Employment Tax Issues

Employment Tax Issues for US Persons Working Overseas & Foreign Persons Working in the USA

This is an area filled with confusion and uncertainty. First there are so many potential variables and combinations such as:

  • A US employee working overseas but not meeting any foreign earned income exclusion [FEI] under §911.
  • A US employee working overseas traveling through multiple countries and qualifying for the foreign earned income exclusion.
  • A US employee working overseas and qualifying for the exclusion but having a principal residence previously established in a state that does not recognize the FEI.
  • The employee’s intent to return to their state of origin may also affect whether they are subject to state tax or can “break residency”.
  • A US person working and living overseas on a more permanent basis but with a US based business.Self-employment taxes may or may not apply depending on many factors including income tax treaties.
  • A foreign employee of a US company that never spends any time within US borders and performs all services outside US borders.
  • A foreign contractor of a US company that performs services both within and without the United States in the course of their duties.
  • A foreign employee of a US company that performs services both within and without the United States in the course of their duties.
  • An employee of a foreign corporation that works both in and outside of the United States. An employee of a foreign corporation that works primarily within the United States and has a work permit, visa or other permission to work legally in the United States.
  • A person working in the United States without legal documentation.

This is not an all-inclusive list of the variations possible but you can begin to see the general idea. There are basic issues that must be addressed before any particular answer is determinable.

  • The employee or contractor’s citizenship or country of origin.
  • The country(ies) where services are performed. Employment Tax Issues for US & Foreign Employees 2 Copyright 2014 by Steven E. Miller, CPA PC
  • What income tax treaties with the US may apply to the situation.
  • The level of salary or contractual payment.
  • The state or states in the US that apply.
  • Legal status of anyone performing work in the US

While we consider a typical US employee working in a single state within the US and not performing any services outside the country, the employment taxes that typically might apply are:

  • Federal income tax withholding FICA tax withholding (US Social Security)
  • Medicare tax withholding
  • State income tax withholding
  • Federal unemployment taxes
  • State unemployment taxes
  • State disability taxes
  • Local/city income tax withholding.

Keep in mind that local or city income taxes often aren’t involved. State income withholding taxes don’t apply to those states that do not have an income tax. State unemployment taxes are quite varied in rates, limits and applications.

The risks to the employee and to the employer are that the proper taxes are not withheld and paid in to the proper government entity. More complicated issues arise when a foreign employee of a foreign employer is working in the US, qualifies for a federal income tax exclusion but is working in a state that does not accept a tax treaty exemption. Penalties and interest charges are typically very severe.

For US employees working overseas, an exclusion from federal income tax withholding is often overlooked or missed. The employee ends up paying in significant amounts of federal income taxes when in fact they may owe little or zero federal tax.

If you are lacking the resources to manage these issues, we are available to consult and guide you through the maze of filing requirements and payroll regulations as it applies to foreign assignments or foreign workers.



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