At a very high level, Global Mobility Tax addresses the tax implications to the employee and their employer when they work outside their primary work location (tax jurisdiction). This includes company registration, allocation of income/deductions, income and social tax withholding and overall compensation reporting.
In years past, employee movement was limited to occasional business trips or long term assignments/transfers. But in the age of remote working, employees can and want to “work from anywhere” and that can have some unintended and dangerous consequences for their employers.
Employee compensation sourcing
How does this happen you may ask. It all relates to how compensation for personal services (employees and contractors) is “sourced” for tax purposes. Personal services are generally sourced to the physical location where the services are performed. This means that wherever your employee is working (yes, remotely counts) is where their compensation is considered sourced.
That means that employees are considered to be earning compensation in another tax jurisdiction if they work remotely, are on a business trip, are on a short term (less than 6 months) or long term (1-2 years) assignment or work from vacation in an exotic location. It is irrelevant where you run your payroll or where your headquarters is.
Even if they are hired from Utah to work for you in your office in Utah, if they work from a remote location in Idaho, all of the compensation related to their workdays in Idaho are considered Idaho sourced and possibly subject to income tax reporting and withholding in Idaho.
As with most things tax related, limitations and specific rules apply so the key is to know where your employees are working (particularly senior level employees). Special rules apply to certain fringe benefits or long-term compensation.
Compensation allowances
Some employers provide additional compensation to alleviate the tax or other implications of working outside of their primary work location. This could apply if an employee is asked to work in a higher tax location (assignment in California or Canada).
These can include any or all of the following:
- Cost of living allowances to cover differences in economic costs between the locations
- Housing reimbursements to compensate for keeping two homes temporarily
- Tax reimbursements to cover additional taxes associated with new location and tax due on allowances/reimbursements (can come in the form of tax protection or equalization)
- Education reimbursements for dependents
- Personal tax services (to claim additional state or foreign tax credits)
All of these reimbursements are considered taxable compensation and result in additional tax due when paid to mobile employees.
Working outside of the US?
Many employers rely on income tax treaties for exemption if their employees are working outside of the US. While these are definitely helpful for standard business trips, treaties are less helpful if your employees spend more time (several months or more), are senior level, are providing services for the benefit of a related company or if your employees are working in a country without an income tax treaty.
The rules in this area are quite complex and the income and social tax implications can vary widely depending on the specific fact pattern.
What could possibly go wrong?
Tax implications could include additional employer registration requirements in unintended states or countries, additional income and social tax withholding requirements, and company tax implications as a result of a “presence” in another state or country (“nexus” or “permanent establishment”).
Penalties for getting it wrong could include penalties/interest charges, being liable for employee withholding tax, the inability to conduct business in the location, audit-determined employer tax requirements/filings and overall negative market optics (such as a perceived lack of compliance=bad corporate governance).
To minimize your risk from these possible tax implications, keeping track and reviewing where your employees work and putting policies in place to respond appropriately if they are creating unintended tax implications is highly recommended. Contact Joni Edwards today to ensure your business is protected and compliant. Call 801-532-7444 or email click here to contact us. Secure your business’s future now!