There are a number of countries that expect an employer and/or employee to track and report business travel as a non-resident. Simply applying a “183 day” threshold is not going to work. Over the last couple months, we explored some of the rules related to business travelers into Canada and the UK. These countries are very clear on what inbound business travelers need to do from a statutory requirement.
As we end our series, we turn to the Internal Revenue Service (IRS) individual income tax reporting requirements for business travelers into the US.
As with the UK and Canada, domestic US tax law is clear. If a foreign employer is engaging in providing services in the US, and a non-resident employee is performing these services, this individual is subject to US income tax based on his or her workdays unless all of the following criteria are met:
- They are an employee of a foreign corporation or office
- They are temporarily present in the US for no more than 90 days during the calendar year, and
- The pay relating to these services does not exceed US $3,000.
Assuming the employee is subject to US income tax, the foreign employer will need to operate a US payroll (local or shadow) and report income allocated to US workdays for federal and possibly state purposes. Income related to dependent personal services performed by the employee in the US that cannot be exempted under a treaty should be reported on a US Form W-2. The income is subject to US income tax withholding using the payroll tables provided by the IRS.
Income exempt from US tax withholding or subject to a reduced rate of withholding under the terms of a treaty should be reported by the foreign employer on Form 1042-S. The foreign employee is required to complete Form 8233 if they are claiming an exemption from withholding due to application of a tax treaty. Form 8233 alleviates the foreign employer’s obligation to withhold US taxes on income paid for services performed in the United States.
The company’s obligations to report US source income paid to a non-resident alien is not removed because a treaty position may apply. The company is required to gather the data needed to determine US source income and to produce the relevant reporting forms. These forms will enable the individual taxpayer to file a US tax return if required (most likely a Form 1040-NR, US Non-resident Alien Income Tax Return). Some companies conclude to work with the individual to pay the US tax liability with the tax return rather than withholding the US tax during the year. This method is not strictly correct and may incur penalties.
There are 43 US states that levy a state income tax based on days of presence or income earned in that state. Some cities and localities also levy an income tax. Not all states follow exemptions offered at the federal level. For example, California does not allow treaty exemptions that apply at the federal level. Thus, California income tax withholding may be required even though no withholding is required for federal tax purposes. The employer should always consider the state payroll reporting and tax return filing requirements in addition to the federal requirements. Tracking employees and understanding the employer’s obligation to report wages and withhold on these wages is critical to remaining compliant with US tax laws.
As we reach the end of this three-part series on business traveler tax rules in Canada, the UK, and the US, there are three main points to remember:
- There are many additional countries (besides Canada, the UK, and the US) that have their own rules for business traveler compliance including payroll withholding, social security, tax return filing requirements for individuals, and corporate compliance. Always consider the tax risks to your business when employees are working in other jurisdictions.
- Review your company’s current business traveler reporting arrangements to determine if you are compliant. This review will highlight areas of risk and will help with planning and building the business case to address these risks.
- Business traveler compliance is a complex business issue that is often seen as too difficult and costly to solve; however, there may be opportunities to reduce the overall cost burden and tax risk through reviewing workforce management processes, travel contracts, VAT refunds, and general internal policy and processes.
Keeping track of and reviewing your business traveler population on a regular basis is an important business decision that will help manage corporate and employee risk.
For assistance with a review or for further details on the requirements of your business travelers, please contact me at firstname.lastname@example.org or at +1.646.915.3301. Additionally, you can visit our Mobility Tax Services page to see what assistance we can provide.
The information provided in this article is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.
Author: David Livitt
David Livitt is Director / National Practice Leader, Business Traveler Services at GTN. He has over 18 years’ experience in the area of mobility tax working with multinational companies of all sizes, assisting them and their employees to navigate the complexities that come with global mobility programs. With a view to managing corporate and employee individual tax compliance, there has been a growing trend to assist companies with their short-term business traveler populations to develop user experience and global governance structures, policy design, process management, and technology enabled solutions. David has successfully led and implemented a number of such global business traveler projects. +1.646.915.3301 | email@example.com
Tags: Global Mobility, Business Travelers, Expatriates, Expatriate Tax, Mobility Tax, Tax Planning