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 withholding
Less exclusions allowed from:
Foreign earned income exclusion
Foreign housing exclusion
Allowable foreign tax credit- increase in W4 withholding
Exempt if foreign country law requires taxation of wages
Taxation for U.S. Citizens & Resident Aliens
working in a foreign country:
 Wages generally are subject to Social Security and Medicare
 Optional if employer is a foreign affiliate of a U.S. Company
 Wages generally are subject to FUTA
Federal Income Tax Exemptions
 Foreign Earned Income or Housing cost exclusion
 Must provide for 673 or equivalent created written
statement
 Qualification 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 exempt
 Signed statement verifying the foreign taxation law is
necessary
Federal Income Tax Exemptions
 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
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
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Australia
Austria
Belgium
Canada
Chile
Czech Republic
Denmark
Finland
France
Germany
Greece
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Ireland
Italy
Japan
Luxenburg
Netherlands
Norway
Poland
Portugal
South Korean
Spain
Sweden
• Switzerland
• United Kingdom
Pending legislative adaptations:
Mexico
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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 test
Have a physical presence / residence in foreign country for the period
of the employment
May 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 income
Number of days worked in the U.S. X
Total number of days worked
Total income = U.S. source income
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
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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.
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Some employers follow a policy of Tax Protection
Tax 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 Cont
How 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
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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:
Resident and Nonresident Aliens Working in the U.S.Resident Aliens
• 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
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“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
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Resident aliens should obtain a U.S. social security number or ITIN (Individual
Taxpayer Identification Number).
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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
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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.
Inpatriates
Reporting and withholding for U.S. resident aliens
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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.
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Employers must report compensation and withhold federal, state, local and
social tax (also state disability and unemployment taxes where required).
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Employers must also fund the employer portion of FICA, Medicare, and federal
and state unemployment taxes.
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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.
Inpatriates
Visas
• 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
Inpatriates
Visas
• E-l - Treaty traders.
Traders in the U.S. only to carry on trade between the U.S. and the visa
holder's home country
• E-2 - Investors.
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.
• E-3 - Specialty occupations
Residents of Australia coming to the US. to work in specialty occupations,
and their spouses and dependents. 10,500 annual limit
Inpatriates
Visas
• 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
Inpatriates
Visas
• 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
International
4-5 questions
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Student Visa
Totalization Agreements
Income Exclusion
Housing Exclusion
Bona Fide Residence
Domicile