Resource limitations and fragmented workflows can increase compliance risk.
Key takeaways
Workforce regulations continue to influence hiring, compensation and retention.
Cross-border hiring and remote work create additional payroll and reporting obligations.
Middle market organizations are facing growing employment tax complexity as evolving federal, state, local and global requirements continue to affect payroll operations and workforce decisions. Employers are increasingly seeking guidance on issues such as tip and overtime compliance under recent One Big Beautiful Bill Act (OBBBA) provisions, remote employee tax exposure and cross-border hiring arrangements.
Reflecting how the middle market is navigating this landscape, in the RSM US Middle Market Business Index Workforce Special Report: Workforce 2026, 52% of organizations surveyed said workforce regulations affect their ability to hire, 56% cited impacts on their ability to offer competitive compensation, and 49% identified regulations as a retention issue.
As remote and global workforce models expand, concerns related to employees working across locations, state residency implications and payroll reporting obligations are becoming more common. Strong data management and timely compliance processes remain critical to reducing operational and regulatory risk.
Challenges limiting a shift from reactive to proactive
Many organizations assume payroll compliance processes are functioning effectively because payroll providers are managing filings, remittances and tax payments. However, compliance management often remains reactive because of broader operational and resource constraints. These include:
Lean payroll functions: Most teams focus on processing payroll accurately and responding to immediate issues, which makes it difficult to plan broader strategies.
Limited resources: Staffing constraints, budget limitations and limited bandwidth reduce the ability to address risks across jurisdictions.
High turnover: Workforce changes across tax, human resources and payroll functions contribute to inconsistent processes and knowledge gaps.
Inefficient workflows: Poor handoffs, fragmented processes and missing login credentials for state tax portals and federal payment systems lead to weak data management.
Poor data quality: Inaccurate and incomplete underlying data gives rise to downstream compliance issues across processes and a “garbage in, garbage out” effect.
To address these challenges more proactively, organizations often require additional time, resources and internal coordination to identify and resolve workforce tax issues before they escalate into broader operational and compliance risks.
Evolving employment tax requirements across jurisdictions
Federal, state and local payroll tax rules are creating additional reporting and compliance obligations as regulatory expectations continue to shift. Internal Revenue Service funding cuts and government shutdown impacts have created difficulty for organizations to obtain timely direction, receive responses to correspondence and navigate reporting requirements.
Employers must also manage varying state conformity rules tied to the Internal Revenue Code, with jurisdictions following different versions of the code and applying their own withholding rules. Organizations must adhere to workforce tax obligations across all 50 states, including the nine states that do not impose an income tax.
Local jurisdictions can add another layer of complexity, particularly when compensation items such as stock options are treated differently at the local, state and federal levels.
Recent federal changes under the OBBBA, including provisions related to tips and overtime, have also prompted questions around Form W-2 (Wage and Tax Statement) reporting obligations and implementation timelines. Transitional relief for 2025 reporting requirements led many organizations to delay action while awaiting additional direction. As organizations prepare for mandatory 2026 reporting requirements, many are working with payroll providers to ensure systems and reporting processes are properly configured ahead of implementation.
Domestic employment tax considerations
Limited bandwidth, staffing and budgets can make it difficult for employers to stay current on changing statutes, regulations and administrative guidance. In many cases, internal resources are not prepared to fully understand and manage new requirements that may wax and wane. As a result, challenges related to year-end reporting, fringe benefits, new tax laws and evolving remote work rules can increase regulatory exposure and operational complexity.
In addition, the OBBBA tip and overtime provisions have generated uncertainty amid limited clarification during transitional relief periods. For organizations unaware of their compliance exposure, issues related to payroll processing, reporting obligations and jurisdictional tax requirements may surface only after they receive notices, submit filings or face other compliance concerns. As these issues emerge, organizations must assess existing processes, identify compliance gaps and seek timely guidance to address potential risks before they escalate.
Organizations often need additional guidance on newer requirements, and even long-standing rules such as New York’s convenience-of-the-employer rule continue to generate remote work questions despite being in place for more than 60 years.
Peter M. Berard, Senior Director, RSM US LLP
These challenges become even more complex in global workforce arrangements, where organizations face additional strain because of a lack of resources and specialized knowledge.
Global workforce and mobility considerations
Current U.S. payroll rule changes are not expected to significantly affect most organizations with global mobility programs. However, manufacturing and construction companies may face additional considerations related to overtime requirements.
In addition, cross-border and remote workforce arrangements continue to create workforce tax and reporting challenges, particularly when employees are hired in one country but work primarily in another. These arrangements can raise corporate, payroll and employment tax questions, especially when employees split time across locations or choose not to relocate.
Many organizations are also evaluating the cost advantages of hiring talent in lower-cost markets. However, those potential savings may be offset by added registration, payroll administration and ongoing reporting obligations. For example, a common scenario involves a worker employed by a UK entity but based in the U.S. and working remotely. More broadly, cross-border arrangements are partly driven by labor cost differentials, as senior roles can be significantly less expensive in the UK than in the U.S.
Broader workforce and geopolitical developments create further complexity, particularly when expatriates working abroad return to the U.S., potentially affecting state residency status and payroll tax treatment if residency thresholds are not met. A repatriation from Dubai to California, for example, can trigger these very issues.
Key areas of focus include Social Security tax implications, payroll reporting requirements and broader workforce tax risks tied to cross-border remote work arrangements.
Organizations must address cross-border hiring, remote work across borders, payroll obligations and state residency implications to mitigate risk and maintain compliance across jurisdictions.
Audra Marshall, Principal, RSM US LLP
Key guidelines for employment tax compliance
As employment tax requirements continue to evolve, organizations are working to meet growing compliance demands with limited internal resources while minimizing operational risk.
Important considerations include:
Navigating varying state and local tax authority requirements
Balancing administrative effort, compliance costs and the size of the underlying liability
Addressing evolving reporting obligations and regulatory expectations
Managing workforce tax obligations across domestic and global operations
To address these challenges effectively, companies should strongly consider working with experienced advisors who understand their business operations, day-to-day workforce challenges and broader compliance considerations across both domestic and global environments.
Building a more proactive compliance strategy
With employment tax requirements becoming more complex across jurisdictions, a proactive approach can help you identify and address risks before they escalate into broader operational and regulatory challenges.
Conducting a high-level assessment of payroll processes, workforce arrangements and reporting obligations can help your organization quickly identify potential compliance pain points across domestic and global operations. Working with experienced advisors who understand workforce structures, operational priorities and jurisdictional requirements can help improve payroll accuracy, strengthen reporting practices and reduce workforce tax exposure.
Ready to get started? Contact our team to learn how RSM can help support a more proactive approach to employment tax compliance.
RSM contributors
Related insights
