Companies are increasingly opting to relocate employees across the border on assignments. As a US human resources professional working out the transfer of some of the company personnel to other English-speaking countries, you would want to find out detailed information about how taxation laws work for both US domestic businesses and their US ex-pat employees. In addition to discussing reimbursement and salary packages, you’ll also work out equalization and housing expenses packages. Here are some basic details to get you started.
Distinguishing Between an Independent Contractor and Company Employee
Your HRCI PHR practice exam will have prepared you to hire the right professionals for the position. Your company has exclusive rights to issue instructions and control the tasks performed by hired employees, along with the financial and commercial functions of their efforts. Various federal and state labor laws regulate the contract you enter into with the workers and any applicable taxes.
Your company calculates payroll taxes and remits the amount to the IRS by way of the Form W-4. However, if you hire independent contractors, they’ll submit Form 1099-MISC to report the fee they receive for any tasks they perform for the company.
Employees Can Qualify for the FEIE
As long as your employees hold US citizenship or Green Cards, they’ll continue to file taxes with the IRS. They must also pay applicable taxes to the government of the country where they live. However, the Totalitarian Agreements between many nations and the US make it possible for expats to avoid paying double taxes on their income.
Accordingly, your employees can take advantage of the Foreign Earned Income Exclusion (FEIE) when filing taxes as an expat in the UK or in Canada. They’ll pay taxes on the balance amount after deducting $107,600 from their total taxable income. (Expect that number to adjust for inflation every year.)
Any workers who qualify for this benefit can complete and submit Form 673 and submit it to your company. Once you receive this form, you need not withhold federal taxes for these employees. But for that to happen, you must ensure that the workers are bona fide residents of another nation and live there for more than 330 days out of 365 days in a year. US human resources professionals would want to organize the company assignments around this requirement.
There’s a lot of paperwork involved in these tasks, which is nothing new for folks who work in human resources. If you come across any documents that require notarization, employees who are not in the US can speed up the process with someone who has chosen to become an online notary.
Equalization Packages for Assigned Personnel
Moving overseas can be expensive for employees. Companies typically offer equalization programs to compensate for the tax costs that their personnel might incur because of the move abroad. The program ensures that workers pay more or less similar taxes to when they live in the US. Added living expenses like rent, groceries, renting furniture, utilities like power and water, and other specific overheads may also be covered.
The IRS permits US ex-pats to deduct living expenses from their taxable income through the Foreign Housing Exclusion benefit. US human resources professionals would want to check with the applicable laws to understand the deductibles that US expat staff members can use. Your company obligations could be adjusted accordingly.
That’s because some of the expenses employers reimburse are included in their employees’ taxable income. Like, for instance, moving costs, education and training, and vehicle allowance.
Moving Expenses Deductibles
The IRS permits employees to deduct their moving costs from their taxable income. However, to avail of this benefit, company personnel must fulfill certain conditions. The new assignment should be at a location more than 50 miles from the previous company base. US employees who lived near the Canadian border and simply shifted to the other side will need to keep an eye on this aspect.
Furthermore, the move should be necessary for working in a position in the company. Most importantly, the worker should continue to remain with your organization full-time for at least 39 weeks after the move.
US taxation laws can be complicated and hard to understand. It is advisable to work with an expert tax consultant who can advise you on how IRS regulations work.