We recently wrapped our 2024 mobility tax summer school series jointly sponsored by AIRINC and GTN with an in-depth review of equity and mobility taxation. Here is a summary of the topics we discussed.
Poll 1 - Does your company issue stock-based compensation to internationally mobile employees?
- 56% - Yes
- 27% - No
- 17% - I don't know
Basics
We started with a basic introduction to deferred compensation, equity terminology, and typical types of equity plans. We then moved on to challenges facing equity tax compliance for global mobility.
When it comes to payroll reporting and withholding for equity compensation, companies don't always realize they may be non-compliant if they have a mobile workforce. These companies may be unaware of the rules in the various jurisdictions their employees have worked, and they may not have processes in place to allow for the tracking of employees. For these reasons, the payroll reporting and withholding, related to equity income, may be handled as if the individual had only worked in one location. However, this approach is often not appropriate for mobile employees working in multiple locations since reporting and withholding rules can vary for each jurisdiction.
Poll 2 - Which department takes ownership of mobile equity compliance?
- 22% - Stock administration
- 10% - HR
- 3% - Payroll
- 2% - Finance
- 63% - Cross-Functional
How payroll challenges impact mobile employees with equity compensation
To illustrate the payroll challenges for mobile employees with equity compensation, consider the following common scenario, which could represent employees with international or state-to-state travel.
The company grants restricted stock units (RSUs) to an employee who is a tax resident in Jurisdiction A (United States/California).
After the grant and before vesting, the employee relocates to Jurisdiction B (United Kingdom).
The RSUs vest while the employee is a tax resident in Jurisdiction B (United Kingdom).
In this scenario, an employer will face trailing reporting and withholding obligations in Jurisdiction A (United States/California) in addition to reporting in Jurisdiction B (United Kingdom). The employee will be taxed in Jurisdiction A (United States) on the portion of the equity income that was earned there, based on the grant to vest period. The reporting requirements of the company may depend on the employee’s citizenship. The company will also need to report the portion of the equity income earned in Jurisdiction B (United Kingdom) via income. Each country has its own unique tax rules surrounding the amount of income that needs to be reported and the amount of taxes withheld.
Due to complex tax laws, many companies are unsure of what, where, and when to report equity compensation. Additionally, it is a time-consuming process to ensure equity is reported correctly, taking significant time and effort by internal teams. It can be difficult to track and manage where all your employees are located, what actions are taking place that are creating taxable events, and when you need to report on the equity compensation.
Many factors come into play, including:
- Award type – different types of awards can cause different reporting requirements.
- Company issues – plan rules, recharge arrangements, and private rulings all must be considered.
- Country-specific rules – some countries require full withholding, partial withholding, or do not require withholding.
- Employee factors – citizenship, residency in each jurisdiction, and immigration status can impact the reporting requirements.
- Event timing – different tax jurisdictions may have different laws to determine when the reporting and/or withholding is due.
- Social Taxes – for international scenarios, the rules for social tax reporting and withholding may not mirror the rules in effect for income tax purposes. Is there relief available to mitigate double taxation (e.g., such as a totalization agreement between the Home and Host locations)?
International scenarios can have many other complexities. For example, employees may be subject to double withholding or even double taxation if event timing rules are unfavorable between two locations. In some instances, this can make the equity income an actual disincentive for the employee. Some countries may have an exit tax on unvested equity that can lead to cash flow and other reporting complexities for your mobile employee.
A mobility tax firm can assist in identifying domestic country tax and payroll rules and highlight the impact of any available tax treaties for your international scenarios. By understanding the rules before the travel occurs, planning may be available to address unfavorable tax or cash flow issues for your employees. It is also important to consult with your legal advisors as labor laws in each country can also impact the reporting requirements.
State-to-state moves will also have special considerations. For example:
- From an administrative perspective, will you report compensation only to the employee’s current state or will you consider reporting and withholding for any state where the employee worked during the equity earnings period (e.g., grant to vest for restricted stock)?
- Does your payroll platform allow for reporting in states other than the current state on file?
- Are there local (e.g., city) withholding requirements?
- Are there reciprocity agreements between states that would impact the need to withhold in all locations?
- Does a state allow a credit for taxes paid to another state, such that the withholding could be reduced for the state providing the credit?
Poll 3 - How do you handle income sourcing and tax withholding calculations for mobile employees?
- 9% - Stock Administration System
- 56% - Tax Service Provider
- 10% - Payroll System
- 6% - Excel
- 19% - I don’t know/not applicable
T+1/Tracking
In 2022, the SEC announced it would require a shorter settlement time for broker-dealer transactions, reducing settlements from two days after the transaction (T+2) to one day after the transaction (T+1). Shortening the settlement cycle creates new challenges for public U.S. businesses that dole out global equity compensation.
Managing reporting and withholdings for equity compensation has always been difficult. It generally requires input from many departments, from HR and equity teams to payroll, tax, and more. That means teams may already be cutting it close—even with multiple days after a transaction to coordinate.
Effective May 28, 2024, the settlement time these teams have to work within has been cut in half.
Company HR, tax, and payroll teams need to figure out an employee’s location, their jurisdiction’s reporting and withholding requirements, and any special rules, and they need to attempt to predict the amount of cash needed for tax withholding before execution of the equity transaction in the broker system.
Many of today’s businesses manage reporting and withholdings for their mobile employee populations by sorting through spreadsheets and manually plugging in figures. As the time frame to report shrinks, these manual methods could become too slow and tedious for teams to keep up.
As mentioned, the new settlement cycle is even more challenging if businesses employ mobile workers. Ultimately, businesses must pinpoint each region’s rules, calculate how much benefit is reported in each jurisdiction, and determine how much tax withholding is due. Additional tax expertise is frequently necessary to correctly interpret the interaction of multijurisdictional tax laws and reliefs for a single transaction.
Separate computations are generally needed for income reporting and tax withholding for each country, state/local, and social tax type required. One fewer day makes it harder — if not impossible — to achieve. If teams make calculations by hand or do any of the work manually, they may not have the time or resources to hit the new T+1 timeline.
Poll 4 - In how many countries do you have employees that receive equity compensation?
- 22% - 0-5
- 20% - 6-20
- 23% - 21-50
- 4% - 50+
- 31% - I don’t know/not applicable
Watch Now
If you missed attending this third session of our summer school series on mobility taxation live, you can view the recording on-demand here. Each session is eligible for 1 CRP/GMS credit. Details provided on the recording.
This was the last in our summer school series:
- Session one essential tax support for inbound employees to the U.S.A. is available here.
- Session two essential tax support for UK is available here.
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