It should come as no surprise that the IRS played a major part in the criminal indictments of officials of FIFA, the international soccer governing organization. After all, Al Capone went to federal prison because of tax evasion, not for something as noteworthy as, say, the St. Valentine’s Day Massacre.
The FIFA kerfuffle should serve as a reminder if you employ nonresident aliens in the United States or send U.S. citizens or residents to work abroad.
We’ll always have Paris
The United States taxes citizens and residents on their worldwide income. So income earned in France, for example, is subject to U.S. income and FICA withholding, unless exceptions apply.
Double trouble: U.S. citizens and residents will be subject to double taxation, since other countries also levy income and social taxes. The tax code and tax policy seek to ameliorate this:
- § 911: Citizens and residents working overseas may exclude from income up to $100,800 in foreign earned income and up to $14,112 in foreign housing costs (in 2015). To exclude these amounts from U.S. withholding, employees must file Form 673 with you
- § 901: Citizens and residents working overseas may credit the foreign taxes paid against their U.S. tax liability
- Tax treaties: Citizens and residents who are on a short-term assignment overseas (usually up to six months) may exclude income from foreign income taxes
- Social Security Totalization Agreements: Citizens and residents who work overseas for up to five years may avoid double taxation on social taxes by permitting U.S. employers to continue to withhold FICA taxes on their foreign income. More information about Totalization Agreements is available here.
Working in America
Nonresident aliens are taxable on income earned in the United States unless a tax treaty or Totalization agreement applies. They can generally claim only one withholding allowance on their W-4s.
Income tax withholding for these employees is trickier than income tax withholding on citizens and residents, because the IRS requires you to add additional amounts into their income before you can determine their federal income tax withholding. These amounts are inflation-adjusted every year. See IRS Notice 1036.