Reporting Year-End Compensation Collection
Where has the year gone? This is a question that many Global Mobility, HR and Payroll professionals ask themselves as they anticipate the upcoming year-end payroll close.
October tends to be the time when many companies begin their global compensation collection and reconciliation process to allow for any final payments and gross ups to be made before year-end. Generally, all payments and withholdings should occur within the calendar year to be properly reported on the employee’s annual US Form W-2 Wage and Tax Statement.
Collecting and reporting the correct taxable remuneration at year-end, especially for short and long-term international assignees, can be confusing and downright frustrating at times. To add to the difficulty, you may have to capture salary, bonuses, equity compensation, benefits, and/or benefits-in-kind paid directly to or on behalf of the assignee from both the US and non-US entities!
Year-End Compensation Checklist
Whether your compensation collection process is in-house or manual, the list below can serve as a quick reminder of a few standard items that should be included on your assignee’s annual W-2 when preparing for year-end.Standard/Typical Compensation Items:
- 401(k) Employee Contributions
- Base Wages
- Bonus/Commissions
- Equity Compensation
- Excess Life Insurance
- Group Term Life (GTL)
- Medical/Dental/Vision Benefits
Assignment Related Allowances/Benefits:
- Automobile Allowance
- Cost of Living Allowance (COLA)
- Education Allowance
- Foreign Pension Employer Contributions
- Foreign Service Premium
- Hardship Allowance
- Home Leave
- Host Country Housing (Including Rent and Utilities)
- Relocation Allowances and Taxable Moving Expenses
- Temporary Living and House Hunting Trip
Assignment Related Tax Benefits:
- Hypothetical Tax Deduction
- Imputed Value of Tax Preparation Services
- Non-US Income and Social Taxes (including Gross Up)
- Tax Equalization Settlement Payment
- US Federal, State and Local Tax Extension Payments
- US Federal, State, Local, and FICA Tax Gross Up
Year-End Considerations for US Tax Law
Generally, under US tax laws and regulations, all cash and non-cash remuneration is subject to tax for US tax residents. Therefore, all remuneration paid to your US-taxable assignees should be captured in the W-2 and subject to appropriate tax withholdings. Certain exceptions may apply; additionally, compensation reporting requirements for short-term assignments may differ from long-term assignments. Consult with your tax provider to determine the appropriate treatment and reporting requirements. Getting it right the first time can avoid unnecessary and costly circumstances, including but not limited to:
- Minimize employer payroll reporting and withholding penalties and interest for noncompliance.
- Minimize employer and/or employee exposure related to underpayment of Social Security, Medicare, and federal and state Unemployment taxes on foreign assignment-related allowances and benefits.
- Minimize the employee’s exposure for underpayment of federal, state, and local income tax withholding and avoid interest and penalties on a balance due with the employee’s tax return.
- Avoid having to prepare Corrected W-2s (W-2Cs) and employer withholding returns after the company’s books have closed.
What About Next Year?
Your annual year-end compensation reporting and collection process is also a great time to plan for the upcoming year. Review your assignee’s withholding Form W-4, Form 673 (if applicable), Certificate of Coverage, and hypothetical tax deductions. This will ensure you start off the new year right with the proper documentation and appropriate withholdings in place for your assignees, instead of backtracking later in the year. Consistency for your assignee will lead to a pleasant assignment experience. Work with your relocation management company and tax provider to ensure that your budgets and accruals reflect the assignee’s current situation, compensation, and benefits accordingly. Planning will relieve additional work and worries for your team at the end of the year!