PayRx – THE PRESCRIPTION FOR A HEALTHY PAYROLL
by Dan Orchant and Ed Gibbons, KPMG, New York

Now that the 1999 payroll process is complete and W-2 forms have been issued, there’s no better time to focus on resolving concerns you may have about your company’s expatriate payroll. Typically, multinational companies with expatriates wrestle with the unique problems and complexities pertinent to expatriate payroll. Achieving an efficient and accurate payroll process is complicated by the need to comply with numerous federal and state income tax and payroll tax regulations. Even the most seasoned payroll managers are often perplexed by the challenges of expatriate payroll issues, which, in addition to arcane laws and regulations, include split-payrolls, short-term assignments, foreign earned income exclusions, foreign tax credits, social security totalization agreements, and income tax treaties.

Am I Doing It Right?
The most challenging aspect of the year-end expatriate payroll process is getting it right! Considering that international assignees are probably being paid from multiple payrolls in different countries and receiving a variety of allowances that just never seem to reconcile, getting it right is easier said than done.

A host of questions typically plagues many expatriate program managers and payroll administrators. What pay components do I include in the W-2? What amounts are subject to withholding tax? Should FICA and FUTA be remitted? How do I account for hypothetical taxes? What am I overlooking?

Few companies actually recognize the shortcomings of their existing tax reporting and withholding processes. In addition, few realize that they may be exposed to substantial risk and sizable penalties that may be assessed. If getting your year-end expatriate payroll process right is proving elusive, KPMG can help.

KPMG’s Payroll Solution: PayRx
KPMG’s International Executive Services (IES) practice has recognized the need to assist international employers with adequate tools to help them evaluate the "health" of their expatriate payroll processes and diagnose areas of concern. PayRx provides clients with a formal, systematic approach for identifying payroll issues and evaluating compliance with relevant U.S. and state tax withholding and reporting obligations, while at the same time identifying cost savings improvements and best practices.

In addition to identifying existing payroll issues, PayRx generates a detailed diagnostic report that is specific to your company’s program. It quantifies the potential liability associated with each item not in compliance. Armed with this information, expatriate program managers and payroll administrators can formulate a "plan of attack" to effectively administer their expatriate payrolls and correct any problems, beginning with those that entail significant exposure to the company. The PayRx diagnostic report also identifies areas of potential cost savings. This cost savings analysis is performed simultaneously with the compliance review.

PayRx covers many matters relevant to expatriate payrolls, including expatriate and foreign national U.S. taxation, short- and long-term assignments, FICA and Medicare, FUTA and SUTA, and human resources policy provisions. Notably, it can help companies determine whether:

  • W-4 forms and tax withholdings correctly reflect estimated income exclusions and foreign taxes
  • Per diems are being treated appropriately
  • J-I visa holders are being exempt from FICA
  • Hypothetical taxes and housing norms are being used to offset taxable income.

The PayRx Process
PayRx does more than just help identify areas of risk and cost saving opportunities. It’s a complete process by which KPMG helps companies reduce risk and implement cost savings strategies. This process entails five distinct phases, which are described in the table below.

Figure 1
The PayRx Process

Phase I:

Diagnostic Review

 KPMG conducts a high-level diagnostic review using PayRx methodologies and then issues a report that quantifies potential exposure to additional tax, penalties, and interest assessments. In addition, it outlines opportunities to reduce costs.
Phase II:

In-Depth Evaluation

 After the diagnostic report is produced, the client selects the problem areas on which to focus and KPMG performs an in-depth evaluation to "true-up" the quantified risks and savings.
Phase III:

Strategy Design

 KPMG works with the client to develop comprehensive strategies for maximizing cost savings and reducing risk.
Phase IV:

Implementation

 KPMG works closely with the client to implement the strategies developed in the previous phase, providing the necessary resources to ensure full implementation.
Phase V:

Post-Implementation Review

 KPMG reviews implementation to make sure that the client has accomplished the expected cost savings and risk reductions.

 

PayRx Helps Minimize Unwanted Exposure to Risk
Part of administering an expatriate payroll program involves understanding the potential exposure to risk that could compromise the company’s financial well-being. Companies may suffer penalties if they are negligent in any way, i.e., they fail to furnish information reports or to deposit taxes on time. Payroll-related penalties can be significant, so companies need to assess their level of risk to adequately plan for future contingencies. The potential for penalties should be communicated to a company’s tax director and financial controller to make them aware of the risk exposure. This will create an opportunity for making informed business decisions and ensuring the well being of the company and its expatriates.

If there is the least suspicion that a company’s payroll processes may be deficient in some way, performing a "health" check on the program is a prudent idea. The alternative is the status quo, the risk of unwanted IRS scrutiny, and the threat of damaging penalties. PayRx is the right medicine for what is ailing many companies’ payroll processes. It quantifies and documents the company’s exposure, and above all, supplies the tools critical to effectively evaluate and rectify problems that inhibit an efficient and accurate payroll.

To learn more about PayRx, contact your local KPMG representative.