Taxable Employee Benefits at Year’s End

Today more than ever, companies are vying for the most talented employees in an increasingly competitive workforce. On top of that, because of the pandemic, employees around the world now work remotely or in a hybrid situation, dividing their time between remote and on-premises work.

This relatively new business model adds an extra layer of complexity when it comes to Taxable Employee Benefits (TEB) as the question for employers becomes, “How do finance and tax teams handle the wage tax and social security liabilities today and going forward due to the increased complexity associated with hybrid work situations?”

The challenge for finance and tax teams

Finance and tax teams must first determine which employee-claimed expenses are deemed to be considered taxable employee benefits based on the local country legislation. It therefore requires detailed knowledge of country wage taxation and social security rules, but also the ability to analyse the available data against these usually quite specific rules.

Taxable employee benefits may include entertainment over certain amounts, hotel bookings on weekends, professional licenses, car rental exceeding a certain number of days or for commute, commute parking, home internet, or gifts sent to employees by their employer, such as wine or gift baskets exceeding certain thresholds or for specific events. Most of these fringe benefits must be factored into the wage tax and social security calculations irrespective of whether the employer decides to gross such payments up or it is pushed to the employee’s tax bill.

Where expenses running through the AP process are typically well structured, recurring and coming from known suppliers, the expenses claimed by employees through employee expense systems are typically not easily identifiable for TEB purposes. This challenge simply is inherent to the fact that these expense systems have been developed for an easy and quick expense process, whereas a proper analysis for TEB will require a different perspective and analysis on the transaction and in some cases even enrichment of the data.

Why is this issue so important for Q4 filings?

Although taxable benefits should generally be tracked for every payroll cycle, especially at year’s end, depending on the country, additional calculation and reporting requirements come up. While this is for finance typically the high season due to year-end closing, automation allows to still ensure the required level of compliance can be ensured with minimal time spent.

WFH expenses make things even more complex

Different rules for work-from-home expenses can make determining taxable employee benefits more difficult.

Some employers allow employees to expense in full or a portion of their home internet charges. Since home internet has become a commodity and typically used for both private and business purposes, when the employer pays for it, it’s seen as a benefit for their employees. If the business usage has to be carved out of the personal usage, this will have to be supported by detailed calculations which have to be maintained.

In some countries, WFH internet-covered expenses are considered a benefit, in some it is not, and then in others it is only partially considered to be a benefit, while again other countries have set up allowance schemes.

Something else that may occur is when an employee leaves the company to go to another employer or retires. These employees may have expensed work-from-home items that are difficult to return to the employer, such as desks, chairs, or other large items or the shipment costs will exceed the day-value of the equipment and thus the employer allows the employee to keep such items. Although this may make perfect economic sense, it may still trigger a taxable event.

Inaccurate data also poses a challenge

Another challenge for the finance and tax teams is that the reporting of taxable benefits on expenses are calculated based on reports submitted by employees. Organisations are relying on this data to be accurate, however, these often are too generic and not validating the actual invoice contents which easily leads to an incorrect classification or incorrect values being processed.

What you should be looking for as you automate your process

It’s important that your business stays up to date with the latest taxable benefits regulations. When considering a company that offers tax compliance guidance, ask yourself which solution offers the required level of checks, controls and calculations for analyzing your employee claimed expenses.

Does the solution run only on data records or is also the image of the invoice automatically analyzed and used for the audit process?

Determine how it is ensured that taxation rules remain up-to-date, and whether you can tailor the audit rules according to your specific corporate policies and requirements.

Most importantly, look for a company that provides a clear vision to compliance and process optimization that your business can follow; one that can help reduce exposure, avoid compliance risk, and gain complete visibility and efficiency over employee taxable expenses.

Ready to learn more?

Find out how Blue dot’s technology-first approach can dramatically simplify your process and reduce risk and costs associated with a manual audit and compliance process. Contact us today to arrange a  with one of our solution architects.