As the snowdrifts down on the many countries that are experiencing winter in all its glory and the world outside their windows soften to black and white images, we often wonder why life is not that clear cut. It seems that something like payroll should be pretty concise with very little interpretation needed. After all, is not that what governments and regulations are for?
It is true that in some countries the rules regarding payroll calculations are quite clear. Countries with very simple taxing structures like the Middle East and some countries in Asia, calculate taxes using a flat percentage, or a percentage up to a maximum, etc. It seems that payroll really is black and white in places, but that is where snow is rarely seen.
More often than not, payroll taxes are complicated and regulations need to be interpreted. You just have to look at how many education and certification programs are offered at the local country level to help payroll managers determine what is taxable and reportable. So what makes them so difficult to decipher?
1. Multiple Levels of Taxing Jurisdictions: Believe it or not, there are countries that not only have federal tax, but state, province, canton, and local taxes. Sometimes these taxes offset, compound, or change the federal/wage calculations. In the United States for example, federal unemployment tax calculations are affected by state unemployment tax calculations. Although federal taxes are relatively straightforward in the US, each state has different tax types and individual state filings. Additionally, inside each state, there may be local and city taxes that are dependent on where a person lives and where he works. So in Pennsylvania, an employee will pay federal, state, and local taxes in two jurisdictions, one where he work and one where he lives. As a payroll professional, you need to withhold for all of these taxes and file in each jurisdiction separately. Basically, you just hope people do not move around a lot!
2. Complex Social Tax Calculations: Social taxes including health, pension, disability, and taxes for other programs are not always straight forward in their calculation. Often it may depend on type of employee, number of children, employment programs, stock plans, or payroll element structure. For example in some countries depending on whether an item is considered a “commission” or a “sales bonus” may depict whether social insurance is applied or not. Often it takes an employment lawyer to finalize the determination of what is taxable and what is not based upon company policy and local employment law.
3. New Hire and Termination Requirements: Some new hire and termination requirements affect tax. In the UK, some types of severance are tax free up to 30,000 GBP. In Belgium, employees must be signed up with social insurance at their new company prior to starting their first day at work. In some countries, taxes are negotiated as part of a final settlement agreement for a termination while wages for a new hire are based on the negotiated net amount and then grossed-up for taxes. In many European and Latin American countries, it is highly recommended that an employment lawyer helps construct new hire contracts and reviews all terminations to ensure all payroll elements are properly coded for tax.
4. Stock Programs Including Restricted Stock Units: Stock programs range greatly from company to company. There are different types of equity arrangements: Restricted Stock Unites (RSUs), Stock Appreciation Rights (SARs), stock options, and phantom stock to name a few. Taxation is highly dependent on the equity program and the country. So it is very possible that in one country, two stock option plans are taxed differently. Some may use a flat percentage to calculate withholding on the value of a vesting or exercise, while others require an actual withholding percentage to be calculated based on the last payroll run or year to date (YTD) totals. If a flat percentage is utilized then the taxable income and withholding of the equity component vested or exercised is submitted during the payroll next cycle. During this cycle, the additional taxable income derived from the equity component may create an adjustment if there was over or under withholding. Also, be aware of countries that vest at grant versus exercise as the taxation rules vary country to country.
5.Expatriates: Payroll calculation always becomes infinitely more complicated when discussing expatriates. All of the above apply to expatriates, but now in more than one jurisdiction. Also, expatriates have the unique aspects of trailing payments and vesting in countries that they have left. Therefore, expatriates often have complex tax returns that need to cover the intricacy of the country combinations, time in country, hypothetical and actual taxes. Companies employ tax specialists to ensure all of the employee and company’s tax obligations are met.
Of course, if payroll calculations were all simple then there would be fewer payroll positions, conferences, certifications, and it would diminish the overall fun of processing payroll. Instead of worrying about taxability, proper filing, and if a jurisdiction changed the tax code, payroll managers would have to fill their time with other less mentally stimulating activities – like shoveling the snow off the driveway.
This article was originally printed in Purely Payroll