Any payroll professional who handles a domestic payroll is already familiar with the processes needed to properly pay expatriates, an expat payroll expert said in the Global Payroll Management Institute webinar “Expatriate Payroll 101: Everything You Need to Know to Get Started.”
Patrick Landers, CPA, CPP, People Advisory Services Partner with Ernst & Young, LLP, covers the basics of paying workers abroad in the webinar, which is available on demand.
“Most individuals who handle payroll are already familiar with how to address cross-border tax issues,” he said. “You are familiar with how you need to treat somebody traveling on a business trip. All of those same parallels exist on an international basis. It really is not that much more sophisticated. It adds complexity because you add immigration and corporate tax issues. If you can handle domestic payroll, you can handle expat payroll.”
Landers defined mobile employees as any employees working outside of their base location for business.
He encouraged his audience to always use IRS definitions of assignment durations because they will determine taxability in the United States based on the Internal Revenue Code.
When an employee goes abroad, “You really should define what that term is, even if you know it only as a projection,” he said.
Once an employee’s overseas assignment reaches a period of one year, regardless of what the duration of the assignment was intended to be, it switches from a short-term assignment to a long-term one. From that point forward, the employee’s business expenses become taxable income when paid or reimbursed by the employer.
He used the following definitions for expatriate employees, saying, “Generally speaking, you can put all of your cross-border travelers into one of these categories.”
Long-term assignment:
- Exceeds one year
- Employee has moved and changed “tax home”
- All international premiums and allowances are reportable as taxable compensation
Short-term assignment:
- Does not exceed one year
- Usually not a move but an extended “business trip”
- Employee business expenses paid or reimbursed by the employer (i.e., per diems) generally excluded from reportable income under Internal Revenue Code §§132 and 162
Mobile employees:
- Also includes employees traveling for business
- Short-term business travelers
- Stealth travelers, for whom payroll and HR have no visibility
Communication is the key when it comes to international assignments, he said, urging payroll, human resources, the business unit, and the legal, immigration, and corporate tax departments to be connected.
If a company email notifies an employee that an overseas assignment is being prolonged to the one-year period or beyond, “From a payroll perspective, you may not be the one sending the email, but as soon as that email is sent, if you’re changing the status from short-term to long-term assignment, the intent has changed and those items that had been treated as non-taxable income now need to be picked up as taxable income.”
He walked his audience through assignment compensation and its sources, approaches to payroll delivery, taxability and reporting, and the compensation management process.
“This is one of the areas where I often see that companies have the biggest opportunity for improvement and the biggest opportunity to streamline their process and identify exceptions, variances, and issues,” he said of compensation management. “If you get it right on the front end, you can minimize Forms W-2c and other things that might traditionally happen looking at this after the fact when preparing a tax return for an expat.”
Kerry Cole is a writer and editor for the American Payroll Association and for the Global Payroll Management Institute. He has more than 25 years of experience in journalism and corporate communications.