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  • Article: Payroll Considerations for a Company Entering U.S. Market By Terrence L. Olsen and Alan King

    Payroll Considerations for a Company Entering U.S. Market

    by


    Foreign companies entering the U.S. market generally send managers, or specialized knowledge personnel to the U.S. to establish operations, and/or assist with creation of company product specific process departments. Companies are often surprised to learn that locating a foreign manager, or specialized knowledge personnel in the U.S., even for a short time, can trigger U.S. tax consequences for the Company, and the employee—especially in light of foreign national employees possessing nonimmigrant visas which do not allow for work authorization in the U.S..

    Payroll is inherently complicated with various reporting and withholding obligations. However, with careful planning, any complexity can be easily managed. It is essential for the U.S. Company to consult with the U.S.-based CPA, and immigration legal counsel to make sure you have systems setup to comply with U.S. payroll laws.

    Also, it is quite common that the Company, and/or the consulting relocation firm for the Company will consider any and all other business, or living issues before they consider whether or not the foreign national employee has the correct nonimmigrant worker status, and thereby whether or not the U.S. Company has established the proper U.S. payroll & benefits systems’ processes for the foreign national employee.

    I am sending a manager or specialized knowledge employee to the U.S.. What payroll issues might I encounter?

    Employers of work authorized nonresident aliens are required to file Forms W-2, 940, and 941—and to deposit employment taxes by the regular deadlines.

    For a foreign company sending a foreign national to either its affiliated company site in the U.S., or to a U.S. customer site, then the U.S. Company—depending upon its relationship to the foreign company—should discuss with the foreign company, foreign national employee, and U.S. immigration legal counsel the pertinent nonimmigrant visa for the foreign national to enter the U.S.—such as to either work for the U.S. company & be paid in the U.S., or to be exclusively in the U.S. for the foreign company for non-U.S. work activities, and to be paid directly by the foreign company.

    Per payroll services terms, nonresident aliens must establish either: (1) foreign status—such as for temporary one time visits by foreign national professors or scholars who receive honorariums, or (2) that their compensation is subject to graduated withholding at the same rates as resident aliens or U.S. citizens.

    Foreign status is established by filing with the employer Form 8233 [Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual]. or Form W-8BEN [Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)].

    Filing Form W-4 (Employee's Withholding Allowance Certificate) will establish that the nonresident alien's compensation is subject to graduated withholding at the same rates as resident aliens or U.S. citizens. Tax is withheld from resident aliens in the same manner as U.S. citizens (Reg. 1.871-1).

    Practice Tip: Employers should ask for a completed Form W-4 from the nonresident alien at the same time Form 8233 is submitted, so that proper income tax withholding can begin when the employee is no longer eligible for treaty benefits.

    Federal Income Tax Withholding for Nonresident Aliens

    Wages and other compensation paid to nonresident aliens for services performed as employees in the U.S. are usually subject to graduated withholding at the same rates as resident aliens and U.S. citizens [IRC Secs. 861(a)(3), 864(b) and 871(b)(2); Regs. 1.861-4, 1.864-2, and 1.871-1]. Therefore, unless a nonresident alien's compensation is specifically excluded from the term wages by law, is exempt from tax by treaty, or is for services performed outside the U.S., it is subject to graduated withholding.

    Additionally, wages paid to a nonresident alien employee for personal services performed in the U.S. are deemed not to be income from sources within the U.S. and are exempt from FIT withholding if—
    1. The services are performed by a nonresident alien temporarily present in the U.S. for a period or periods not exceeding a total of 90 days during the tax year,
    2. the total wages do not exceed $3,000, and
    3. the wages are for services performed as an employee of, or under a contract with—
    a. A nonresident alien individual, foreign partnership, or foreign corporation that is not engaged in a trade or business in the U.S.; or
    b. A U.S. citizen or resident individual, a domestic partnership, or a domestic corporation if the services are performed for an office or place of business maintained in a foreign country or in a possession of the U.S. by this individual, partnership, or corporation.

    Wages for services performed outside the U.S. by a nonresident alien are not U.S. source income. Therefore, these wages are not subject to FIT withholding. Wages for services performed partly in the U.S. and partly outside the U.S. by a nonresident alien must be allocated between U.S. and non-U.S. source income. The allocation of compensation is determined on a time basis but, in certain circumstances, may be determined on an alternative basis if the alternative basis more properly determines the source of the compensation [Reg. 1.861-4(b)(2)]. Allocation on the time basis is made by multiplying total wages by the number of days worked in the U.S. and dividing by the total number of days worked for which compensation was paid.

    I am sending independent contractors to the U.S. to complete work for my company. What are my U.S. reporting and withholding obligations?

    Withholding on Compensation for Independent Personal Services

    Generally, payments to nonresident aliens for independent personal services (i.e., personal services performed by an independent nonresident alien contractor as contrasted with those performed by an employee) are subject to a 30% FIT withholding rate while, as previously discussed, payments to nonresident aliens for dependent personal services (i.e., services performed in the U.S. by a nonresident alien individual as an employee rather than as an independent contractor) are subject to graduated FIT withholding rates. However, some of these payments are exempt from FIT withholding because of tax treaties or the personal exemption amount.

