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An HR’s Manual to Expat Tax Filing and Processing

When hearing the word “human resources,” what comes to mind often is employee relations or workplace safety. However, the HR department also fulfills another role: ensuring the organization remains tax compliant.

You may not hear HR and tax compliance together as often. But, the HR team certainly plays a crucial role in taxes, especially when it comes to withholding taxes.

For HR teams handling expat employees, filing taxes can become more complicated. Not only do they have to abide by local tax laws, but they must also stay compliant with foreign ones.

If your organization employs U.S. expats, your HR needs to know the ins and outs of expat tax filing. This level of knowledge doesn’t just improve processes. It can also help your organization prevent tax compliance issues and risks. Read on to know how HR can help with tax compliance for U.S. expats.

The Role of HR in Employee Tax Filing

The Basic Functions of HR

The human resources department manages employee-related concerns and activities. They are the ones who onboard new employees and address their concerns, among others.

HR management is an essential function in your business. Your HR team helps maximize the potential of your employees by bringing out the best in them. As such, they have a hand in pushing your organization towards success.

One of HR’s most important jobs is looking for and attracting the best candidates that fit your open roles. They are also in charge of motivating employees to deliver what the company expects from them. HR also oversees compensation packages, employee benefits, leave policies, and holiday celebrations.

Lastly, HR is responsible for promoting a code of conduct and other related policies. Trained in conflict resolution and negotiation management and possessing excellent interpersonal skills, the HR team can help keep a safe working environment.

The Basic Functions of Payroll

Payroll is the process of paying or compensating employees, which may also fall under the HR department’s functions in certain organizations. Payroll tasks often have an administrative nature and entail a lot of documentation.

When releasing your employees’ salaries, HR must coordinate with the finance department in balancing and reconciling payroll data. Aside from wages, HR should also compute reimbursements, bonuses, overtime, and holiday pay. Other tasks include ensuring that the company stays compliant with tax laws, recording new hire documents, and updating the files of existing employees.

With the nature of their responsibilities, the payroll team must ensure accuracy and punctuality, especially in paying salaries and tax dues.

The Overlap in Human Resources and Payroll Functions

Some companies maintain separate HR and payroll departments. However, it’s possible to have these two functions combined as their activities may overlap. It all depends on how your organization is structured.

The HR and payroll departments must work closely together on shared tasks. For example, HR units negotiate compensation and benefits when hiring employees. Meanwhile, the payroll team is responsible for releasing the payment of salaries and benefits.

They must also work together to ensure that employees receive the proper compensation based on relevant factors like leaves, bonuses, and holiday pays. For instance, HR must give the correct attendance data to the payroll team; otherwise, you may face salary complaints if employees do not receive their salaries on time and accurately.

With these overlapping activities, HR can take on payroll activities. As such, your HR personnel must know the basics of tax filing, including those for expat employees.

4 Common Approaches to Handling the Income Tax of Expat Employees

HR departments can be hands-on regarding the income tax filing of expat employees. Alternatively, they can provide as little help as necessary to focus on the more critical parts of the business.

Here are four common approaches to how your HR team can manage tax filing for your expat employees from the least to the most required effort.

  1. Laissez-faire

    In a laissez-faire approach, the business is passive in managing domestic and foreign taxes. Simply put, this method places the sole responsibility on employees regarding their tax obligations. As such, the employees will have to compute and pay any taxes they incur from the host and home countries.

    If the host country has lower taxes, then all is well with the expat employee. However, higher taxes from the host country—which usually go with higher compensation resulting in additional tax expenses—can add extra tax liability burdens.

    However, using this approach may lead to noncompliance with government tax regulations. As such, you must proceed with caution with this method as you may incur fines and penalties.

  2. Ad hoc

    With an ad hoc approach, the employer issues a tax reimbursement to their expat employees on a case-to-case basis. Companies don’t have a formal tax policy and allow their expat employees to negotiate tax terms. So, expat tax treatments may differ depending on the agreed terms between the company and the employee.

    However, this tax approach may only work if a company has a small international workforce. Once it grows big, negotiation processes can become unmanageable. Besides this, the differences in tax treatments may vastly differ from expatriate to expatriate, causing inequities and unfairness.

