- Economic stimulus payments are largely available to U.S. citizens or permanent residents working abroad, while nonresident aliens in the U.S. are generally not eligible.
- The IRS has acknowledged potential extenuating circumstances for cross-border employees, and has eased some procedures for those affected by COVID-19 travel restrictions.
- Analyze potential tax implications as a result of remote employees working outside of their state or country.
Need help navigating tax implications of working abroad?
As technology advances and people and products move around the world, the web of global business grows increasingly complex. The global mobility industry helps organizations tackle human capital management across borders, and a global workforce has opened the doors for many organizations to procure top talent.
Due to the spread of COVID-19 mobility plans for many organizations and employees have been disrupted as they deal with travel restrictions related to the virus. Companies should review how having a less mobile global workforce could impact their tax strategy, business model and more.
Stimulus payment eligibility for employees abroad
In early March 2020, U.S.-based organizations worked quickly to help mitigate the impacts of COVID-19. Employees were equipped with necessary tools to work from home and maintain adequate social distancing to help slow the spread of the virus. These and other measures are still being carried out around the world.
As U.S. organizations continue to adjust to these new norms domestically, they’re also looking at how their global workforce is affected. When governments around the world ordered travel restrictions, many frequent business travelers from the U.S. found themselves stranded in a foreign country and some employees started working remotely from outside the U.S.. As a result, there was confusion regarding economic stimulus payment eligibility authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
U.S. citizens and permanent residents living and working abroad
The CARES Act authorized the U.S. Treasury to deliver direct payments for workers with incomes of up to $75,000 per year ($150,000 for married couples). The payment fully phases-out for those earning more than $99,000 ($198,000 for joint filers with no children).
U.S. citizens living outside the country are eligible for a payment if they have a Social Security number (SSN) that is valid for employment, can’t be claimed as a dependent by another taxpayer, and their adjusted gross income does not exceed the above amounts.
Prior to the transition from the Trump administration to the Biden administration, these income thresholds remained the same for the second wave of stimulus payments that the U.S. Treasury Department started delivering on December 29, 2020.
Nonresident aliens working in the U.S.
The legislation aimed to provide stimulus payments to U.S. tax residents who have a valid SSN. In 2020, the U.S. Treasury used tax filings from 2018 and 2019 to determine who is eligible to receive a stimulus payment. If an individual filed as a nonresident in either 2018 or 2019, a stimulus payment would not have been processed — even if the individual had a valid SSN.
In short, nonresident aliens who file a Form 1040-NR or Form 1040-NR-EZ are not eligible for the payment. A person who is a qualifying resident alien with a Social Security number is eligible for the payment only if he or she is a qualifying resident alien in 2020 and may not be claimed as a dependent of another taxpayer. An individual who received a payment, but is not a qualifying resident alien for 2020, should return the payment to the IRS.
There may be individuals who left the U.S. during 2020 and became nonresident aliens but filed as tax residents for 2018 or 2019. It is possible that such an individual who would otherwise be a nonresident for 2020 received a stimulus payment. The IRS requests that these individuals voluntarily return the stimulus payment.
Revenue procedures impact U.S. tax residency rules
To slow the spread of COVID-19, many city and state leaders across America issued lockdown mandates that resulted in record-breaking unemployment numbers. At the same time, increased travel restrictions meant many individuals were unable to enter or leave the U.S. As a result, the IRS recognized that some U.S. citizens and permanent residents were forced to leave the foreign country in which they were working. Similarly, the IRS acknowledged that foreign nationals visiting the U.S. on short-term business may have been unable to leave the country before becoming a statutory tax resident (as defined in the Internal Revenue Code). As a result, the IRS issued two important revenue procedures to provide some relief so that these individuals are not penalized due to circumstances beyond their control.
U.S. citizens and permanent residents working abroad
This revenue procedure provides guidance on qualification requirements to claim the foreign earned income exclusion under IRC Section 911.
For example, if an individual was a tax resident in China before December 1, 2019 (or another foreign country before February 1, 2020), but was required to leave China on or after December 1, 2019 (or another foreign country on or after February 1, 2020), this individual may qualify to claim the foreign earned income and housing exclusion for the portion of 2019 and 2020 the person was in the foreign country. Under this revenue procedure, the exemption is not allowed if such an individual left the foreign country after July 15, 2020, unless the Treasury — after consultation with the State Department — deems it necessary to further extend this date.
Nonresident aliens working in the U.S.
Certain days are now excluded from the substantial presence test under a new COVID-19 Medical Condition Travel Exception, established as a "single period of up to 60 consecutive calendar days selected by an individual starting on or after February 1, 2020, and/or before April 1, 2020, during which the individual is physically present in the United States on each day." This is generally claimed on Form 8843.
Post-pandemic global assignment considerations
Sweeping legislative changes in 2020, coupled with a significant shift in political power in 2021, have increased uncertainty on taxation in the global economy. As a result, many organizations are finding it difficult to efficiently estimate or recalculate the cost of supporting cross-border employees who work remotely.
Income tax on regular earnings is only one piece of the puzzle. Social Security tax and related benefits could introduce a double taxation cost if an employee’s remote workplace is in a different country or state than their assigned office location. Review the temporary relief noted above and the ongoing tax residency of your cross-border employees to help your organization manage unknown costs and to maintain top talent in these uncertain times.
Employers may consider revising tax reimbursement programs to include income caps on tax-equalized income, or to limit the amount of multi-year income — such as equity compensation — awarded during the pandemic. Companies may also need to update policies to address cross-border employees who are unable or choose to work remotely in a country different than the country of their employer where the employer has no office or permanent establishment. Keep in mind, an employee’s work location can lead to additional tax cost if net profits of the organization become taxable only because an employee is working remotely in a country other than the employer’s country’s place of business.
How we can help
If you are unsure how a cross-border employee working remotely in a new location may impact your organization, contact a CLA professional. We can help you analyze the cost and tax exposure for both your organization and the cross-border employee. Our global team understands the intricacies of doing business abroad and is here to help guide you.