Payroll for U.S. Employees Abroad and Aliens in the U.S.

• This increase in foreign assignments for U.S. employees and in U.S. assignments for aliens has also had a profound impact on the payroll departments in these companies. The rules governing wage and tax withholding and reporting for such employees are more complex and require a high degree of coordination among payroll, human resources, and benefits. This section provides an explanation of the rules regarding the payroll ramifications of U.S. employees working abroad (expatriates) and aliens working in the U.S., including provisions designed to help these employees avoid double taxation of their income.

Taxation for U.S. Citizens & Resident Aliens working in a foreign country:

Wages are generally subject to federal income tax withholdingLess exclusions allowed from:

Foreign earned income exclusionForeign housing exclusionAllowable foreign tax credit- increase in W4 withholdingExempt if foreign country law requires taxation of wages

Wages generally are subject to Social Security and MedicareOptional if employer is a foreign affiliate of a U.S. Company

Wages generally are subject to FUTA

Taxation for U.S. Citizens & Resident Aliens working in a foreign country:

Federal Income Tax Exemptions

Foreign Earned Income or Housing cost exclusionMust provide for 673 or equivalent created written

statementQualification for exclusion via bona fide residence or physical

presence test- time in foreign country and housing cost to calculate the allowable exempt amount

Wages Subject for foreign income withholding If the foreign country law mandates withholding taxation

for the foreign country- federal exemptSigned statement verifying the foreign taxation law is

necessary

Wages for work in U.S. possessions other than Puerto Rico Employer believes that 80% of work will be done in another U.S.

possession—such as Guam, American Samoa & other islands Wages for work in Puerto Rico

Bona fide resident for the entire year in Puerto Rico Extra withholding allowances for foreign tax credit

Additional allowances on W4 can be taken if expectation of income exclusions

Federal Income Tax Exemptions

Bona fide resident & presence test

• Employee is considered a bona fide resident if:– Is physically present in the possession for 183 days during the year– Does not have a tax home outside the possession during the year &– Does not have a closer connection to the U.S. or a foreign county than

in the possession

• Presence test:– Physically present in the possession at least 549 of preceding 3 year

period (current and two previous), present at lest 60 days each year– Spend no more than 90 days in the U.S. during the year– Sped more time in possession than US and have less than $3000 in

U.S> earned income– No significant connection to the U.S.

Social Security & Medicare Taxes

• US Citizens and resident aliens working abroad generally pay Social Security/ Medicare tax and company must match

• Employees for foreign affiliate companies generally do not pay the SS/ MED unless opted by employer

• Expatriate employees may also be subject to foreign social security tax

Totalization Agreements

• Alleviates the double taxation for Social security• Temporary assignments , < 5 years are paid to US • Permanent assignments > 5 years are paid to the foreign

country

• Certificate of US or Foreign Social Security must be obtained from the SSA via a formal request

US has agreements with: 24 Countries• Australia• Austria• Belgium• Canada • Chile• Czech Republic• Denmark• Finland• France• Germany• Greece

• Ireland• Italy• Japan• Luxenburg• Netherlands• Norway• Poland• Portugal• South Korean• Spain• Sweden

Pending legislative adaptations:

Mexico

• Switzerland• United Kingdom

• A foreign affiliate is a foreign business entity in which a U.S. company has at least a 10% interest. The U.S. employer is responsible for paying both the employer and employee shares of the U.S. social security and Medicare taxes. The employer is not obligated to withhold or cause the foreign affiliate to withhold the employee share of the taxes from the employee’s wages, although the employee can agree to such withholding with the U.S. employer.

• Form 2032, Contract Coverage Under Title II of the Social Security Act• Employer receives a separate EIN and must file separate 941 form with verbiage

“3210” written on the top • Heroes Earnings Assistance and Relief Act, a foreign employer is treated as an

American employer for social security and Medicare tax purposes with respect to employees of the foreign employer performing services under a contract between the U.S. government and any member of any domestically "controlled group of entities" that includes the foreign employer.

