Attracting and retaining skilled workers in today’s tight labor market takes more than a competitive salary. Many companies find they can meet their employment needs and their employees’ incentive preferences by offering a portion of their compensation as equity.
Offering an opportunity for equity ownership in the form of stock options, restricted shares, or employee stock purchase plans is not new. It’s a time-tested way of helping employees build their wealth while more closely aligning their personal financial interests with those of your company. If some portion of compensation is equity-based, it means that as your company prospers, your stock-owning employees do as well.
However, when participants of your company’s equity-based compensation plans work in multiple locations, additional withholding and reporting challenges may arise. To avoid the potential taxation pitfalls equity awards can cause, you’ll need to develop a customized solution.
Understanding the complexities equity income has on your program and cross-border employees
Before you can adequately address the additional challenges an equity incentive plan will have on your mobility tax program, it helps to understand the various ways it can impact your reporting requirements. After all, payroll reporting becomes more complicated when multiple jurisdictions have reporting and withholding obligations for taxable compensation. Also, offering stock options to mobile employees can be especially complex because they are often granted, vested, and exercised over several years. During that time, an employee may work in multiple tax jurisdictions, each with its own rules.
It's important to understand the reporting requirements regardless if the move is employer or employee generated. When an organization accommodates employee requests for self-initiated relocations, it may create employer reporting and withholding obligations that differ from the employee's final tax obligations across multiple jurisdictions. It is crucial for employees to understand both the employer's reporting requirements and their own individual tax implications associated with their relocation(s).
Domestic/Multi-State Considerations
Income taxes aren’t the only obligations impacted; so are the withholding and reporting requirements for social security obligations. To make matters more complex, these reporting requirements are not linked to just national or federal levels. In the US, for example, there may be state taxes for non-residents to consider.
When employees work across multiple states within a year, it creates complexities for both employers and employees. Employers face additional tax reporting obligations and complex withholding requirements, making accurate W-2 preparation challenging without proper systems in place. Employees, on the other hand, may need to file income tax returns in multiple states, not just in their Home state.
Adding to this complexity, some states have their own distinct reporting requirements. For example, New York mandates separate reporting requirements for employers and employees. This further complicates the process of tracking and reporting work locations and earnings.
To effectively manage these multi-state employment scenarios, employers need robust systems that can accurately track employee work locations and ensure compliance with varying state regulations. Without such systems, the task of meeting all tax obligations and providing accurate documentation becomes increasingly difficult as employees work across state lines.
Global Considerations
While domestic, multi-state scenarios present their own set of challenges, the complexity increases exponentially when operating on a global scale. International business operations introduce a new layer of intricacy, with each country having its own unique set of laws and regulations that must be navigated carefully.
Monitoring legislative changes across countries is crucial for global employers. Recent developments illustrate this need:
- Canada: Proposed changes resulting from the 2024 budget may affect stock option exercises and share sales, impacting employer reporting and employee taxation.
- Ireland: As of January 1, 2024, employers must withhold income tax on stock options.
These examples highlight the importance of staying current with regulations in all countries where you operate. Key areas to watch include:
- Data privacy regulations
- Foreign exchange rules
- Labor laws
- Securities law
Keeping abreast of these changes is essential for maintaining compliance and mitigating risks in your international operations.
Creating a customized plan for managing the compliance burdens of a global workforce
Before proceeding with an equity-based compensation plan, you’ll need to put a comprehensive and preferably technology-based process in place to cover your location exposures. Here are some things you’ll want to consider as you do.
#1: Determine what you need to report and withhold for each type of equity transaction.
#2: Capture and organize your data by:
- Location
- Mobile employee
- Relocation date(s)
- Workday data
#3: Share information by:
- Coordinating with payroll
- Explaining to employees that reporting may be required in additional jurisdictions and withholding will reduce their gross award but may not cover their final tax liability due
#4: Review equity income as a compensation strategy to:
- Understand how a mobile workforce may create challenges
- Ensure that any tax equalization policies appropriately address and manage the complexities and risks associated with equity income
- Consider that equity-based compensation could be a disincentive for some globally mobile employees because of tax requirements
- Anticipate any mismatch between the additional tax return filing requirements your employees might face and your payroll tax reporting and withholding obligations
See how our equity professionals and robust technology work together to ensure you meet your equity compliance needs:
How a Global Mobility Tax Provider Can Help
Knowing the various implications associated with your mobile workforce is essential for you and your employees to successfully navigate between the desire for equity compensation and the responsibility of fulfilling the resulting compliance obligations.
A global mobility tax provider can help alleviate the added challenges of offering equity compensation. Such a provider will work with you to develop a policy for your firm to follow and share with assignment managers, HR business partners, mobile employees, and business travelers.
These firms can also keep you updated regarding country-specific guidance on payroll reporting and changes in withholding requirements for equity rewards. Additionally, global mobility tax experts can prepare calculations for the allocable amounts of reportable compensation, income tax, and social security withholding on equity income by state and by country.
For more information about how a specialist can help you customize a global mobility solution to your program’s unique set of risks, contact us.
