Tax & Accounting Blog

Paying Foreign Employees Part 4: Tax Treaty Exceptions

ONESOURCE May 24, 2012

The United States has income tax treaties with over 60 countries. Tax treaties provide exemptions from income taxes but not from employment taxes with one exception. Teachers or Researchers from one of the nine countries eligible for an exemption from tax on their compensation covered by the Former USSR/CIS treaty are also exempt from Social Security and Medicare taxes. However, this exemption only applies to the employee’s share of FICA, not the employer’s share, which is an excise tax, not an income tax. As a result, such exemption may only be claimed on a Form 843, Refund Claim.

All treaties include U.S. tax exemptions on employment income if the employee does not exceed a maximum time period in the U.S., provided the employer is either a resident of the treaty country or not a resident of the U.S., depending on the treaty. These benefits are lost if the salaries are cross-charged to a U.S. company.

Many treaties provide exemptions from income taxes for foreign nationals in the U.S. to study, train, teach or engage in research who are (or were) tax residents in a treaty country when they came here for that purpose. Nonresident employees may request an exemption from wage withholding by presenting a completed Form 8233 (required annually), which the employer must verify, sign and submit to the IRS within five days of acceptance of the form. Resident alien employees may request treaty benefits on a specially annotated Form W-9 explaining their treaty claim (not required annually), which is not sent to the IRS but, rather, is maintained in the employer’s files to support the tax exemption.