FUTA • US citizens working abroad for an affiliate company and the

work would be covered if performed in US are taxable• Does not apply to resident aliens working abroad or

Americans of foreign affiliates

• Coverage exception for Canada and Virgin Islands to avoid dual coverage for employees of US companies working where local unemployment exists– Must pay the 6.2% -

Foreign Earned Income and Housing Cost Exclusion

• Expatriates can exclude the first $92,900 of foreign earned income

• Must have a “tax home” & meet the bona fide residence testHave a physical presence / residence in foreign country for the period of the employmentMay still have home in US, just frequent visits

• Assignment if temporary cannot fall under the travel expense exclusions– tax home and domicile must be present

Foreign Earned Income • Partial year calculation for foreign earned incomeNumber of days worked in the U.S. X Total income = U.S. source incomeTotal number of days worked

Total exclusion ($92,900) – amt from calc for US income = foreign earned income exclusion

Foreign Housing Cost Exclusion • Employees who have a foreign tax home and qualify under

the bona fide residence or physical presence test can take an exclusion for a limited amount of reasonable foreign housing expenses exceeding a base housing amount

Housing expenses include :rent, utilities,insurance, occupancy taxes, fees paid for securing a lease, furniture rental, household repairs, and automobile parking costs.

Reasonable housing expenses do not include:• lavish or extravagant expenses under the circumstances;• telephone and cable television charges;• deductible interest and taxes;• capital expenditures, such as a house (including mortgage payments), home improvements, or furniture; or• the cost of domestic labor (e.g., maids or gardeners).

• Base housing amount.- The base housing amount is 16% of the maximum foreign earned income exclusion, figured on a daily basis, multiplied by the number of days during the year the employee met the bona fide residence or physical presence test. The maximum foreign earned income exclusion is determined on January 1 of the year in which the employee’s tax year begins.

• Housing cost exclusion limitation.- The reasonable housing expenses that are used to calculate the housing cost exclusion are limited to 30% of the maximum foreign earned income exclusion, figured on a daily basis, multiplied by the number of days during the year the employee met the bona fide residence or physical presence test. The maximum foreign earned income exclusion is determined on January 1 of the year in which the employee’s tax year begins.

Tax Equalization- Tax Protection• Many employers follow a policy of Tax Equalization

Tax Equalization is designed to ensure that the tax impact to an employee of taking an international assignment is neutral – the employee will pay no more or no less tax than they would have if they had remained in their home country.

• Some employers follow a policy of Tax ProtectionTax protection is designed to ensure that the employee pays no more tax than they would had they remained in their home country; however, if the actual tax liability is less than what the employee would have paid had he/she remained in their home country, the employee retains the benefit.

Hypothetical Tax

• Hypothetical tax represents the home country tax that the employee would have paid had he/she remained in the home country.

• Hypothetical tax is typically withheld from the employee in lieu of actual tax (i.e., federal income tax).

• In addition to hypothetical federal tax, the employer may take a hypothetical state tax depending on the terms of the international assignment and tax reimbursement policies.

• Hypothetical tax is treated as a REDUCTION to earnings and reduces the federal and FICA/Medicare wages reported on an employee’s Form W-2.

Earnings Adjustment ContHow does everything make it to the W-

2?• Certain reimbursements may be excluded from wages based on IRS rules.

Factors to consider include:– Intended length of the assignment – Nature of the payment– Form of the payment– Policy provisions

• Certain relocation expenses may be excludable but reportable in Box 12 Code P of Form W-2.

Resident and Nonresident Aliens Working in the U. S. Resident

Aliens

The state of domicile/residence must be determined.

• Domicile – factors used to determine:• Where the employee intends to return• State issuing the employee’s drivers license• Where the employee votes

• Residence – factors used to determine:• Where employee is physically present• Where immediate family lives and where children attend school• Where the employee works

Calculation of Federal Income Withholding

• The amount required to be added to the wages of a nonresident alien for purposes of calculating federal income tax withholding is the highest wage amount to which a zero withholding rate applies as shown in the Table for the Percentage Method of Withholding for a single person (including a head of household) for each payroll period For 2011, these amounts are as follows:

• While the inpatriate may continue to be paid in his/her home country, wages received for work performed in the U.S. should be reported in the U.S. and the appropriate taxes should be paid to the appropriate tax authority on Form W-2.

