B-1 Visitors, U.S. Tax Traps for the Unwary
The most common immigration status for entry into the United States for business is the B-1, Visitor for Business, which includes the visa waiver for business status. A foreign national who enters the United States in B-1 visitor status can work temporarily in the United States in connection with a foreign employer's international transactions. Such a visitor may not perform employment services in the United States for a U.S. employer. Except for very limited exceptions for payments such as directors' fees, a B-1 visitor may not be paid for U.S. services from U.S. sources. The majority of B-1 visitors entering the United States are generally unaware of the U.S. tax implications of their mere physical presence in the United States.
U.S. Source Services Income
Economic activity is generally taxed where the activity occurs. The United States follows this general rule and designates the source of income for services to be where the services are performed. Even if payment is made on a foreign payroll in a foreign currency, the pro rata portion of a B-1 visitor's compensation for U.S. workdays is U.S. source income unless an exception applies. One such exception is the "commercial traveler rule" that treats compensation as foreign source if 1) the individual is temporarily in the United States for 90 days or less in the calendar year, 2) the compensation for the U.S. services does not exceed $3,000 in the aggregate and 3) the services are performed as an employee of a foreign corporation. As a practical matter, few individuals will be able to meet these conditions.
Income Tax Treaty Exemptions
If the visitor is tax resident in a country with which the United States has an income tax treaty, the compensation for the U.S. workdays may be exempt from tax under the treaty. However, the United States only has income tax treaties with 61 countries. All treaties include articles exempting employment compensation from U.S. tax if the individual meets the treaty conditions. Although the conditions vary by treaty, the Article 15 of the treaty with France is typical. To be exempt from U.S. tax 1) a resident of France must be present in the United States less than 183 days in a 12-month period, 2) the compensation must be paid by an employer that is not tax resident in the United States, and 3) the compensation cannot be taken as a tax deduction by a U.S. entity. The Treasury Explanation for the treaty article makes it clear that no exemption is allowed when the foreign employer transfers to costs of a visitor's compensation to the U.S. entity. This is viewed as circumventing U.S. payroll tax rules.
An employee who exceeds the commercial traveler limits, and who is not from a treaty country, is subject to U.S. income taxes on his compensation for U.S. services. No doubt hundreds of thousands of B-1 visitors to the United States each year exceed these rules and are subject to U.S. income taxes without becoming aware of the obligation.
183-Day Tax Residency Rule
A B-1 visitor's U.S. presence can have much more dire tax consequences. Under the U.S. tax rules, a visitor who spends 183 days or more in the United States in the calendar year or 183 days based on a formula is a resident for U.S. tax purposes. The formula adds all of the current year's U.S. days, 1/3 of the prior year's U.S. days and 1/6 of the U.S. days in the second preceding year. Vacation days count as well as business days. Partial days, such as the arrival day and departure day, count as a full day in the formula. If the visitor's U.S. days exceed 30 days in the current year, and the result of the formula is 183 days or more, the visitor is a resident for U.S. tax purposes. For example, a visitor who spends on average 5 months a year in the United States becomes a resident under the formula as follows: 150 + 150/3 + 150/6 = 225. A resident is subject to U.S. income taxes on worldwide income. In order to avoid this result, a business visitor must average less than 122 U.S. days per calendar year unless an exception applies.
One exception allows a visitor who is present less than 183 days in the calendar year but whose presence over the current year and two prior years equals or exceeds 183 days to avoid U.S. tax resident status if the visitor has a tax home in a foreign country for the full calendar year, and the visitor can prove a closer connection to a foreign country for the calendar year. An individual who is in the United States for a period expected to last more than a year cannot meet this exception because the visitor's tax home has shifted to the United States. Also, to meet this exception, the visitor must submit a completed Form 8840 to the IRS Center in Philadelphia, PA by June 15 of the following year.
An individual who is tax resident in a treaty country may be able to claim nonresident status under a residency tie-breaker rule of the treaty even if his U.S. presence exceeds the 183-day residency test. To claim an exception under a treaty, the individual must submit a statement or Form 8833 to the IRS stating the facts supporting a claim for nonresident status under a treaty. A visitor who can typically meet the typical residency tie-breaker conditions maintains all substantial social and economic contacts with the treaty country, and is unaccompanied to the United States by a spouse and children.
Adjustment to a Work Authorized Status
Most problems occur for business visitors when they enter the United States in a status authorizing employment such as L-1 intra-company transferee following a period in the United States as a business visitor in the calendar year. If the visitor is in the United States more than 183 days in the calendar year, the individual no longer qualifies for the treaty exemption for the foreign pay. In addition, the visitor has become a resident of the United States from his first day of U.S. presence in the calendar year subject to a de minimus rule exception. Worse yet, if the visitor has U.S. investments, the gain exclusion on sales of U.S. securities is lost for all gains during the calendar year because the visitor's presence exceeds the 183-day U.S. presence limitation of the gain exclusion rule. Even if the visitor remains a nonresident under the 183-day residency rule in the initial year, a change of tax home to the United States will cause the loss of the gain exclusion. In the typical transfer situation, the employee considers that income tax obligations for the visitor period have been satisfied by payments to the foreign tax authority. However, in the view of the IRS, the transferee has paid the pre-transfer period taxes to the wrong tax authority!
B visitors who wish to avoid exposure to U.S. income taxes must plan their U.S. presence carefully to maintain nonresident status. Foreign employers from treaty countries need to avoid the transfer of costs to a U.S. entity to preserve available treaty benefits. Visitors planning an eventual transfer to the United States need to be aware of these tax rules when they and their employers plan a transfer to the United States.
About The Author Paula N. Singer, Esq., a partner with the tax law firm, Vacovec, Mayotte & Singer has been providing tax planning and compliance services to employers relocating employees internationally for over 20 years. Ms. Singer is also Co-Founder of Windstar Technologies, Inc., a software company that develops and distributes software for nonresident alien tax compliance. For more information see www.vacovec.com and www.windstar-tech.com.
Paula N. Singer, Esq., a partner with the tax law firm, Vacovec, Mayotte & Singer has been providing tax planning and compliance services to employers relocating employees internationally for over 20 years. Ms. Singer is also Co-Founder of Windstar Technologies, Inc., a software company that develops and distributes software for nonresident alien tax compliance. For more information see www.vacovec.com and www.windstar-tech.com.
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