One big tax problem that arises for U.S. citizens that have jobs abroad is that they can be subject to double taxation. This can occur because U.S. citizens and resident aliens working abroad are required to pay federal income taxes on their entire income, even if they didn’t live or earn money in the United States. Unfortunately, the United States is only one of two countries in the world that taxes U.S. citizens and resident aliens based on their citizenship or residency status.
In most countries, income taxes are based on where you earned the money or where you reside. If you are working in a country with a territorial income tax system, you only pay income taxes on the money that is earned in that country. If you earn money in a country using the residential system, you pay taxes on worldwide income if you are a resident in that country. It is important to know what the rules are regarding what constitutes residency in a country that uses a residential system. For example, if you’ve been in Canada for more than 183 days, no matter the source of your income, it is taxable in Canada.
The IRS does offer several tax breaks that help mitigate the effects of double taxation. One tax break for foreign workers is called the Foreign Earned Income Exclusion. In 2013, this exclusion allowed people working abroad to exclude up to $97,600 of foreign earned income to be free from U.S. taxation. In order to qualify for this exclusion, you have to have lived outside the United States for at least 330 days in 12 consecutive months. It is important to note that you are required to file an IRS form 1040 and claim the exclusion even if your income is less than $97,600. This exclusion also cannot be claimed if you are working on a ship on the high seas.
Another tax break that the IRS offers U.S. citizens working overseas is a foreign tax credit. This rule allows you to pay taxes on the difference between subtracting the lower tax rate from the higher. To illustrate how this works, let’s look at an example. Let’s say you reside in a country with a twenty percent tax rate. In the U.S., your worldwide income puts you in the twenty-eight percent tax bracket. In this scenario, you would be liable to the IRS for income taxes on 8% of the income your earned from your work abroad.
Another potential tax problem that U.S. citizens can encounter is double taxation on social security taxes. In general, the Unites States charges social security taxes and Medicare taxes regardless of where you make your income. There are a few exceptions, but very few. The Unites States has tried to mitigate this double taxation by establishing a network of bilateral Social Security agreements that coordinate the U.S. Social Security program with comparable programs of other countries. Currently, the U.S. has these agreements with the countries in Western Europe, Japan, South Korea, Chile, Australia, the Republic of Czech and Poland.
Double taxation with regards to social security taxes can be a major problem if you are working in a country that does not have a bilateral Social Security agreement with the United States. This can be especially costly for companies that offer tax equalization arrangements which guarantee that any added taxes will not reduce an employee’s income. When companies do this, they agree to increase an employee’s income to cover the added cost of the host country’s additional income tax and social security taxes. This can often increase their payroll costs 65-70%
In summary, before you accept a job working abroad, it is important to fully understand the tax implications of your taking on the assignment. As a U.S. citizen or resident alien you are required to pay income taxes on your worldwide income regardless of where you live or make your money. As a result, you can be subject to income taxes and social security taxes in the foreign country you are working in and to the IRS. Therefore, it’s prudent to discuss with your employer whether they will mitigate any added tax expense arising from double taxation before you accept the job.
If you are looking for a job either in the Unites States or abroad, one good place to look is EmployAPro.com. This website is devoted to connecting startups and new businesses with skilled workers looking for employment and freelancers looking for work.
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Written by: Mark J. Krupp, Cofounder of NewBusinessCreator.com