International nongovernmental organizations (INGOs) have often employed remote workers. But the pandemic, the tight labor market and other factors have made the practice much more common. Where someone works has an impact not just on that individual but on the INGO as well. Therefore, when it comes to managing a remote workforce, INGOs should take the following into account:
- Permanent establishment
- U.S. employment tax
- International payroll
- Human resources policy
- Individual taxation
Each of these factors can significantly impact on how the INGO fulfills its mission.
If a foreign government asserts that an INGO has established a fixed place of business through the activities of its employees, that organization may be subject to additional taxes in that jurisdiction. For example, a permanent establishment (PE) may be created if an INGO’s employees set up an office there.
Usually, PE rules are addressed in treaties with foreign nations. If no treaty exists, the INGO should look to local laws. But in either case, organizations must have a clear idea of the variables that will trigger taxation. Failure to do so could obligate the INGO to pay foreign taxes, for which it would likely not receive a U.S. tax credit.
U.S. employment tax
Generally, an employee working from home establishes a nexus for payroll taxes in that jurisdiction. Therefore, organizations must register not just in the jurisdictions in which they have physical offices but in all the jurisdictions where they have employees working.
Furthermore, it is not sufficient to register only for state withholding and unemployment taxes. Some states also have local taxes that must be addressed. In addition, having even one remote worker in a given state might subject the INGO to hourly wage laws, minimum wage requirements, or guidelines for calculating of overtime that differ from those of other states. As such, INGOs need to be conscious of these potential tax implications.
INGOs with employees working in foreign nations may receive an unpleasant surprise if their workers trigger payroll reporting and withholding requirements in that country. Employees working remotely can trigger a payroll reporting obligation in a given jurisdiction even if they have not created a permanent establishment. Organizations may have to register and pay into the local payroll system to avoid penalties.
Human resources policy
Unfortunately, few organizations have established clear policies for remote work. This is troubling because assuming that everything will run smoothly is a dangerous position to take. Creating well-defined guidelines for remote work will save INGOs a great deal of time, effort, and stress.
Organizations need to address, for example, which jobs can be done remotely with regard to tax regulations. Also, INGOs must assess whether remote workers have access to all the technology required to perform their jobs well. Organizations also must figure out the employee metrics and key performance indicators for remote workers and whether they are fair to everyone at the organization. These are just some factors INGOs must consider before setting up a remote workforce. Organizations need to perform a gap analysis to understand their current HR policies and develop new procedures to support a remote work environment.
Imagine the shock of finding out you must file income tax returns in two separate countries. For some INGO employees, this can be an administratively burdensome reality. Employees who work remotely may trigger filing requirements outside of the United States, and to make matters worse, they may not even know about this issue until the last minute or have any guidance on how to resolve it.
Individual workers may not know all the subtleties and exceptions to local tax law. Hence, INGO employers need to encourage employees working outside their home country to pay close attention to the personal tax filing requirements in both their home country and their remote work location. Ideally, they should work with an international tax advisor in both countries as needed.
In summary, managing a remote workforce requires INGOs to consider the permanent establishment, U.S. employment tax, and international payroll. Organizations should also establish clear policies regarding human resources and remote work. Finally, INGOs should consider assisting their employees in navigating the complexities of individual global tax filings. Balancing these crucial aspects will help ensure that the INGO continues to support its employees and perform its best work.
Visit RSM’s website for additional insights on how organizations can address operational challenges.