Cross-border payments have become an increasingly tough challenge for corporate buyers and sellers. Supply chains are shifting, B2B commerce is digitizing and globalizing, and companies are more often working with businesses across borders, bringing challenges of foreign exchange and regulatory compliance to their front doors.
But the world of cross-border payments has given rise to a less discussed challenge for companies in the U.S.: cross-state payroll.
New reports from Bloomberg BNA published last week (Aug. 14) brought this unexpected issue to the forefront in analyzing input from members of the publication’s Payroll Library Advisory Board. As it turns out, employers in the U.S. are struggling to manage payroll and tax compliance in paying workers across state borders. Reports said members of the Payroll Library Advisory Board turned their attention to the topic during this month’s annual meeting.
Bloomberg BNA said CPP and KPMG senior manager of international executive services and employee tax practice Fred A. Basehore Jr. was one of the members to speak out on these challenges. According to Basehore, payroll departments are tasked today with knowing an array of information when it comes to sourcing employees from more than one state. This is key, he added, especially for employees that travel.
For example, “a lot of states have de minimis rules,” Basehore said. “Some states have no de minimis rules – it’s just instant.” De minimis rules are those that apply to benefits given to employees that are so minimal that it is not worth accounting for, according to the IRS. These types of benefits can include holiday gifts or use of the photocopier.
Further, reports said, many of these difficulties are exacerbated back home with the shift between federal and local employee compensation and tax rules. Bloomberg BNA said the Affordable Care Act has become a key focus of payroll departments in the nation. According to CPP and Automatic Data Processing senior learning specialist Lois Fried, ACA tax rules will be key for payroll officials from now on.
But even more challenging is understanding that while federal payroll and tax rules may change on a more consistent basis, local, state-level regulations are more likely to happen sporadically, forcing payroll officials to stay on their toes. These include rules governing minimum wage, paid leave guidelines, and more.
A recent white paper by payroll service provider Paychex highlighted just how crucial it is for payroll managers to balance compliance with both federal and state authorities. “Employers must comply with the FLSA as well as applicable state regulations to ensure appropriate classification of exempt employees,” the paper concluded. “A single mistake can initiate a full wage and hour audit at either the federal or state level."
The FLSA is the U.S. government body that establishes the minimum wage and other rules regarding employee compensation including overtime pay and record-keeping policy.
One payroll manager, Charlotte Hodges at Towers Watson & Co, said that Big Data analysis and metrics will be key to assuring that payroll remains in compliance on state, federal and international levels. “That’s one thing about payroll professionals and practitioners, and human resources and benefits – everybody looks for ways to be in compliance,” she said. “We want to do things right."
The issues of cross-state payroll can pose additional struggles for payroll departments that are also working to overcome the friction of a multinational staff. CPP and American Payroll Association president Barbara Youngman spoke on this topic at the event, too, according to Bloomberg BNA.
“Go into a country,” she said, “you have to know what’s taxable. If you bring in lunch, it’s taxable to those employees. So try to understand what those fringe benefits are.”
“There are some countries where even a 39-cent pen, if that’s given as a gift, that’s taxable,” added Basehore. “And it’s no questions asked. You’ve got to do it.”
According to Bloomberg BNA, evolving markets mean payroll compliance is now more complicated, yet more crucial than ever. And, according to Paychex, while some companies – especially SMEs – may be tempted to overlook the minute details that go with assuring payroll and tax compliance, a business’s reputation may depend on it.
"A squeaky-clean record with tax agencies reinforces a company’s reputation in the community and with employees, vendors, and creditors much like a credit score,” the company said in its white paper. “Both employers well-versed in tax, employment and benefits guidelines and those who outsource payroll and accounting and consult legal advisors may avoid costly penalties and inconvenience."