We recently discussed two situations where US tax withholding was required for transactions between a US business and foreign persons. The first was a situation where investors in an LLC were nonresident aliens. The second dealt with interest being paid to a foreign parent corporation. Today we will discuss an employment situation. (As with any of the cases we discuss, when based on our actual experience, the names and details have been changed.)
Tech Inc. has been operating in New York State for three years. The majority shareholder, Mike, is a university professor who helped develop a certain technology and subsequently licensed that technology from the university. Mike is US citizen and has been working with Alfonso, a colleague at the university who happens to be a Swiss citizen. Alfonso has been present in the US for the last two years on a J-1 visa. He has agreed to work for Tech Inc. and has just received his H-1b visa. Alfonso’s duties for Tech Inc. will involve a lot of international travel and work abroad, and he will only be present in the US three or four weeks every quarter.
Mike’s business manager at Tech Inc., Jill, has a number of questions. She is familiar with the I-9 form and knows she must obtain from Alfonso the required documentation showing he is permitted to work in the US, but she is uncomfortable determining what taxes need to be withheld from Alfonso’s pay. Luckily, Alfonso’s immigration attorney is able to refer them to a CPA with expertise in this area.
Jill learns that this situation is even more complex than she thought. There is a US-Switzerland tax treaty and social security agreement that need to be considered. Because of Alfonso’s limited physical presence in the US, at least for the initial year of employment, he will be considered a nonresident alien for US tax purposes. Although the pay Alfonso receives for providing services while working in the US will still be subject to the usual federal and FICA withholding taxes, those taxes will not be required to be withheld from the pay he receives for the work he does for Tech Inc. outside of the US Jill will need to complete one additional step when calculating the federal withholding on Alfonso’s US wages because he is a nonresident alien.
On a go-forward basis, at the beginning of each calendar year Alfonso will need to inform Tech Inc. as to his anticipated US residency status for the coming year by providing Jill with the appropriate IRS form for the status he is claiming. He will need to keep detailed records of his whereabouts and work closely with his own tax advisor regarding his US filing requirements.
Jill, Alfonso, and Mike are glad that they obtained qualified advice and can proceed knowing that they are handling Alfonso’s employment taxes correctly. Their focus can be where it needs to be—on expanding business operations and profitability.
We hope you enjoyed this blog series on the possible withholding tax requirements when business activities involve international entities and individuals. If you would like to learn more about how we can help you navigate the US and foreign tax landscape, please reach out to us at info@swcllp.com or call us at 607-272-5550.