US Expat Taxes for US Employees on Assignment

The trend of U.S. employees sent on assignment overseas in on the increase. For that reason, it is paramount for US businesses and US expatriated employees to recognize the plethora of US expat tax concerns that may arise. It is much easier to mitigate the cost of items such as equalization packages, payroll taxes reporting responsibilities, travel, or various reimbursements, with forward-looking planning and knowledgeable professional tax advice.

Foreign Earned Income Exclusion

A US business should instruct an employee (or employees) sent on assignment about the typical if not the entirety of the tax implications of a transfer overseas. One great planning idea is to organize the transfer in a manner to safeguard the employee eligibility to the Foreign Earned Income Exclusion (FEIE). That will generally happen to an employee is placed in a foreign country s/he can claim as a ¨Tax Home¨ for a period longer than a year. Qualifying for the FEIE will mean a possibility to exclude up to $99,200 in 2014 (and $100,800 for 2015) of earned income from their US expat taxes.

There are typically two tests to be met to qualify for the FEIE:

1. Physical Presence Test: Under this test the employee on foreign assignment must be abroad for 330 days in a period lasting 365 days. Now, that 365 days period needs not to be January 1 to December 31, and could start at any point prior to filing the US expat taxes.
2. Bona Fide Residence Test: An employee will be eligible for the FEIE under the Bona Fide Residence Test, when that employee transfers on assignment for an indefinite period that would last more than a full calendar year.

In most case, employees sent on assignment claiming the FEIE will do it under the Physical Presence Test.

Payroll Taxes

Even if a US Business sends its employees abroad, there´s a potential for a requirement to withhold unless, the employee is exempted because of the qualification to the FEIE. In order to get that exemption, US Federal Form 673, Statement for Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911 should be filed.

Foreign Housing Exclusion and Deduction

So let´s now imagine employees meeting one (or both) of the tests to qualify for the FEIE. They will then also be eligible to claim an exclusion/deduction for certain foreign housing expenses. In other words, an employee sent on assignment using employment income to pay for housing will usually claim a housing exclusion on US Federal Form 2555. Those expenses eligible for exclusion/deduction include property insurance, rent, repair, residential parking and utilities.

Equalization Package

Tax equalization package is often offered to employees on foreign assignment should the cost of transferring prove to be excessive for the employee. A tax equalization package usually ensures that an employee´s out-of-pocket tax expense is more or less what it would have been should the employee had remained in the US.

Therefore, the equalization package would not only include consideration for any foreign advantages such as housing, school or cost of living but also foreign taxes and any other taxable factors caused by the foreign assignment.

Employee Benefits

Employee sent on assignments may find many of their expense being refunded. These expenses include:

• Auto allowance
• Educational expenses
• Home leave
• Moving expense
• Spouse allowance

These reimbursements will become taxable income for the employee.

Moving to a foreign country from the US for work will generally permit deduction of moving expense. Moving to another country generally satisfies the requirements to deduct moving expenses if:

• The move is related is related to the start of work at a new job location
• The new job location is greater than 50 miles from your previous location
• The employee remains employed full time at least 39 weeks following the move.

Moving expenses will solely consist of actual expenses to move house furniture and other goods from the old location to the new one (that´s including storage and travel expenses). Be aware that

• Temporary living expenses
• Travel associated with house hunting
• Meals

are all typically non-deductible.

Creating permanent establishment overseas:

A US company can find itself creating a branch in a foreign country just by having employees situated in a foreign country. Make sure that as a US domestic company sending employees abroad you should enlist the help of an experienced US expat Tax and potentially an knowledgeable local tax professional.

For additional information

If you have any additional questions or would like to learn how we can assist you, please do not hesitate in contacting us.