| U.S.
Payroll Reporting for Foreign National (Answer true or false for each of the following statements.)
U.S. Payroll
Reporting for U.S. Expatriates
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Administering payroll to both U.S.-inbound and U.S.-outbound expatriate employees can be a daunting and thankless task. The rules governing payroll taxes are complex, compliance is cumbersome, and the penalties for failing to comply can be severe. Few companies are prepared and few payroll departments are staffed to handle the difficulties of full compliance with U.S. (expatriate) payroll law, whether they are only just beginning to confront expatriate issues or have an established expatriate population and program.
Given the increasing burdens placed on payroll administrators and expatriate program managers, and the limited or decreasing internal resources, it’s no wonder that many companies fail to comply with U.S. payroll law applicable to expatriates. While it may seem easier to ignore the rules and raise the white flag in defeat rather than invest the time and resources necessary to ensure compliance, this is neither prudent nor responsible. Preserving a corporate tax deduction and being a good corporate citizen should suffice to warrant the extra attention and resources required for achieving full compliance with U.S. law. If they are not, however, then perhaps the threat of potential severe penalties and increased scrutiny of expatriate matters by the IRS will be. It is important that your company is paying attention and is aware of all the issues.
The following discussion highlights some of the issues, rules, penalties, and related complexities in this area. It also identifies some of the solutions that are available to help companies identify their exposure areas, comply with the law, and control costs.
Passing
the Test
We encourage you to take the following true-or-false test to help you determine whether
your company is paying attention to relevant payroll issues or, rather, is poised to pay
the piper.
Test Your Knowledge of Key Payroll Administration Issues
U.S. Payroll Reporting for Foreign National
(Answer true or false for each of the following statements.)
No U.S. reporting is required for a foreign national employee working in the U.S. for less than 90 days. J-1 Visa holders are considered nonresidents of the U.S. and are always exempt from taxation and payroll reporting requirements. No U.S. reporting is required for B-1 Visa holders who enter the U.S. on business trips. Foreign nationals working in the U.S. are not subject to U.S. social security tax. No U.S. reporting is required for foreign nationals working in the U.S. who are paid by a foreign employer. There are no U.S. reporting requirements for the exercise of stock options issued by a U.S. company to a foreign national employee if exercised when the employee is not resident in the U.S. U.S. Payroll Reporting for U.S. Expatriates
(Answer true or false for each of the following statements.)
All U.S. income tax withholding should stop once an expatriate assignment has begun. A completed (and signed) Form 673 provides payroll with the authority to stop all income tax withholding on expatriate compensation. Expatriate compensation paid in the foreign location need not be reported on a U.S. Form W-2. A certificate of coverage issued by the U.S. Social Security administration exempts an expatriate from contributing to U.S. social security while on assignment outside the U.S. U.S. payroll reporting requirements do not apply to foreign companies with no operations in the U.S.
If you answered "false" to all of the questions (and know the complete answers), you may want to contact your nearest KPMG recruiter to discuss career opportunities. If you answered "true" to one or more of the questions, you should read on.
The
Rules Are Complex
U.S. payroll reporting rules are much too complex to cover fully in this discussion.
However, one should be aware that, as a general rule, U.S. payroll laws are written to
cover virtually all employees and employers worldwide.
For example, employers are required to withhold income taxes on all wages paid to U.S. citizens or resident aliens regardless of whether the wages were earned in a foreign country, or whether the employer is not a U.S. person or company. In addition, foreign employers with nonresident alien employees working in the U.S. are required to withhold U.S. income and other payroll taxes from the wages of these employees if the wages are not exempt from U.S. taxation under U.S. domestic tax law or treaty. This means that a foreign employer may be required to establish a formal U.S. payroll system, obtain an IRS employer identification number, make periodic deposits of tax, and file the applicable informational returns. Alternatively, the foreign employer may consider transferring the employee to the payroll of the U.S. affiliate or appointing a paying agent to perform the required U.S. payroll functions.
Proper Withholding
With any effort made to appropriately reduce (or eliminate) U.S. federal income tax
withholding on expatriate compensation (that would otherwise be subject to withholding),
it is important for payroll to maintain adequate documentation in its files to support the
actions taken. Several methods for reducing or eliminating withholding are listed below:
Proper Reporting
Employers must collect compensation-related data and report all wages paid to or on behalf
of a U.S. citizen or resident alien employee on a Form W-2. This includes payments made
through U.S. accounts payable (e.g., payments made to third-party vendors) and from
a split payroll or accounts payable in the foreign location.
In addition, employers generally need to provide their expatriate employees and their tax service provider with a summary statement that provides a breakdown of the amount and type of each component of compensation. Certain amounts that may be buried in a total figure may be necessary for the completion of the U.S. and foreign tax returns. It is essential to have a system that can accumulate the information so that accurate amounts can be reported on the W-2.
Proper Timing
Wages paid to or on behalf of employees should be recorded as compensation in the period
paid. Due to the difficulty of accumulating and reflecting foreign-paid compensation back
in the U.S., many companies have adopted an annual process (usually at or near year-end)
for soliciting this information from the foreign locations to include in the U.S. Form
W-2. This practice, while common, is not correct under the law and could give rise to
employment tax penalties.
