International Payroll Issues: Federal
Original Author: Ryan F. Donovan
Updating Author: Rena Pirsos, XpertHR Legal Editor
- The earnings of US citizens and resident aliens working in a foreign country for a US employer (expatriates, collectively) are generally subject to US federal income tax withholding unless they can be excluded from the employees' gross income under the foreign earned income and/or housing cost exclusions or certain exemptions. See Taxing Expatriates.
- US employers are also generally required to withhold and match Social Security and Medicare taxes on compensation earned by expatriates working abroad. In addition, US employers are subject to federal unemployment insurance tax for work performed abroad by US citizens under certain circumstances. See Taxing Expatriates.
- Standard rules under the Internal Revenue Code apply to the filing, depositing and reporting of withheld taxes for expatriates. See Taxing Expatriates.
- To qualify for the foreign earned income and/or housing cost exclusions, employees must have foreign earned income, their tax home must be in a foreign country, and they must satisfy either the bona fide residence test or the physical presence test. See Foreign Earned Income and Housing Cost Exclusions.
- To prevent expatriates from being taxed both in the US and the foreign country to which they are assigned, they may be entitled to a credit against US tax for qualifying foreign income taxes. In addition, if the US has an income tax treaty or totalization agreement in effect with the country of assignment, they will typically allow for various tax credits, deductions and exclusions to limit foreign taxes. See Social Security and Medicare Tax Withholding; Credit or Deduction for Foreign Taxes Paid; Effect of US Income Tax Treaties.
- In addition to being subject to federal income and employment taxes, expatriates must also pay state taxes if they are a resident of a state while on assignment abroad. In most states, part of the determination of residency is based on an individual's domicile. See State Taxes.
- The taxation of aliens working for a US employer in the US depends on whether they are resident aliens or nonresident aliens. See Taxing Aliens Who Work in the US.
- In general, citizens from foreign countries who work in the US are considered nonresident aliens unless they qualify as resident aliens under the lawful permanent residence test or the substantial presence test of the Internal Revenue Code. See Determining the Residence of Aliens Who Work in the US.