Description

International Aspects of U.S. Income Tax Withholding on Wages and Service Fees analyzes the U.S. wage withholding rules (for income tax purposes) that apply to aliens working in the United States, and to U.S. citizens and certain aliens working in foreign countries.

Author Thomas St.G. Bissell, Esq. discusses the rules regarding the 30% U.S. withholding tax on U.S.-source service fees paid to self-employed nonresident alien individuals, and U.S. information reporting requirements concerning wages and service fees paid to employees and self-employed individuals in an international context. There is also a discussion of the wage withholding tax rules that apply in Puerto Rico and the other U.S. overseas possessions.

The author takes an in-depth look at the major issues involved in tax withholdings including

• General Structure of the U.S. Wage Withholding Tax
• Wage Withholding on International Employment
• Withholding on Fringe Benefits
• Withholding on Bonuses and Deferred Compensation
• Withholding on Self-Employed Aliens
• Puerto Rico and the U.S. Possessions
• Special Computational Problems for Employees
• Form 1099 Information Returns
• Tax Payment and Filing Procedures and more!

In general, wage withholding is not imposed on remuneration paid to an employee for services performed outside the United States if the employee is a nonresident alien, but withholding tax may apply (subject to numerous special rules) if the employee is a resident alien or a U.S. citizen.

This Portfolio discusses the increasing importance of the question of wage withholding on fringe benefits, and on bonuses and deferred compensation paid to international employees either while they are still working for their employer, or after their termination from service. Numerous special withholding rules are applied which attempt to match the amount of withholding tax with the employee's substantive liability.

In the case of service fees paid to a self-employed individual who is not an employee, withholding is generally required only in the case of fees paid to nonresident aliens with respect to services rendered within the United States. A number of special exceptions may apply, however, and these are discussed within the Portfolio. In the case of service fees paid to self-employed individuals who are resident aliens or U.S. citizens, withholding is required only in the case of “backup” withholding.

International Aspects of U.S. Income Tax Withholding on Wages and Service Fees allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Foreign Income Portfolios Library, a comprehensive series containing more than 90 Portfolios, which covers critical transactions and issues in international taxation. This highly-regarded resource service offers commentary on a wide range of foreign income topics including: Foreign Tax Credit, Business Operations in more than 40 foreign countries, Branch ProfitsTax, Source of Income Rules, Subpart F (Controlled Foreign Corporations), Foreign Partnerships and Partners, Transfer Pricing, and more. 

Table of Contents

Detailed Analysis

I. Introduction

A. General

B. Scope of This Portfolio

II. U.S. Wage Withholding Tax - General Structure

A. General Statutory Requirements

B. Definition of Wages

1. Statutory Exceptions

2. Administrative Exceptions

3. "Worldwide" Embrace of § 3401(a)

C. Overview of Withholding on International Wages

1. Nonresident Aliens

2. U.S. Citizens Abroad

3. Resident Aliens

4. "Territoriality" of Wage Withholding Tax

a. General Comments

b. U.S. "Sourcing" Rules

c. Definition of "United States"

