withholding, FICA, FUTA, Medicare, and self-employment taxes for all parties if structured properly. Further, qualifying payments are still deductible business expenses for the employer, even though they are not taxable to the recipients.
A qualified disaster relief payment includes any amount paid by an employer to or for the benefit of an employee to reimburse or pay “reasonable and necessary” personal, family, living, or funeral expenses incurred as a result of a qualified disaster.
While the IRS has not issued specific guidance regarding the type of expenses that may be reimbursed tax-free in the context of a national pandemic, the underlying purpose of IRC Section 139 suggests that potential tax relief may be available for reimbursement of COVID-19 related expenses, including:
- Transportation or commuting
- Expenses incurred to allow the employee to work from home (e.g., the cost of a personal computer, printer, supplies, internet service)
- Incremental utility costs due to working from home
- Medical expenses not covered by insurance (e.g., co-pays, deductibles, over-the-counter medicines)
- Health-related expenses (e.g., hand sanitizer, face masks, sanitizing cleaning products)
- Dependent care expenses due to school/place of care closings
- Tutoring and home-schooling related expense (e.g., Internet, computers to directly aid the education, online education applications)
- Critical care or funeral expenses of an employee or their family due to COVID-19
- Legal and accounting expenses
Section 139 does not require receipts or other proof of expenses incurred by employees provided that the payment amounts are reasonable, and Section 139 does not require that employers establish a written program to make qualified disaster relief payments. However, as a best practice it is strongly recommended to have these in place in case of an IRS audit.
One thing to note is that Section 139 applies to qualified disaster relief payments paid by an employer to or for the benefit of any employee, i.e., not just for assignees or transferees. While the year-end review might be based around mobile employees, we recommend sharing this topic with your benefits department to see whether they can identify any payments to employees that could be excluded from compensation under IRC Section 139.
Year-end tax payments
Once reportable compensation is identified, you may want to have a calculation to determine whether there is a need for any additional tax gross-up payments to avoid underpayment penalties. If there are any expected Host county tax payments, you may want to have them made before the end of the calendar year in order to be able to claim these payments as foreign tax credits on current year tax returns.
In summary, while we have outlined some of the more typical year-end processes and additional items that should be considered due to the ongoing global pandemic, it is important that you establish a well-defined plan with your mobility tax provider and other strategic mobility vendors. By working together and keeping lines of communication open, you can successfully meet your 2020 compliance requirements and set-up processes to ensure success going forward.
As always, we invite you to schedule a call with our team to talk through your specific situation and ask any additional questions you may have.
Author: Emre Kicik
Emre has nearly 20 years of experience in expat and foreign national tax preparation and consulting. Having lived in many different countries, Emre knows what it means to relocate, live, and work in a foreign country. He credits his own expat experiences for helping him understand individual and corporate global mobility needs. What Emre finds enriching about his work is that he can give close attention to his clients’ needs and find creative solutions to complex problems.
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