The New Challenges of Tax Compliance Management and How to Overcome Them

Employee benefits have come a long way from the days of life insurance, a two-week paid vacation, and, if you were lucky, casual Fridays. Today, human resources departments are getting creative with benefits and employee perks to attract and retain top talent.  

From gym memberships and massages to home-office Wi-Fi and food delivery, these pumped-up packages are increasing employee loyalty and retention — and making life a lot more challenging for corporate tax managers.  

Whereas benefits like car allowances and health care are taxed through payroll, and are fairly simple to track and manage, many of these new benefits are employee purchases, coming through on expense reports. That not only makes these taxable expenditures difficult to identify without a line-by-line review, but, also requires knowledge of tax laws that govern the state and countries where the employees making the purchase live and work. A task made more challenging in today’s hybrid, remote, and work-from-anywhere models.  

Navigating the Gray Areas 

While there are federal guidelines on what’s taxable and what’s not, some states have additional regulations on top of federal mandates. Corporate tax managers are now responsible for knowing where employees are based, whether that gives your organization a taxable presence in those locales, and what those tax requirements are.   

There are also a lot of gray areas. Even seemingly straightforward scenarios, such as employee parking expenses, reveal the intricacies tax managers face. For example, if you have a $5 charge at your office building’s parking garage, and you give your employees $5 to cover that cost, that’s not a taxable benefit. But if your employee pays $5 to park at the train station for their daily commute to your office, and you provide $5 to that employee, that $5 is a taxable benefit.  

Yet, on an expense report, both would be categorized under “parking.” 

This is just one of many examples of the nuances of taxable vs non-taxable employee benefits.  

Combatting the VAT Dilemma 

Tax managers in global organizations must also navigate rapidly changing value-added tax (VAT) regulations — the European Union’s consumption tax — for employee purchases. For the most part, VAT expenses occur when goods or services are purchased explicitly for business purposes. The challenges come when those goods and services can also benefit the employee’s personal life — like Wi-Fi or a cell phone, or any other of those items that straddle that ever-blurring line of demarcation.  

Yet despite the complexity, most organizations are still trying to manage VAT and employee benefits tax compliance manually — a practice that is not only inefficient and error-prone, but also puts the company at greater risk.  

The problem is, while you haven’t automated, the tax authorities have.  

In recent years, these authorities, like other government agencies, have digitally transformed their operations, investing in technology to streamline their compliance and audit functions.  

That means they now have greater visibility and oversight, and a simpler way to share their findings with other jurisdictions. All of which make it harder to fly under the radar.  

Organizations need a way to stay one step ahead, or be liable to hefty fines, increased government scrutiny, and reputational risk.  

Making Tax Management Less Taxing with Automation 

Employee benefits and business models will never go back to the way they were. In an environment where the workforce remains decentralized, and employees independently make taxable purchases, manual tax management is no longer sustainable.  

If your organization is still processing expenses manually, that’s problem one. Having a digital expense management system with audit rules and end-to-end visibility is critical to not only tax management but overall fiscal management.  

With an automated solution in place, organizations are positioned to add tax management tools that use machine learning and artificial intelligence to automate employee benefits and VAT compliance. The technology essentially “reads” the expense report, creating contextual meaning from receipt data to accurately identify, track, and calculate taxable spend.   

Instead of continually updating spreadsheets with federal, state, and global compliance rules, the solution makes these updates automatically. Instead of culling through expense reports, you can monitor progress through a custom dashboard that segments the tax liability by category, provides detailed audit trails, and offers the insight you need to analyze what’s happening in your organization.  

Making Tax Management Everybody’s Business 

Tax management is no longer an isolated function, but a collaborative effort involving multiple stakeholders. Take these three steps to enhance your organizational readiness: 

1. Partner with Your Benefits Team 

The benefits team has to understand the tax ramifications for every benefit they propose, before it’s approved and announced. How many employees will or can take advantage of it? Where are they located? How will the benefit be claimed — through the benefits department, a regional office, or via expense report? 

Define a process for vetting current and proposed benefits, and a regular review process as tax laws change.  

2. Work with Executive Leadership to More Clearly Define Your Policies 

If you provide an employee benefit, incentive, or gift for a specific achievement or job well done, who will be responsible for the taxes? If the company reimburses a remote worker for the purchase of a desk, a chair, and a lamp, is that company property, or the employee’s property? If it’s company property, what happens when that employee leaves? 

Work with executive leadership to answer these questions and clearly define corporate policies and processes for managing these types of expenditures.  

3. Educate Your Managers and Supervisors 

Rewarding a job well done with a gift card to a favorite retailer or season tickets to a sporting event can be a great motivator — that is, until you realize that those gifts are considered taxable income by the IRS.  So, those gifts must be tracked, and reported on the employee’s W-2, just like their annual pay.  

All of a sudden, those gifts aren’t quite so motivating, after all.  

It is imperative to educate your managers and supervisors on the difference between taxable or non-taxable employee gifts, and how to report these to payroll. Consider developing an approved list of gift types, or a mechanism for vetting and approving prior to purchase. That way your employees can get the rewards they deserve, without any unpleasant surprises.  

By educating stakeholders and putting the tools and technology in place for automated tax compliance management, tax managers can protect their companies from risk, improve oversight, and better adapt to a new business environment.  

For more information on how you can get ahead of changing tax requirements, read our whitepaper and listen to our podcast.