Compliance
Is Cumbersome
Many payroll departments are hard pressed to cope with the obvious burden of keeping
abreast of and complying with the complexities of the laws. They simply do not have the
resources for setting up the procedures necessary to administer expatriate payroll.
Moreover, most payroll systems are not flexible enough to handle expatriate reporting
requirements.
Areas where companies typically encounter difficulties in their payroll systems and departments include:
Deficiencies in these areas can lead to serious problems. For instance, one multinational company had requested a full review of compensation delivered to its expatriate employees to ensure that they were receiving proper amounts in accordance with the terms of their agreements. Prior to the review, many of the expatriates complained of missed payments and improper tax withholding. The review confirmed that there were serious issues with the company’s withholding, disbursement, and information collection practices.
A review of expatriate payroll at another multinational company revealed not only improper reporting but also duplicate payments of expatriate benefits. Surprising as it may seem, duplicate payments are not that uncommon. This often occurs because most expatriate allowances are usually paid via payroll, while other allowances and reimbursements may be paid through expense reports or accounts payable.
As these examples clearly illustrate, it is imperative for companies to dedicate the resources necessary to properly deliver and account for expatriate payroll. Failure to do so can result in disgruntled employees and troublesome expatriate programs.
Federal
Penalties Can Be Severe
Both civil and criminal penalties can be imposed on employers that fail to carry out their
duties as collection agents for the government. Penalties may be imposed for:
Penalties may take the form of additions to tax, interest, fines, and imprisonment. The severity of the penalty generally depends on the degree of willfulness present in the employer’s conduct. Furthermore, penalties are not only assessed on the corporate employer but may also be imposed on the individual having the duty or responsibility for collecting, accounting for, and paying over any tax. With the IRS’s increased focus on expatriate issues, it is important to be aware of the penalties and risks.
Failure to File Employment Tax Returns
In the case of an employer's failure to file an employment tax return, a penalty based on
a percentage of the tax required to have been reported may be assessed. This penalty is
applicable unless the failure to file is shown to the satisfaction of the IRS to have been
due to reasonable cause and not to willful neglect. Penalties can include:
Failure to Pay Over Employment Taxes
A penalty of one-half of one percent of the amount due (not to exceed 25 percent) may be
imposed on the employer for each month or portion of a month that the tax shown on an
employment tax return is paid late, unless such failure is due to reasonable cause.
Interest will also be charged on the late payment.
Negligence
To the extent that an underpayment of tax on an employment tax return is due to negligence
or a disregard of the rules and regulations, a 20 percent penalty can be imposed, unless
reasonable cause can be shown.
Failure to Make Timely Deposits
The penalty for untimely deposits is based on applicable percentages of the amount of
underpayment determined by the number of days the deposit is overdue. The penalty ranges
from two percent to 10 percent of the underpayment. An additional 15 percent can be tacked
on if the undeposited taxes are not paid on or before the earlier of the following two
events: either 10 days after the date of the first delinquency notice or the day on which
the notice and demand for immediate payment is given. Taxpayers required to make deposits
using the Electronic Funds Transfer Payment System (EFTPS) who fail to do so are subject
to a 10 percent penalty even if they used an alternative method in a timely fashion.
Failure to File Correct Wage and Tax Statements on Time
A penalty of $50 is imposed for each failure to file a required information return with
the IRS or to include all required information when a return is filed. The same fine is
levied for a return that includes incorrect information. A higher penalty may be imposed
if the failure is due to intentional disregard of the filing requirements. Similar
penalties can be imposed for the failure to furnish correct wage statements to employees
on a timely basis. However, these penalties can be waived if the reporting failure was due
to reasonable cause and not to willful neglect.
Some
Solutions
The first step to avoiding common payroll pitfalls is to recognize that there is a
problem. Expatriate program managers and payroll administrators must then identify the
source of the problem, quantify the extent of the exposure or risk, and work toward a
solution in each area. The solution to a company’s problems will be unique to each
company and will depend on many factors, including the size of the expatriate population,
the resources within the payroll group, the flexibility of the current payroll system, and
the company philosophy regarding risk.
The solutions can vary and may include investing internally within the payroll group, contracting for consulting services from an experienced expatriate payroll advisor, or fully outsourcing expatriate payroll services. Whether a decision is made to invest within or without, to consult or fully outsource, the following tools and services can help a company meet its goals of a smooth-running international payroll program and full compliance:
Conclusion
U.S. payroll reporting is one of the most challenging aspects of any international
assignment program. Noncompliance in this area can create large exposure to employment
taxes and associated penalties. Whether your company is in its infancy in dealing with
expatriate issues or has a mature expatriate program, there could be exposure that
warrants immediate attention. With increased IRS scrutiny of expatriate issues and the
threat of potentially severe penalties, now is a good time to identify problem areas,
quantify exposure, and take action to minimize risk. There is no better time to make sure
your company is paying attention.
