Employees working for a foreign government or an international organization in the U.S. are subject to some special tax rules. The tax treatment of their compensation can vary according to whether the employee is a U.S. citizen, a dual citizen, a green cardholder (lawful permanent resident), or a foreign citizen without a green card.
U.S. citizens and green card holders pay U.S. taxes on their compensation while working in the U.S. They report their compensation as income from wages on line 7 of their Form 1040, U.S. Individual Income Tax Return.
U.S. citizens working in the U.S. must report self-employment income under the Self-Employment Contributions Act (SECA). SECA makes the contributions to the U.S. Social Security and Medicare systems for self-employed individuals. Self-employment tax is computed on Schedule SE, Self-Employment Tax, and reported on line 58 of the Form 1040. U.S. citizens working for foreign governments and organizations outside of the U.S. are not subject to self-employment tax. Green card holders and foreign citizens are not subject to self-employment taxes and may not voluntarily participate.
U.S. employees pay self-employment tax because the foreign government or organization is not liable for the employer’s portion of the contribution to the U.S. system. However, these employees are not “self-employed” for any other federal tax purposes. They may not claim deductions for expenses on Schedule C. They are not qualified to establish a Simplified Employee Pension (SEP) Plan and there is no allowable deduction on line 28 of Form 1040 for contributions to any such plan. Rules of contributing to SEP/IRA plans are explained in IRS Publication 560 and Revenue Ruling 73-384.
U.S. citizens and green card holders may claim deductions for unreimbursed employee business expenses arising from their employment on Form 2106, Employee Business Expenses. The deduction is claimed on line 20 of Schedule A, Itemized Deductions, on the Form 1040. These expenses are miscellaneous itemized deductions subject to the 2 percent of adjusted gross income limitation.
U.S. citizens and green card holders who expect to have tax due at the end of the year must file estimated tax payments because their compensation is not subject to withholding. The estimated payments ensure that employees have paid their proper amount of tax throughout the year. Estimated payments are made using Form 1040ES, Estimated Tax for Individuals. Forms are filed quarterly: April 15th, June 15th, September 15th, and January 15th.. There is a penalty for failure to make estimated tax payments.
Foreign citizens working in the U.S. for foreign governments and international organizations are generally exempt from U.S. income tax and self-employment tax on compensation. For example, exemptions can be found in section 893 of the Code, tax treaties, consular agreements, or international agreements. Individuals should check with their embassies and/or their tax preparers to find out if any exemptions apply.
Foreign citizens receiving U.S. source income (other than compensation) are generally subject to U.S. income tax. This income is reported on Form 1040-NR, U.S. Individual Income Tax Return Non-resident. Estimated payments may be required depending upon the amount received.
Additional Reading Materials:
Employee of Foreign Government or International Organization
Publication 560, Retirement Plans for Small Business
Topic 306, Penalty for Underpayment of Estimated Tax
Form 1040ES (PDF) and Instructions
The term “international organization” means a public international organization entitled to enjoy privileges, exemptions, and immunities as an international organization under the International Organizations Immunities Act (22 U.S.C. 288-288f).
U.S. citizens and green card holders pay U.S. taxes on their compensation while working in the U.S. They report their compensation as income from wages on line 7 of their Form 1040, U.S. Individual Income Tax Return.
U.S. citizens working in the U.S. must report self-employment income under the Self-Employment Contributions Act (SECA). SECA makes the contributions to the U.S. Social Security and Medicare systems for self-employed individuals. Self-employment tax is computed on Schedule SE, Self-Employment Tax, and reported on line 58 of the Form 1040. U.S. citizens working for foreign governments and organizations outside of the U.S. are not subject to self-employment tax. Green card holders and foreign citizens are not subject to self-employment taxes and may not voluntarily participate.
U.S. employees pay self-employment tax because the foreign government or organization is not liable for the employer’s portion of the contribution to the U.S. system. However, these employees are not “self-employed” for any other federal tax purposes. They may not claim deductions for expenses on Schedule C. They are not qualified to establish a Simplified Employee Pension (SEP) Plan and there is no allowable deduction on line 28 of Form 1040 for contributions to any such plan. Rules of contributing to SEP/IRA plans are explained in IRS Publication 560 and Revenue Ruling 73-384.
U.S. citizens and green card holders may claim deductions for unreimbursed employee business expenses arising from their employment on Form 2106, Employee Business Expenses. The deduction is claimed on line 20 of Schedule A, Itemized Deductions, on the Form 1040. These expenses are miscellaneous itemized deductions subject to the 2 percent of adjusted gross income limitation.
U.S. citizens and green card holders who expect to have tax due at the end of the year must file estimated tax payments because their compensation is not subject to withholding. The estimated payments ensure that employees have paid their proper amount of tax throughout the year. Estimated payments are made using Form 1040ES, Estimated Tax for Individuals. Forms are filed quarterly: April 15th, June 15th, September 15th, and January 15th.. There is a penalty for failure to make estimated tax payments.
Foreign citizens working in the U.S. for foreign governments and international organizations are generally exempt from U.S. income tax and self-employment tax on compensation. For example, exemptions can be found in section 893 of the Code, tax treaties, consular agreements, or international agreements. Individuals should check with their embassies and/or their tax preparers to find out if any exemptions apply.
Foreign citizens receiving U.S. source income (other than compensation) are generally subject to U.S. income tax. This income is reported on Form 1040-NR, U.S. Individual Income Tax Return Non-resident. Estimated payments may be required depending upon the amount received.
Additional Reading Materials:
Employee of Foreign Government or International Organization
Publication 560, Retirement Plans for Small Business
Topic 306, Penalty for Underpayment of Estimated Tax
Form 1040ES (PDF) and Instructions
The term “international organization” means a public international organization entitled to enjoy privileges, exemptions, and immunities as an international organization under the International Organizations Immunities Act (22 U.S.C. 288-288f).
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