Short-term Business Travelers & the U.S. Tax Net - Caution
posted Dec 2, 2015 by Francheska Pimentel
Foreign executives, employees, and self-employed individuals visiting the U.S. and any of the states for business reasons need to be vigilant about tracking and documenting their travel. The period during which they are present in the U.S. can expose the foreign individual to U.S. federal and state income taxation. The duration of their presence can also affect how, and to what extent, they are subject to tax. Proper planning can mitigate U.S. tax exposure and costs to the individuals.
Nonresident aliens will generally have a U.S. income tax filing obligation if they perform services in the United States and earn at least $3,000 in connection with the performance of these services. Unfortunately, this income threshold is not indexed for inflation and has remained constant since it was put in place decades ago. What was once a relatively meaningful amount of income is now quite small in today’s dollars, making it much more likely that the threshold may be crossed. Fortunately, many U.S. income tax treaties provide for additional potential protection from U.S. taxation.
Generally, an individual is treated as being present in the United States for a full day on any day that the individual is physically present in the country for any amount of time. Therefore, it is important to ensure that travel time is recorded and communicated to the payroll department so that it can be monitored for proper U.S. tax compliance for the foreign individual and employer. Various software applications can help individuals track their time in different countries and states to facilitate compliance.
Moreover, nonresident aliens need to be wary of their physical presence in the United States to avoid becoming a resident for U.S. income tax purposes. U.S. tax residents are subject to tax on their worldwide income and may have extensive information disclosure requirements.
As an example, let’s use the 2015 calendar year for the purposes of the following illustration. Under the substantial presence test, a foreign individual is considered a U.S. tax resident if the individual:
- is physically present in the United States for at least 31 days in 2015, and
- has been physically present in the United States for a weighted average of 183 days from 2013 through 2015.
Days of U.S. presence are computed under a weighted formula that counts the following nonexempt days of presence:
- All of the days in 2015,
- One-third of the days in 2014, and
- One-sixth of the days in 2013.
As a result, the frequent but unwitting foreign business traveler could find him or herself subject to taxation as a U.S. tax resident if there is a high level of presence in the U.S. over a period of time and despite not being present in the U.S. for more than 183 days during 2015.
To add more uncertainty, each U.S. state has its own rules and thresholds for how it determines whether an individual should be subjected to tax under its local law. They also each have various ways to try to establish the presence of a person within the state. For example, some states have used public information such as the newspaper to target executives and other employees that have spent time in the state. Very often, foreign business travelers pay much more attention to U.S. federal tax considerations and overlook or ignore state income tax requirements and exposures – a cautionary matter.
Nonresident aliens that travel to the United States for business purposes should understand the potential tax considerations that pertain to their unique circumstances.
Questions? Contact any member of our Global Tax Services Team.