  3. Tax protection

    The business takes on more responsibility in a tax protection approach. The company is the one to estimate the U.S. expat’s income tax and put it against the actual taxes paid.

    If the expat employee’s income taxes are higher than what they have back home, the employer reimburses the difference at the end of the year. Otherwise, the employee can keep the difference.

    One drawback of using this approach is it may come off as unfair to coworkers in other locations. It can promote inequities between low-tax and high-tax countries. On top of this, your expat employees may have cash flow problems as reimbursements may not be paid immediately until tax returns are filed, taxes paid, and discrepancies reconciled.

  4. Tax equalization

    Companies that use the tax equalization approach follow the same treatment for international compensation. The hypothetical amount withheld for an expat’s income tax is the same as those in the home country.

    The employer will reimburse the difference if the taxes are higher in the expat’s host country. So, unlike the laissez-faire approach, the employer takes charge of paying the foreign taxes. Otherwise, the income tax savings are kept by the business.

    One downside to taking this approach is it may entail more administrative work and resources. However, you can ensure equitable and fair tax treatment among all your expat employees.

How HR Can Help Expat Employees Avoid Double Taxation

Every country has income tax and withholding tax policies that apply to workers. However, U.S. expats are vulnerable to double taxation because of the current citizenship-based tax system. So, they are subjected to income taxes in the U.S. on top of taxes in their host country.

But with the help of HR, expat employees can avoid double taxation. Thus, employers must have HR teams knowledgeable about the nuances of tax laws of foreign countries. This awareness enables your HR team to offer fair and competitive compensation packages for potential and existing employees.

Aside from this, the IRS has numerous tax benefits to offer U.S. expats. But, eligibility may depend on their foreign income type. For example, foreign earned incomes, such as salaries and commissions, are eligible for a foreign earned income exclusion (FEIE), as long as they receive these for rendering services or products.

That said, your company’s HR team must know how to obtain the right benefits for U.S. expat employees to prevent having their income taxed twice. The Internal Revenue Code (IRC) has two provisions that can make this possible: IRC Section 901 and IRC Section 911.

  1. IRC Section 901

    Not all countries have the same income tax rates. This variation may give way to inequities in the taxes paid by U.S. expats. With that, the IRC Section 901 provides a way to help those in high tax-cost host countries.

    In this provision, the expat employee will pay the US-based taxes if it is higher than the host country imposes. However, U.S. expats working in a host country with a higher tax than the U.S. can claim the host country’s tax as a deduction.

    This provision allows U.S. taxpayers working outside the country to claim a tax credit for foreign income in their host countries.

  2. IRC Section 911

    This section refers to U.S. expats who have a foreign tax home. Under this section, a portion of the U.S. expat’s foreign gross income may be excluded from being taxed. However, they may only exclude a part of it according to the annual maximum limit established by the IRS. They must also prove they are a U.S. expat through a bona fide residence or physical presence test.

    For the bona fide residence test, expat employees must prove they are current foreign country residents without interruptions or without going to the U.S. for a full tax year.

    Meanwhile, a U.S. expat can pass the physical presence test if they live outside the U.S. for 330 full days within 12 consecutive months. However, domestic visits to the U.S. in between will not count into the required days. For example, visiting the U.S. for work assignments stops your day counter and will only resume once you leave the U.S.

    Taxpayers can fill out IRS Form 2555 or 2555-EZ to request the exclusion as part of their U.S. tax filing.

Stay Tax Compliant with Your HR

The role of your HR team doesn’t just end with conflict resolutions and keeping a safe working environment. They are also there to support you in tax compliance, along with your payroll team. But, tax matters can quickly get complicated once you throw expat employee taxes into the mix.

Knowing the requirements for expat tax filing can help overcome problems with international and local tax laws. It can also prevent expat employees from getting taxed twice and help HR develop fair and competitive compensation packages.

Support your HR department and enlist the help of tax preparation services like Tax Samaritan to determine the most efficient way of managing tax filing for expat employees. We have been providing professional-quality tax resolution services to U.S. expats since 1997.

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