D. Foreign Employer with No U.S. Contacts

1. Exposure to Tax

2. Disbursing Agent Subject to U.S. Jurisdiction

E. Withholding Tax Rates and Procedures

1. General

2. Percentage Method and Wage Bracket Method

3. Shorthand Features of the IRS Methods

4. Avoidance of Overwithholding; Form W-4

5. Special Form W-4 Rules for Nonresident Alien Employees

6. Employee Who Expects No Tax Liability

7. Included/Excluded Wages

8. Withholding on Supplemental Wages

9. Timing Problems Resulting in Overwithholding and Underwithholding

a. Overwithholding - Full-Year Employees

b. Underwithholding - Full-Year Employees

10. Additional Withholding

11. Part-Year Employment

12. IRS Publications for Employers and Employees

F. Estimated Tax Requirements of Individuals

G. Crediting of Wage Withholding Tax and Estimated Tax by the Individual

H. Penalties for Underwithholding of § 3402 Tax

I. Issue of W-2 Reporting at Year-End

J. Importance of the Sarbanes-Oxley Legislation

K. Wage Withholding on behalf of "Disregarded Entities"

III. Wage Withholding on International Employment

A. Nonresident Alien Employees

1. Determining Alien's Status as a Nonresident

2. Territorial Rules Applicable to Nonresident Aliens

3. Services Performed Within the United States - Exempt Remuneration

a. Short-Term Business Visitors

b. F-, J-, and Q-Visa Holders

c. Employees of Foreign Governments and International Organizations

d. Canadian and Mexican Residents

e. Crew Members of Foreign Vessels

f. Remuneration Exempt under an Income Tax Treaty

4. Services Performed Within the United States - Taxable Remuneration

a. Special Nonresident Alien Rules

b. Withholding on U.S.-Source Remuneration Only if Classified as Wages

c. Services Performed Both Within and Without the United States

d. Wage Withholding Is Almost Never at 30% Rate

5. Nonresident Aliens Electing Resident Status Under § 6013(g) and (h)

6. Resident Alien Election

7. Estimated Tax Requirements

8. Foreign Employer Who Fails to Withhold

9. Nonresident Aliens Without a U.S. Social Security Number

B. U.S. Citizen Employees Working Outside the United States

1. General Rules

2. Income Excluded Under § 911

3. Income Excluded Under § 931

4. Income Excluded Under § 933

5. Remuneration Subject to Foreign Wage Withholding Tax

a. Employer Must Be Legally Required to Withhold Under Foreign Law

b. Foreign Political Subdivisions

c. Rate of Foreign Withholding Tax Not Relevant

d. The Foreign Withholding Tax Must Be on "Income"

