Five And A Half Tax Tips For U.S. Employers Managing International Remote Workers

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Because both businesses and employees have learnt to embrace the practicalities and benefits of remote working, the pandemic may have permanently altered working practices. The main advantage of remote working for firms is that it lowers overhead costs by reducing or eliminating the requirement for office space and all of its accompanying costs. One of the primary advantages for employees is that they will have more time in their day because they would not have to commute.

However, not everyone or every company wants to work remotely indefinitely, especially in business models that require or profit from face-to-face team and client engagement. While some companies may decide to continue working entirely from home after the epidemic, others are expected to adopt a hybrid strategy, with staff working part-time from home and part-time in the office. Firms may also allow employees to choose their own balance of home and office work, but a hybrid office-remote working model has the potential to combine the best of both worlds.

Given the increased adoption of remote working, many employees are projected to take advantage of the possibility to work remotely from overseas as international digital nomads. This allows people to travel the world while potentially saving money. In this article, I’ll provide five (and a half) tax suggestions for U.S. firms with international employees that work remotely.
1. Keep in mind that international remote employees may be required to file federal, state, and foreign taxes in the United States.
Because the United States taxes all citizens on their worldwide income, Americans operating remotely must still file a federal tax return in the United States.

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If they have ties to the state where they previously lived (such as property, dependents, or financial accounts) or plan to return to live in the state, they may be required to file state taxes as well, depending on the rules in that state. If they can, some Americans who live in high-tax areas like California relocate to a different state before going abroad to minimize their overall tax burden.
If they dwell and work in a single nation rather than traveling between countries (as many digital nomads do), remote employees may be required to pay foreign taxes in their new country of residence.

As a result, the first step for employers of international remote employees should be to understand the applicable state and foreign country tax legislation, preferable before moving abroad. These can affect not only the person but also the company, as certain countries may wish to tax companies with employees that live in their country.
2. Remind employees who are working in another country that they may be eligible for special credits and exemptions.

Employees working in the United States who pay international taxes on their earnings in another country can claim the U.S. Foreign Tax Credit by filing IRS Form 1116 with their federal return. To avoid double taxation, the Foreign Tax Credit provides a $1 US tax credit in lieu of the equivalent amount of foreign taxes paid overseas.
Another IRS provision, the Foreign Earned Income Exclusion, permits Americans working abroad to exempt the first $107,600 (in 2020; the figure for 2021 is $108,700) of their earned income from U.S. taxation, regardless of whether they pay foreign income tax.

The majority of Americans working overseas will owe no federal income tax if they claim the Foreign Tax Credit or the Foreign Earned Income Exclusion. Other exclusions and credits may be available to Americans filing from abroad, depending on their personal and financial circumstances.

3. Consider tax equalization.

If an American employee works only in France, for example, they will be subject to French income tax. Because French income tax rates are higher than those in the United States, even if they use the Foreign Tax Credit to reduce their tax bill in the United States, they will still pay more income tax overall than if they lived in the United States. Some businesses agree to pay the difference to the employee. This is known as tax equalization, and it is most commonly utilized when an employer wishes to encourage an individual to work abroad by lowering their overall net income.

4. Be aware of beneficial provisions in tax treaties.

Although the United States has signed tax treaties with more than 70 countries, none of them exempt Americans residing overseas from filing US taxes. However, certain treaties have provisions that benefit some Americans, particularly those who engage in research and development, the arts, sport, or education, or who earn money through dividends or royalties. Employees must claim benefit provisions on Form 8833 as part of their annual tax return.

5. Don’t forget about U.S. Social Security tax.

Americans working for an American company in another country are nevertheless required to pay Social Security taxes in the United States. The only exception is if they live in a country that requires them to pay a local social security tax and has signed a Totalization Agreement with the United States.
Totalization agreements are tax treaties aimed at preventing double taxes on Social Security. They also permit workers to transfer credits earned in a foreign social security system to the US system in order to receive future benefits.

5.5. Seek advice, if needed

Due to the additional paperwork that must be completed to lower U.S. taxes, as well as the frequent intersection and interaction with a foreign tax system, filing U.S. taxes from outside the United States is more complicated than filing from within the United States. As a result, rather than using a U.S.-focused accountant or employees attempting to prepare their taxes on their own, it may be beneficial to consult an expat tax professional.