Get to know the authorThe COVID-19 pandemic has made many US expats rethink what they want out of life. During a time of travel restrictions and isolation, some expats realize that coming back home to be close to family and friends is what they value most.
It was the case for Louisiana native Chara Richterberg, who until March of 2020, was living across four different continents due to her husband’s career in the oil and gas industry. According to Richterberg, in an article for the Financial Times:
“The older we get, the more important it becomes to be closer to home, and we did not want to be stuck halfway across the world, away from elderly parents and with such uncertainty about air travel,” says Richterberg. “Moving to Houston [Texas] for his job has been lonely for me but, wherever I am, I eventually find my own people.”
The rise of remote work has made it easier for American expats who work remotely for a foreign company to return back to the land of the free while keeping their job. But there’s a catch: while they can still work for their foreign employer, spending too much time in the US could make them liable to also owe money to the IRS.
The reason is because you’re now subject to the tax rules of the US because of your presence there, even if your employer is withholding foreign taxes.
Working Remotely for a Foreign Company: What About Taxes?
If you come back to the US while working remotely for your company based overseas, they’re still withholding your foreign taxes. However, here comes the central dilemma: Since you are now in the US again, you also are liable for taxes to the IRS.
The thing is, as an individual taxpayer, your wages are sourced based on your physical location. That means if you decide to stay in the US for a certain period of time, the IRS gains taxing rights over your now US-sourced earned income. According to the IRS official website:
“All wages and any other compensation for services performed in the United States are generally considered to be from sources in the United States. The place, where the personal services are performed, generally determines the source of the personal service income, regardless of where the contract was made, or the place of payment, or the residence of the payer.”
As a result, Americans who return to the US while continuing to work remotely for a foreign company could end up owing a bunch of money to the IRS. So much for a warm welcome back home, huh?
The Best Way to Avoid Double Taxation While Working for a Foreign Company
Thankfully, working for a foreign company while staying in the US doesn’t have to be a logistical nightmare regarding taxes. It’s still possible to work remotely for a company overseas while avoiding double taxation.
Some tax experts recommend changing your employment contract with a foreign company to become an independent contractor. The issue with this approach is that while the company won’t be withholding taxes, you’ll be in charge of paying all of your employment taxes (such as Medicare and FICA) on your own.
Some options you might explore include:
Tax Treaties
Some US tax treaties include a provision for resource income. Meaning even if the person was on US soil, the income might still be considered foreign-sourced.
Foreign Tax Credit Type Deduction on the Foreign Return
While the income you earn in the US is US-sourced on the US tax return, it would be foreign-sourced on your tax return abroad. You might explore an FTC (1116) like provision on your foreign tax credit to eliminate double taxation by way of the foreign return.
How to Qualify For Foreign Tax Credits (FTC)
To benefit from the Foreign Tax Credit, your foreign earned income must comply with certain criteria. The basic requirements to qualify for the Foreign Tax Credit include:
- – The foreign must impose its taxes on your income. You won’t qualify for the Foreign Tax Credit if the country that’s paying doesn’t tax its residents or citizens.
- – The taxes you paid need to be legal.
- – You must have paid income tax. The types of taxes that don’t qualify for the Foreign Tax Credit include sales tax, real estate taxes, or taxes to a sanctioned country under the US government.
However, if you don’t want to deal with all the paperwork that comes with claiming your Foreign Tax Credits, you can always hire a team of tax experts to help you. The tax advisors will prepare your US return with the balance due and then you would have to inform the credits to claim on the foreign tax return.
You Don’t Have to Navigate the Complex US Tax System on Your Own
The US has a rigorous tax system that can be pretty complex with a lot of paperwork. For example, it’s one of the only countries in the world that requires its citizens to declare their worldwide income no matter where they live. It’s no wonder many US expats feel confused about their tax obligations.
If you returned to the US while still working remotely for a foreign company and still have questions about your tax situation, Bright!Tax is here to help. Over these past turbulent two years, we’ve helped various clients come back to the US while on foreign payroll avoid double taxation during their return.
Contact us today to learn more about our tax services.
