Employment tax liabilities of foreign entities.

• Author: Smith, Annette B.

Foreign companies often send employees to the United States to conduct business. If an employee is in the United States on a temporary or transient basis, the foreign company may be reluctant to apply for an employer identification number (EIN), establish an employment tax account with the IRS, and undertake the mechanics of withholding, depositing, and reporting employment taxes.

Whether a foreign entity constitutes an employer for U.S. employment tax purposes is an important question, because the Code imposes tax liabilities and certain other obligations on an employer. Also, the determination of employee status can affect whether a foreign entity has a permanent establishment in the United States that would cause the foreign entity to be subject to U.S. tax on U.S. effectively connected income. A number of technical questions are involved in determining status as an employer for federal employment tax purposes when a foreign business sends individuals to work in the United States.

Employer Obligations

A U.S. employer generally must withhold income taxes, plus Social Security and Medicare (i.e., FICA) taxes from wages paid to an employee. Also, the employer must pay FICA and unemployment (FUTA) taxes on wages. The employer must deposit these taxes timely and, in most cases, file quarterly employment tax returns reporting the wages, income tax, and FICA taxes paid and file an annual FUTA return. The employer also must provide to the mployee and file with the Social Security Administration a Form W-2, Wage and Tax Statement, showing the wages paid and taxes withheld from the employee. As a prerequisite to remitting and reporting, the employer must obtain an EIN.

Foreign Employers With Employees in the United States

These rules also apply to a foreign entity that has employees performing services in the United States, unless a statutory exception applies or these obligations have shifted to another entity. The foreign employer generally must withhold income taxes unless the employee is a nonresident alien and is present in the United States only for a short time (90 days or less) during the tax year and earns only a small amount ($3,000 or less), or unless the employee provides certain documents establishing that he or she is exempt from income taxes under a treaty.

Similarly, FICA taxes are imposed on wages paid by a foreign employer to employees working in the United States, unless the employee is a nonresident alien and working as a...