• The assignee may also receive other company paid benefits.

• An earnings adjustment may be required (as with an expatriate) to ensure proper reporting and withholding on Form W-2.

• Where taxes are paid on behalf of the assignee by the company, a tax gross-up will be added to the individual’s compensation each pay period to result in a neutral net effect to the employee.

Resident and Nonresident Aliens Working in the U.S.Resident Aliens

• “Commercial travelers.” Withholding is not required on small amounts of wages paid to nonresident aliens who are in the U.S. for a short period of time. The specific conditions that must be satisfied for this “commercial traveler” exception to apply are as follows:

• • The nonresident alien employee is in the U.S. for no more than a total of 90 days during the taxable year;

• • Compensation received for work performed in the U.S. totals no more than $3,000 during the taxable year; and

• • The nonresident alien is employed by: a U.S. employer in a foreign country or a U.S. possession or by a foreign employer not engaged in a trade or business in the U.S.

Resident and Nonresident Aliens Working in the U.S.Resident Aliens

• Resident aliens should obtain a U.S. social security number or ITIN (Individual Taxpayer Identification Number).

• Resident Aliens should complete a Form W-4, Employee’s Withholding Allowance Certificate, and Form I-9, Employment Eligibility Verification.

Social security card is not required to be provided as authorization to work

• Wages paid to and taxes withheld from resident aliens must be deposited and reported by the employer in the same way it does for all other employees, using Form 941 and Form W-2.

Resident and Nonresident Aliens Working in the U.S.Resident Aliens

InpatriatesReporting and withholding for U.S. resident aliens

• In general, U.S. resident aliens are subject to the same U.S. federal, state and unemployment tax reporting and withholding obligations as U.S. citizens/permanent residents.

• Employers must report compensation and withhold federal, state, local and social tax (also state disability and unemployment taxes where required).

• Employers must also fund the employer portion of FICA, Medicare, and federal and state unemployment taxes.

• In general, federal unemployment (FUTA) applies to all wages paid for work performed in the U.S. regardless of the citizenship or residency status of the employee or the employer.

• Immigrant Visa – I-551 Permanent Resident Card (i.e., green card)

• Most common nonimmigrant visas include:

• B-1: Visitors for business Students, workers, or foreign press being paid by a foreign

employer

• H-1B: Professional and technical workers

College-educated or experienced professionals

D-1- Foreign Crewman

InpatriatesVisas

• E-l - Treaty traders.

• E-2 - Investors.

• E-3 - Specialty occupations

InpatriatesVisas

Traders in the U.S. only to carry on trade between the U.S. and the visa holder's home country

Foreign investors who are in the U.S. to direct a business in which they have invested or will invest a substantial amount of money.

Residents of Australia coming to the US. to work in specialty occupations, and their spouses and dependents. 10,500 annual limit

• J-1: Exchange visitors Students, trainees, and teachers in the U.S. to participate in an

exchange program Federal income tax withholding exemptions available Exempt from social wage reporting and withholding

• F-1: Students Full-time students at an approved U.S. educational institution Federal income tax withholding exemptions available Exempt from social wage reporting and withholding

InpatriatesVisas

• L-1 (A & B)- Intra company transfers Managers and executives in a specialized field of knowledge

• M-1 – Non academic or vocational students

• O-1 and O-2: Extraordinary Ability Extraordinary ability in the arts, sciences, education, or athletics

• P-1- Entertainers, athletes• Q-1- Cultural exchange visitors• R-1 Religious occupations• TN-NAFTA- Canadians, Mexicans working under the North American Free

Trade Agreement

InpatriatesVisas

International 4-5 questions

Student Visa Totalization Agreements Income Exclusion Housing Exclusion Bona Fide Residence Domicile

Questions