This guest blog is written by one of my colleagues, Gila Halleli Weiss, an Israeli and US-certified accountant and CPA, who provides financial advisory and Outsourced CFO services to companies in in Israel and companies expanding to the United States. She shares her perspective about what Israeli companies should consider before they expand to the US.
What you see from here, you don’t see from there.
In Israel, wherever your employees live, you’re all in the same country, the same time zone and most importantly, the same regulatory environment. Severance pay, vacation day and termination notice regulations are the same whether you live in Haifa or Eilat. There’s one set of Bituach Leumi (National Insurance), Mas Briut (health tax) and Mas Hachnasah (income tax) rates for the whole country. So if your ten-person team has had to move over to a remote work setup thanks to COVID-19, while there are certain disadvantages (scant 10Bis options in your area, no fancy coffee machine, no ability to pop over to your co-worker’s office for a chat while enjoying a certain level of plausible deniability that this is actually work-related, or trying to work while monitoring 3 hyperactive children trying to learn remotely) having to adjust to ten different labor law and tax regimes isn’t one of them.
The US, on the other hand, is a different world. If you are planning on opening up shop in the US, here are a few things to keep in mind when deciding where to open and once you have, just how remote you want your brand-new American employees to be.
One Country, Fifty States, Many Different Jurisdictions
In addition to federal labor laws and tax codes the fifty states, individual counties and even cities have their own regulations and taxes covering everything from minimum wage levels, to minimum pay-frequency, to paid sick leave requirements, to unemployment and disability tax rates and reporting requirements to additional employer taxes levied to cover the new high school being built down the road. San Francisco, for example, just approved an additional tax on companies with disproportionately paid CEOs. This is something you would want to know before you decide to set up shop in the City by the Bay! The investment of a bit of time and resources into local labor and tax environments before taking the plunge is well worth it.
Your Tax Strategy is Determined by Where Your Employees Live
You may already know that employees are covered by the tax codes in effect where they live, but did you know that their choice of a home base can affect your corporate tax and sales tax obligations as well? While the rules vary from state to state, and some states have temporarily relaxed rules during the COVID-19 crisis, a number of states require that companies wishing to employ someone living in their state first register as a foreign corporation. In some states this just means periodic statutory filing; in others, including New Jersey, Illinois and Connecticut, the presence of an employee is considered to create an economic nexus. That can result in anything from having to register for sales taxes in a state earlier than you would have had to otherwise, to having to allocate a portion of your corporate revenues to the state and pay state corporate income taxes. Beyond the additional expense involved in meeting the additional reporting requirements (yet another set of quarterly and annual employee tax submissions and annual franchise or income tax returns), there’s the potential for a higher tax bill on a portion of your income.
No Playing Favorites!
Having employees spread out over multiple states can impact the benefits package you need to offer. Thanks to federal (that’s the ממשל, on the country level( and state non-discrimination rules, what you offer to one, you have to offer—if not to all—to at least to all employees in that group, and it’s illegal to discriminate in favor of highly paid employees. Even in a small organization, what you give to one, you may have to give to all. In addition to your group benefits, there are a growing number of states with statutory paid family and medical leave. How do you treat employees who happen to live in a state without those requirements? In order to attract and retain staff, you may need to level the offerings regardless of where the employee lives.
The continental US has four major time zones: Eastern, Central, Mountain and Pacific. An office located within the Eastern time zone means your weekly call with the sales director will be at 9AM his time, when he’s fresh, and 4PM Israel time, when you’re, if not fresh, at least still comfortably within normal working hours, while leaving you a several hour window for additional calls. That same 9AM call if the director is in California means you are speaking at 7PM, with very little window to spare. Even within the US, having your employees spread out over an excessively large geographic area can make employee face-to-face interactions impractical and/or pricey.
It’s not just a question of communication with the mother ship or meetups with co-workers; there’s an impact on operations as well. In Israel you can get to most places with a few hours on the road or train, and a fair amount of the heavy-duty commercial activity is clustered in relatively compact area. The US, however, is BIG. The current situation notwithstanding, the sheer size of the United States means that companies must consider the location of one’s target when selecting employees. You might find your dream VP sales in Utah, but if your initial target market is 2,200 miles away in Philadelphia, and sales in your industry are normally face-to-face, you may be better served going with less dreamy candidate #2, who lives in Delaware.
We get it: allowing workers to work from wherever they want is the flavor of the month right now; many of the big tech companies are proudly announcing their adoption of a permanent work-from- home strategy. But that doesn’t mean that this is the right choice for you. Twitter, for instance, can afford to fly employees in for monthly meetings or hire fancy tax advisors who can make their tax obligations magically disappear. You probably can’t. Make knowledgeable choices, and not cool ones.
Taylor HR Group Guest Blog written by: Gila Halleli Weiss, CPA (US) (ISR) – a financial matters expert who works with early-stage startups as a consultant and mentor.