Article by Allan Rooney and Carl Berry
One of the side effects of the pandemic is a dramatic growth in remote work. Globally, 16% of companies are fully remote, according to an Owl labs study. With the advance in technology and increasing global opportunities, more of the workforce are taking jobs across domestic and international borders. But as companies reward cross-border employees with equity compensation, you must be aware of your tax compliance risk.
Fortunately, there are ways to navigate mobile equity challenges while keeping your company and staff tax compliant. Equity is often an essential part of the compensation packages and a common way to attract and retain talent, especially in the tech world. Due to the nature of equity compensation, companies can directly reward employees for business growth over specified periods.
Depending on the type of award, the employee may receive compensation when they earn the right to receive a benefit (at the time of “vest”) or when they decide to buy or sell stock at a specified price (at the time of “exercise”). The right to receive, buy, or sell the equity may take place over several years, helping to align employee goals with the company’s long-term strategies and providing an important retention tool for crucial employees.
Challenges
On the flip side, the benefits of equity income (to companies and staff) as a compensation strategy could also lead to tax compliance challenges for both the employee and the employer. This is heightened when the equity income is provided to mobile employees who work in multiple domestic or international locations.
Two things to consider:
- If employees with equity-based compensation relocate during the life of the award, your company and those employees could face complicated tax issues.
- Failing to address those issues could generate compliance violations, damage reputation, spark legal penalties, and create ongoing audit nightmares.
Who is considered a mobile employee?
- Business travelers and commuters
- Domestic and international permanent transfers
- Domestic and international employees on short- or long-term assignments
- Remote and work from anywhere employees
Running the traps
What questions should you ask about how equity impacts your mobility program?
Where will the equity award be subject to tax? Different tax jurisdictions can enforce different tax withholding and payroll rules. These rules, combined with each employee’s situation (which can vary), complicate determining taxability.
Where does the award trigger social security obligations? Most countries have social security programs where obligations are determined by different rules than those relating to income tax. It is the company’s responsibility to account for country-specific social security taxes.
What trends are influencing global compliance for equity compensation? The rules change frequently. With the dramatic rise in remote working and the need for tax authorities to drive tax revenue following the pandemic, it is even more important to pay attention to the changing landscape to remain compliant.
Cheat sheet
Here are the most critical factors causing companies and staff mobile equity challenges.
- Type of equity award – there are different reporting requirements for different awards
- Country-specific rules – the rules can differ significantly from country to country
- Company issues – plan rules, recharge arrangements, and private rulings need to be considered
- Employees – citizenship, jurisdiction, and immigration status can impact reporting requirements
- Social program taxes – the rules for social tax reporting may not reflect those for income tax. This could lead to double taxation.
- Event timing – different tax jurisdictions may have different laws to determine when reporting or withholding is due.
The team at Rooney Law has experience helping companies with the complexities of tax, employment, and immigration law. If you need help or have any questions, please call us at +1 212 545 8022 or click here to learn more about our capabilities.
