Foreword
In this month’s newsletter we’re excited to welcome a special guest contributor: Kristin Konschnik, a seasoned authority on U.S. taxation with more than 20 years of experience helping individuals and businesses navigate an increasingly complex tax landscape. Kristin is a co-founder of McLemore Konschnik LLP, a London-based boutique law firm of US lawyers specialising in tax, trust and estate planning advice for US citizens and green card holders and their businesses, whether based in the UK or internationally.
In this article, Kristin responds to frequently asked questions about U.S. tax law for foreign national obtaining U.S. visas, breaking down what you need to know to stay informed and ahead of the curve. We’re thrilled to share her expertise with our readership.
US Tax Basics for UK Employees Working in the United States
By Kristin Konschnik, McLemore Konschnik LLP
The US federal income tax (and, if applicable, state and local income tax) rules are extremely complex; the information below is necessarily general in nature and are not intended to address all potential situations. All taxpayers should obtain US tax advice from a qualified professional based on their particular circumstances.
1. How is my income taxed if I’m living in the United States on an E-2 or L-1 work visa?
If you are working in the US, regardless of your visa, you generally are subject to US federal income tax and filing obligations on any wages attributable to your US workdays and your employer likely will have to apply US wage withholding to your pay, unless you are only working there very irregularly and for very short periods of time. Depending on where you work, you also may have US state and local tax and filing obligations.
2. Will I be considered a US tax resident, and how is that determined?
You will be subject to US federal income tax on your worldwide income and gains, not just your US-related compensation, if you are “US tax resident.” Assuming you are not a US citizen and do not have a US “green card,” the US uses a statutory residence test to determine whether you are US tax resident, applying a three-year rolling average calculation. Under this test, and subject to limited exceptions (possibly including under a US income tax treaty) you are US tax resident in a US tax year if you are physically present in the US for at least 31 days in that year and were physically present in the US for at least 183 days in total over the prior three years, calculated by adding the days of US presence in the current year, one-third of the days of US presence in the first immediately preceding year, and one-sixth of the days of US presence in the second immediately preceding year. Any part of a day counts as a full day for purposes of this test, subject to very limited exceptions. Complex “residency starting” and “residency termination” dates determine when you start and end US tax residency.
3. What are the tax implications if I’m paid through UK payroll while working in the United States?
Your US employer likely will need to apply US wage withholding if you work in the US more than irregularly, but even if you are paid through UK payroll, you likely still are subject to US federal (and potentially state and local) tax and filing obligations on wages attributable to your US work. Being paid through UK payroll also is likely to complicate your tax position; if you have to pay tax in both the US and the UK, you should ask your UK tax accountant if you can credit the US tax you pay against your UK tax, which may be complicated. UK payroll also may not withhold US state and local income tax, so you may have to pay out of pocket for these each year.
4. What changes if I’m paid through US payroll instead?
If you are paid through US payroll, this will operate similarly to the UK PAYE system, although you still will have a US federal (and potentially state and local) tax filing obligation because the US requires you to file a tax return even if your employer withholds on your wages. The tax credit position for your wages may be more straightforward in this case, but you should confirm this with your US and UK accountants.
5. Could I be taxed in both the United Kingdom and the United States, and how can I avoid double taxation?
If you are subject to both US and UK tax, you may be able to claim a credit for UK tax you pay against your US federal income tax (although generally not against state or local income tax). However, the US tax credit rules are very complex; for example, UK tax you pay cannot offset US tax on “US source” income, such as US tax on wages attributable to your US workdays, and non-US source income and the taxes you pay are allocated to “baskets,” with “cross-crediting” of taxes between baskets is prohibited. Depending on your situation, you may be able to claim a tax credit in the UK for US tax you pay, but you would need to speak with a UK tax advisor or accountant further about this.
6. Does the US–UK tax treaty help in reducing or avoiding double taxation?
From a US federal income tax perspective, double tax mitigation often occurs under US domestic law, rather than the US-UK Income Tax Treaty, although the Treaty also may help to reduce or eliminate double taxation in some cases. However, as with the US domestic rules, the application of the Treaty is complex and depends on your particular situation, so you would need to talk with a tax advisor about this.
7. What reporting or tax filing requirements will I have in the United States and are there any special tax forms or declarations I need because I’m from abroad/paid from abroad?
If you earn wages related to services you perform in the US, you likely must file a US federal income tax return (and state and local tax returns, depending on where you work), even if your employer applies US wage withholding. If you are US tax resident, you must file your US federal (and state and local) tax returns reporting and paying tax on your worldwide income and gains. You also may have to file specific tax forms; for example, you are likely to need to report your bank and financial accounts outside the US (including in the UK), interests in non-US companies or partnerships, your UK pensions and your ISAs. Further, if you hold certain types of assets, such as non-US ETFs, you may have complex filing obligations and tax consequences. Before you become US tax resident, you should make sure you understand the US tax consequences that could apply to you based on your personal situation, including the assets you own, and you should hire a US qualified tax accountant who is familiar with US international tax reporting to prepare and file your US tax returns to ensure you comply with all your US tax filing obligations.
8. What is the best payroll setup — UK or US — from a tax and compliance point of view?
Your US employer likely will have to apply US wage withholding to your wages, particularly if you are working in the US more than very irregularly or for very short periods of time. This also is likely to be more straightforward to you, as discussed above. If you work in the US but are paid through UK payroll, it could create US tax exposure for your UK employer. Both you and your employer should obtain appropriate US tax advice before you start working in the US to ensure you are compliant with all your US tax and filing obligations.
Need Assistance?
To discuss any of the issues raised in this article, contact Kristin at McLemore Konschnick.
Author
Founder & Principal Attorney Nita Nicole Upadhye is a recognized leader in the field of US business immigration law, (The Legal 500, Chambers & Partners, Who's Who Legal and AILA) and an experienced and trusted advisor to large multinational corporates through to SMEs. She provides strategic immigration advice and specialist application support to corporations and professionals, entrepreneurs, investors, artists, actors and athletes from across the globe to meet their US-bound talent mobility needs.
Nita is an active public speaker, thought leader, immigration commentator, and immigration policy contributor and regularly hosts training sessions for employers and HR professionals.