Payroll taxes, expatriates and nonresident aliens.

• Author: Anderson, Ronald M.

U.S. employers with expatriates must be concerned with the effect of an overseas assignment on social security and other payroll taxes as well as income taxes. Employment taxes also may be a trap for employers of nonresident aliens providing services within the United States. Foreign employers unfamiliar with U.S. law may be particularly unaware of these additional taxes incurred through employment of individuals performing services within the United States.

These rules operate separately from the income tax rules and can be very confusing. To assist in determining who is subject to these taxes, Rev. Rul. 92-106 discussed the treatment of nonresidents and expatriates. The ruling did not alter their treatment; the positions taken have always applied and are required by the Internal Revenue Code.

Social security (FICA) taxes

Sec. 3101 imposes a tax of 6.2% on the wages received by an employee for old-age, survivors and disability insurance (OASDI). An additional tax of 1.45% is imposed for hospital insurance (Medicare). For 1993, the taxes are imposed only on the first $57,600 of wages for OASDI and the first $135,000 of wages for Medicare. An employer must withhold these taxes from an employee's wages under Sec. 3102; a corresponding tax is imposed on the employer under Sec. 3111.

Wages, with certain exceptions, means all remuneration for employment including the cash value of benefits and other non-cash remuneration (Sec. 3121(a)).

Employment is broadly defined as any service of whatever nature performed in the United States by an employee for the employer, without regard to the citizenship or residency of either party. Services performed by a U.S. citizen or resident outside the United States for an "American employer" is also employment. Special rules apply to services provided on or in connection with an American aircraft or vessel (Sec. 3121 (b)).

An "American employer" is a U.S. resident; a partnership, if at least two-thirds of the partners are U.S. residents; a trust, if all trustees are U.S. residents; a corporation organized under the laws of the United States or any state; and the United States or any U.S. instrumentality (Sec. 3121 (h)).

Federal unemployment tax

Employers are also subject to the Federal unemployment tax (FUTA) of 6.2% of the first $7,000 of each covered employee's wages (Sec. 3301). A credit up to 5.4% is allowed for payments made to state unemployment funds. Therefore, the net FUTA tax usually is 0.8% of the...