Claudia Howe – Global Mobility Tax, LLP
Wow! Where did the year go? Now that it’s almost over, HR and payroll professionals are working hard to finish out the year. In the world of expatriate compensation and taxation, here is a reminder list of 10 things to do before December 31 (for our international readers, I realize this will be a bit US-centric, but hopefully useful nevertheless):
Tip #1: Pay all taxes due for jurisdictions that do not have a 12/31 year-end
Some countries have different year-ends, for example: Australia = June 30, Hong Kong = March 31, New Zealand = March 31, UK = April 5, South Africa = February 28.
If taxes are not paid throughout the year or by 12/31 (especially in the first year of assignment), the employee or the company (for tax equalized assignees) may lose out on claiming important foreign tax credits on the US tax return and could have a nasty surprise at April 15. This is due to the fact that the US only allows tax credits on the US return against taxes paid or accrued during the tax year.
For example: Suppose you have an expat from the US in the UK since June 2009 and have not quite been able to get regular monthly UK tax payments set up. If UK taxes have not been remitted to Her Majesty’s Revenue and Customs (aka UK tax authorities) before 12/31, they cannot be claimed as a credit on the US return, causing temporary (and potentially permanent) double taxation!
Tip #2: Pay all US taxes due through payroll
Perhaps you are aware of a very large January bonus that was not withheld at the top marginal rate and on which a US tax payment should be made to avoid the underpayment penalty. What are the options to make the payment?
- Option 1: send a check in the mail to the IRS with an estimated tax payment voucher (1040-ES – Q4, due January 15).
- Option 2: make the payment through payroll before 12/31.
Best choice? Option 2. When making payment through withholding, the IRS will treat it as evenly paid throughout the year and this will minimize/eliminate estimated tax penalties that could otherwise apply.
Tip #3: Update your tax accruals
Year-end budgeting is in progress. If there are liabilities out there – be it US or foreign tax liabilities that will come due, it is important to accrue for them so that the financials are correct and also to avoid surprises later on.
Tip #4: Review relocation Gross-ups
For folks that were relocated during the tax year but are not tax equalized, a relocation gross-up should be processed if the company promised to pick up the taxes on the taxable items such as temporary lodging, temporary transportation, etc. Many major relocation companies will do this for you, or will at least give you the amounts to be grossed-up. Tax professionals can also be useful here especially if you are relocating an executive with the expectation of no tax detriment: your 25% supplemental rate would likely not cover that tax bill and you could end up with a disgruntled exec at tax time in April.
If you process gross-ups at year-end, don’t forget to send a courtesy email to the employee informing him/her why the last paystub or the W-2 looks so much higher all of the sudden. And be sure to process the payments of withholding through payroll (see Tip #2, Option 2 above!).
Tip #5: Review expatriate compensation details for W-2 inclusion
The tricky part of expatriate compensation is that it is usually not delivered all from one location; many items such as housing, children’s education, local tax payments, etc. are paid from the host location and are not channeled back to US payroll for inclusion in the W-2 (which, of course is required by law: all compensation no matter where or how paid must be reported to the IRS on the W-2).
It is especially at year-end that I am reminded that our colleagues in payroll are indeed the unsung heroes of corporate America: they are expected to deliver correct payroll on-time with 100% accuracy all the time – talk about stress! And no-one stops by to say: “Thanks, Andrea, for getting my W-2 right - I know it must have been a challenge”!
Tip #6: Review withholding on US bonus, commission and equity compensation payouts
For US expatriates on assignment in a foreign location, remaining on US payroll, usually federal (and sometimes state) withholding will be turned off. In lieu of the actual withholding, a hypothetical tax withholding for tax equalized folks is implemented or a fixed withholding amount for the foreign jurisdiction is taken out of the pay. Since oftentimes these are fixed dollar amounts per paycheck, the withholding on bonuses or commissions are easily overlooked. Better late than never – now is a good time to review and ascertain that the correct amount of withholding has been taken out of these type of payments to ensure that the employee does not owe the company or the governments any underwitheld amounts.
If actual federal/state taxes are withheld from executive or high-income taxpayer’s bonus and commission payments, and if the person is tax equalized, you will want to ensure that taxes were withheld at the highest marginal rates, not the 25% supplemental rate.
Tip #7: Finalize your Authorization List
Make sure to finalize the list of employees that are eligible for tax services and let your tax service provider know before 12/31. Delays beyond that date could delay the kick-off for the tax season. Then your employees could be left wondering if their taxes will be taken care of – or not?
Tip #8: Sign your Engagement Letters
Your tax firm may not be able to provide services until they get that signed engagement letter back from the company. So better check with the person who signs the letter to make sure it get out and not hung up in legal or procurement. Again, delays could cause problems for your employees.
Tip #9: Solicit the completed 2009 travel calendars from all assignees
This can be coordinated with the tax firm you are using; the travel calendar is one of the most important items in the tax preparation process. Most will supply you with an automated calendar at the beginning of the year to make this process easy, but of course, your assignees have to use the tool! Tax firms spend almost half of the tax preparation time on reporting compensation in the correct format and sourced to the correct jurisdiction. The travel calendar is a key item needed for this exercise as well as to determine tax residency status, qualification for tax exclucsions, etc. The earlier the tax professionals can get their hands on it, the better!
Tip #10: Don’t forget to enjoy the holidays!
We all tend to get very stressed at year-end – it is a hectic time, after all! But sometimes we do have to remind ourselves that we need to take a deep breath, sit back, and relax…and enjoy the Season!
More about Claudia: