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October 14, 2021
“Payroll” refers to the payments companies make to their employees and/or contractors in exchange for their services. It’s usually handled by the Human Resources department of an organization. While usually an afterthought for most employees, the process of running payroll can be extremely tedious and complex depending on the business process. In the United States, the team in charge will need to have an understanding and solution for the following items:
Most companies outsource the majority of these processes to a direct payroll provider. However, the software required depends on where the company and employees are located, and where the work is done. In the next section we’ll look at some of the differences in payroll legislation by country.
In the United States we have a locality-based taxation system. This means that individual cities and counties in certain states are free to impose their own payroll taxes and reporting requirements. These are in addition to the Federal and State payroll laws, which all but 9 states have. This leads to a complex ecosystem where millions of payroll scenarios can arise due to 25,000+ tax changes per year, 11,000+ tax jurisdictions, and dozens of reciprocal agreements signed between states. Reciprocal agreements, also known as a reciprocity agreement, is a treaty signed between states when a worker works in one state and lives in another. Not all states have reciprocity agreements, which can lead to confusion and double-taxation.
In the European Union, member countries each impose a different set of rules when it comes to payroll tax. Dissimilar to the U.S, European employees are generally only taxed in the location in which they reside. E.U. citizens must generally reside in a country for over six months to become eligible for taxation. HR and data requirements are also dependent on the respective country, for example: payroll record keeping. In some states, electronic copies are all that are required while others require physical copies stored for a certain period of time.
This is all to illustrate that tax compliance in payroll is a location-based system. Employers should be certain that the software they use to manage payroll has coverage in their locality or state, or that they have a good understanding of the applicable laws.
United States employers are required to confirm their employees are legally permitted to work within the country. It’s the responsibility of both employee and employer to verify legal employment status. If a potential employee is not a citizen or permanent resident of the U.S. they must obtain a permit to work, known as the Employment Authorization Document (EAD), plus a work visa.
The are four categories of workers permitted to work in the U.S.:
The last bucket of non-citizen non-residents has three subcategories and is the most complex. Those categories are:
U.S. citizens are not required to obtain a working permit to work in the United States. Neither are permanent residents, outside of having their green card.
W-8 BEN is a form filed by foreigner workers who receive multiple types of income from U.S. sources. The purpose of a W-8 BEN form is to establish the following:
Citizens of the United States should not use Form W-8 BEN.
Foreign businesses use W-8BEN-E, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting, while foreign workers use W-8BEN.
Under a tax treaty, residents of foreign countries can be eligible for reduced tax rates than otherwise. Most of the United States’ allies have such tax agreements, including:
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