e. Relationship to the § 911 Exclusion

f. Peculiarities of Foreign Law

g. Noncompliance with Foreign Withholding Law

h. Withholding Agreement with Foreign Government

i. Supplemental Wages

6. Adjustment to Reflect Foreign Tax Credits

7. Employee Who Expects No U.S. Tax Liability

8. Business Days in the United States

9. Foreign Employer with No U.S. Contacts

10. Wage Withholding by U.S. Disbursing Agent

11. Estimated Tax Liability

12. Practical Implications

13. Employees of Foreign Governments and International Organizations

C. Resident Alien Employees

1. Determining Alien's Status as a Resident

2. Work Outside the United States

a. No Special § 3401(a) Exception

b. Remuneration Excluded from Employee's Gross Income

c. Remuneration Subject to Foreign Wage Withholding Tax

d. Form W-4 May Be Used to Reduce U.S. Withholding

e. Employees Classified as Residents of a Treaty Country

f. Business Trips Back to the United States

g. Foreign Employer with No U.S. Contacts

3. Employment Based in the United States

a. Remuneration Not Excluded from Gross Income

b. Remuneration Exempt by Treaty

4. Estimated Tax Requirements

5. Nonresidents Electing Resident Status

6. Employees of Foreign Governments and International Organizations

7. Illegal Aliens

IV. Withholding on Fringe Benefits

A. Typical Fringe Benefits Provided to International Employees

B. Temporary Living Expenses - "Tax Home" Rules

1. Effect of 1992 Energy Act

2. Expenses Qualifying for the "Tax Home" Deduction

3. Applicable Wage Withholding Rules

4. Per Diem Arrangements

C. Taxability of Other Allowances

1. Housing

2. Home Leave Expenses

3. Tuition Expenses for Dependents' Private Schooling

4. Personal Use of Automobile

5. Telephone

6. Moving Expenses

7. Tax Equalization Payments

8. Low-Interest or Interest-Free Loans

9. Cost of Meals

10. Reimbursement of U.S. Education Expenses of a Nonresident Alien Student

11. Miscellaneous Fringe Benefits

D. Sourcing of Taxable Allowances

E. Potential § 6662 Penalty

V. Withholding on Bonuses and Deferred Compensation

A. General

B. Section 409A Rules

C. Nonresident Alien Recipient

1. Payment Is Foreign-Source Income

2. Payment Is U.S.-Source Income

3. Combined U.S.- and Foreign-Source Income

D. U.S. Citizen Recipient

1. Payment Is Foreign-Source Income

a. Section 911 Exclusion

b. No § 911 Exclusion

c. Other Wage Withholding Exemptions

2. Payment Is U.S.-Source Income

E. Resident Alien Recipient

1. Payment Is Foreign-Source Income

2. Payment Is U.S.-Source Income

F. Funded Deferred Compensation Plans

1. Distributions from U.S. Qualified Plans

2. Plans Not Qualified Under U.S. Law

3. The Rules of § 72(f)(2) and § 72(w)

4. Special § 911 Rules

G. Miscellaneous Types of Deferred Compensation

1. Dismissal Pay

2. Cancellation of Employment Contract

3. Death Benefit Paid to Employee's Spouse

4. Stock Option Plans

VI. Withholding on Self-Employed Aliens

A. Self-Employed Aliens and U.S. Citizens Compared

B. General Rules

1. U.S.-Source Income Only

2. Withholding Even if Income Is Effectively Connected

3. Identity of Payor and Place of Payment

4. Payor's Knowledge of his Withholding Liability

5. Return-on-Capital Income Versus Services Income

6. Self-Employed Status Is Not Elective

C. Procedures Where No Withholding Exemption Applies

1. General Comments

2. Section 1441 Procedures Where No Exemption Applies

3. Pro-rated Personal Exemption

4. Form 1042/1042S Filing

D. Exceptions from § 1441 Withholding

1. Wages Subject to § 3402 Withholding

2. Remuneration Exempt from § 3402 Withholding

3. Compensation of Certain Canadians and Mexicans

4. Income Exempt Under the Code or a Treaty

a. Short-Term Business Visitors

b. Crew Members of Foreign Vessels

c. Income from the Operation of Ships and Aircraft

d. Tax Treaty Exemptions

e. IRS Penalties for Failure to Document § 1441 Exemptions

5. Certain Payments to Ship Masters

6. Certain Wages Exempt from Withholding Under § 3402(e)

7. Contractors with Foreign Governments and International Organizations

8. Reduction in 30% Withholding Rate

9. Form 1042/1042S Filing Requirements

E. Estimated Tax Rules

F. Social Security Tax

G. Special Categories of Aliens

1. Directors' Fees

2. Artists, Entertainers, and Athletes

3. Fellowships of F-, J-, M-, and Q-Visa Aliens

4. Section 6013(g) and (h) Aliens

H. The Section 409A Rules

I. Service Fees Paid to Foreign Corporations and Foreign Partnerships

VII. Puerto Rico and the U.S. Possessions

A. General

1. Relationship with the United States

2. U.S. Tax Requirements for Residents of Possessions

B. Substantive Tax Liability of Individuals

1. Puerto Rico

a. U.S. Tax Rules

b. Puerto Rican Tax Rules

c. Aliens Resident in Puerto Rico

2. U.S. Virgin Islands

3. Guam

4. Commonwealth of the Northern Marianas (CNMI)

5. American Samoa

6. The "Scattered Possessions"

7. Practical Implications of Possessions Withholding

8. Social Security Taxes

9. Self-Employed Individuals

C. Puerto Rico

1. U.S. Withholding on Employees

a. Services Rendered in Puerto Rico

b. Services Rendered in the United States

c. Services Outside Puerto Rico and the United States

2. Puerto Rican Withholding on Employees

a. Services Rendered in Puerto Rico

b. Services Rendered Outside Puerto Rico

3. Potential "Cross-Border" Tax Problems

D. U.S. Virgin Islands

1. U.S. Withholding on Employees

a. Services Rendered in the Virgin Islands

b. Services Rendered in the United States

c. Services Rendered Outside the United States and the Virgin Islands

2. Virgin Islands Withholding on Employees

a. Services Rendered in the Virgin Islands

b. Services Rendered Outside the Virgin Islands

3. Potential "Cross-Border" Tax Problems

a. U.S. Residents

b. V.I. Residents

E. Guam and the CNMI

1. U.S. Wage Withholding

2. Possessions Wage Withholding

3. Potential "Cross-Border" Tax Issues

F. American Samoa

1. U.S. Wage Withholding Tax

2. American Samoan Wage Withholding Tax

3. Potential "Cross-Border" Tax Issues

VIII. Special Computational Problems for Employees

A. General

B. Employee Who Moves Abroad During the Year

C. Employee Who Moves to the United States During the Year

1. Pre-Move Salary Exempt from U.S. Tax

2. Alien Employee Fails Treaty Exemption on Pre-Move Salary

D. Improper Treatment of Particular Remuneration

E. Employee Abroad Who Visits the United States on Business

IX. Form 1099 Information Returns

A. General

B. Statutory Requirements

1. All Service Fees Potentially Covered

2. Payor Must Be Engaged in Trade or Business

3. Payments Must Total $600 or More

4. Payee Must Be an Individual

5. Treatment of Employees

6. Global Scope of § § 6041 and 6041A

C. Exceptions

1. Limitations on Global Scope of the Provisions

2. Exceptions in the § 6041 Regulations

D. Practical Guidelines

1. Nonresident Aliens

2. U.S. Citizens and Resident Aliens

3. Foreign Governments and International Organizations

X. Tax Payment and Filing Procedures

A. General

B. Wage Withholding Rules

1. Taxpayer Identification Numbers

2. Deposit of Withheld Taxes

3. Forms

4. Penalties

a. Statutory Interest

b. Late Deposit of Tax

c. Late Filing of Form 941

d. 100% Penalty

e. Other Penalties

C. Section 1441 Withholding on Self-Employed Nonresident Aliens

1. Taxpayer Identification Numbers

2. Deposit of Withheld Taxes

3. Forms

4. Penalties

D. Information Returns (Form 1099)

1. Taxpayer Identification Numbers

2. Withholding of Tax

3. Forms

4. Penalties

Working Papers

Table of Worksheets

Other Resources

Worksheet 1 Form SS-4, Application for Employer Identification Number

Worksheet 2 Form SS-5, Application for a Social Security Card

Worksheet 3 Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding

Worksheet 4 IRS Industry Specialization Program Coordinated Issue Papers: Shipping and Air Transportation Industry Coordinated Issue - Federal Income Tax Withholding on Compensation Paid to Non-Resident Alien Crew by a Foreign Transportation Entity, July 24, 1995

Bibliography

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