    Nonresident aliens should complete Form 8233 [Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual] to claim exemption from FIT withholding on some or all compensation paid—if they possess the pertinent nonimmigrant visa status which would allow so. However, Form W-4 is used by nonresident aliens providing dependent personal services to claim the personal exemption amount (but not a treaty exemption).

    Note: Under some tax treaties, compensation for independent personal services performed in the U.S. is treated as business income, and is taxed according to the treaty provisions for business profits. However, withholding must often be made according to the statutory rules for services provided in the U.S. This is because the factors that could determine a treaty exemption may not be known until after the close of the year. In such a case, the nonresident alien will need to file a U.S. income tax return (Form 1040NR) showing proof of the treaty exemption to recover any taxes that were over-withheld under statutory provisions.

    Overall, it is essential to note that independent contractors—non-employees of either the foreign company or the U.S. Company—must have the correct nonimmigrant visa in order to enter the U.S. per their intended valid legal purpose. This is especially true in light of the Trump Administration’s “extreme vetting”, and thereby any foreign national entering the U.S. not as an employee of the U.S. Company must be prepared to demonstrate that they possess the correct nonimmigrant visa for work authorization, or that they can demonstrate that they will be performing only non-U.S. work activities in the U.S..

    It must be noted that during the past year or so the IRS has become more aware of B-1 nonimmigrant entries of a totality of 6 months, and then connecting these entries to large movements of monies from a U.S. company to a foreign account. And even if the U.S. Company has construed the monies to be reimbursement of expenses for costs of goods, or some other item cost, the IRS has argued that the monies were used as payment for work performed by the “supposed” independent B-1 nonimmigrant contactors.

    If I send my foreign national employee to the U.S., do I have to remit payments to both Social Security systems?

    In general, U.S. social security and Medicare (FICA) taxes [including the additional 0.9% Medicare tax, if applicable apply to payments of wages for services performed as an employee in the U.S., regardless of the citizenship or residence of either the employee or the employer [IRC Sec. 3121(b)]. In limited situations, these taxes apply to wages for services performed outside the U.S., Employers must deduct these taxes from wages even if alien employees do not expect to qualify for social security or Medicare benefits. Employees cannot make voluntary payments if no taxes are due. However, a totalization agreement may relieve an employee's FICA tax liability in some cases.

    Note: The “H-1B” nonimmigrant visas are issued to nonimmigrant aliens who are temporarily employed in the U.S. in a specialty occupation (e.g., architecture, engineering, medicine and health, education, accounting, law, theology, and the arts). When a foreign national changes visa status to “H-1B,” the employer must start withholding FICA taxes on the effective date of the status change. There is no FICA tax exemption for “H-1B” employees working for a U.S. employer with respect to services performed in the United States. Information on the various types of visas can be found on the IRS website (www.irs.gov) by entering “visa type” in the search feature.

    The U.S. has entered into agreements with foreign countries to coordinate social security coverage and taxation of workers who are employed in those countries. These agreements are commonly referred to as totalization agreements and are in effect with the countries listed below.
    • Australia
    • Austria
    • Belgium
    • Brazil
    • Canada
    • Chile
    • Czech Republic
    • Denmark
    • Finland
    • France
    • Germany
    • Greece
    • Hungary
    • Ireland
    • Italy
    • Japan
    • South Korea
    • Luxembourg
    • Mexico
    • Netherlands
    • Norway
    • Poland
    • Portugal
    • Slovak Republic
    • Spain
    • Sweden
    • Switzerland
    • United Kingdom

    Conclusion

    In this ever-changing world of nonimmigrant entry & requirements for the U.S., the U.S. Company, foreign company, payroll service provider, the U.S.-based C.P.A., and the U.S. immigration legal counsel must not only work as a team together, but must also accept that even if they are prepared to provide very logical legal arguments & explanations for nonimmigrant visa status selections, and for payroll process determinations that both U.S. consulates, and U.S. port of entries are becoming more aggressive in terms of asking questions about social media postings, cell phone content such as contacts & messages, and recent email communications.

    Therefore, not only must the foreign national employee or independent contractor coming to the U.S. must be aware of the printed documents which they carry on them, but must also be aware of the electronic information that is either carried on them or the world-wide web.

    Simply, the consular officer, or the port of entry agent may use their own discretion to determine immediately that the prospective nonimmigrant entrant is the opposite of either the purported employee or independent contractor category which the U.S. Company and its team of professionals so carefully attempted create and craft.


    About The Author

    Terrence L. Olsen is the partner of Olsen Law Firm. He founded Olsen Law Firm in September 2003, and practices Immigration & Nationality Law exclusively. Terry has served, and continues to serve, the international community and his clients’ interests in the United States and internationally. By actively participating in government discussions of immigration law and policy, Terry is an active participant with the agencies governing immigration law, rather than being an observer on the sidelines. Alan King is an accountant managing partner of Market Street Partners.


    The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.

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