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Tax Considerations For Remote Workers
The following is designed to provide general tax information for Americans living abroad or contemplating a foreign move. As with all tax and legal issues, seeking tailored advice from qualified counsel is advisable.
A rapid advancement of technologies and resources designed to assist remote workers has been borne out of the global pandemic. This development may quickly become the catalyst for a dynamic transition to a permanent remote workforce driven by the elimination of employee commutes and ease of transition from one meeting to the next. With return to office policies being widely met with resistance, the combined productivity gains for organisations and lifestyle enhancements for associates may prove too difficult for the draw of traditional in-office camaraderie to overcome.
The concept of a remote workforce will present many Americans with the opportunity to relocate to another part of the world where the cost of living is manageable, and a new cultural experience brings an exciting change of pace. All without sacrificing the stability of a current employment arrangement. Now with the proliferation of short-term vacation rentals and budget airfare options, the world can truly become the oyster of the remote worker. Breaking up the monotony of working from home every day by taking Zoom calls at the beach could become an increasingly desirable option.
Once the decision has been made to make a move, the first issue to consider will be where to travel. American and British passports offer a tremendous amount of flexibility for short-term business and leisure travel. Nevertheless, every country will have unique rules with respect to the length of such stay and the type of activities that can be performed within the country under the terms of said visa.
Undoubtedly, short-term and potentially even extended visa avenues will be available to Americans wanting to spend some time outside the United States while continuing to work remotely. Whether this means that tax relief would follow in the US or additional tax exposure will arise in the country where the remote work is being performed will depend entirely on the circumstances involved. The length of the stay, whether the United States has income and social security tax treaties in place with that country, and the extent of the company’s activities within that country, will all be important elements.
Short Visits Abroad
income from personal services is generally sourced to the location where the services are performed. This means that even though wages are being paid by a US company, the earnings would technically be classified as foreign source if earned while working remotely abroad.
Income earned during short-term visits to countries with which the United States maintains an income tax treaty will generally be protected from foreign taxation. The flip side of this coin is that even though foreign earnings are produced, limited visits abroad will not qualify a remote worker for the foreign earned income exclusion, which allows up to $108,700 (2021) to be excluded from US tax if certain requirements are met. Eligibility for the exclusion requires at least a year outside the United States and these presence requirements cannot be accomplished with short-term travel.
Furthermore, as local taxes are not being paid in that country on account of the treaty protection, no credit for foreign taxes paid will be available. Though in rare instances, foreign tax credit carryovers from a prior year working abroad could still produce a tax windfall from the short trip overseas and the “foreign source” income generated.
Moreover, a temporary visit outside of a US state will always be insufficient to break state residency, requiring state-level taxes to continue to be paid on the foreign source income. Short-term travel outside the United Kingdom would also be insufficient to break domicile and discontinue worldwide taxation as a UK resident. Special relief may be available for certain remittance-basis taxpayers. Contrary to US policy, the United Kingdom does not maintain the same citizenship-based tax system, meaning that UK tax residency could potentially be terminated if sufficient time is spent outside the country. American expats in the United Kingdom who are able to break UK domicile would still have American taxes to manage irrespective of where they move.
The experiences gained may be priceless, but a temporary trip abroad would offer no tax savings on the US side to offset any duplicated living expenses. To complicate matters, in the absence of protection from a US income tax treaty, exposure to foreign country taxation could conceivably arise, even in a short-term stay of only several weeks or months. For example, nonresidents visiting the United States from a non-treaty country are only afforded protection from US income tax if present in the United States for less than 90 days during the year, earn less than $3,000 in compensation, and are paid by a foreign employer.
Assuming 240 workdays per year, this would mean that a nonresident earning $100,000 annually would have US income tax exposure on or after his or her eighth remote work day. Fortunately, if foreign income tax is triggered by the short visit abroad, the tax paid can generally be credited back against the US liability for that year. Each country will have unique rules for how individuals working in the country on a remote assignment are classified and understanding the boundaries to stay within can go a long way to avoiding future hassles.
Impact Of US Income Tax Treaties On ShortTerm Travel
The United States has executed income tax treaties with over 65 countries. The specific provisions will vary, but the goal of all treaties is the promotion of cross border business by allowing business people from one country to spend limited amounts of time working in the other country, without needing to worry about local tax obligations.
If working abroad remotely for a US company, the provision of the Treaty covering income from “employment” or “dependent services” would be operative. Article XV of the US-UK Treaty explains that an American working in the United Kingdom would not be subjected to UK tax provided: 1. The work is performed for a non-UK company; 2. The employment is not operated through a permanent establishment that company maintains in the United Kingdom; and 3. Less than 183 days is spent in the United
Kingdom during any twelve-month period beginning or ending during the stay. Permanent establishment is a term of art, further defined in Article V of the Treaty to mean a “fixed place of business through which the business of an enterprise is wholly or partly carried on.” The term specifically includes a place of management, branch, office, factory, or workshop. The term is clearly not designed to cover a makeshift home office in a short-term Airbnb rental, but given that it still leaves quite a bit of room for interpretation, ensuring that activities performed on behalf of the company within the country will not give rise to a permanent establishment is crucial. Client-facing associates or those in management positions would need to take even greater caution.
Accordingly, with the protection of the Treaty, spending up to half the year in the United Kingdom, working for an American
company on a remote contract is possible without triggering UK taxation. The same would be true for a British national working remotely from the United States for half the year, though the additional layer of statelevel taxation would also need to be taken into account. Notably, California does not extend the benefits of income tax treaties to state-level tax.
Income tax treaties do not cover related charges, such as unemployment, disability, or social security-type taxes. As a practical matter, this is typically not a concern if the company has no presence at all in that country and the employee has not spent enough time there to establish residency. But exceptions can always arise in this area and maintaining compliance with non-income tax obligations can be one of the more onerous challenges faced by US remote workers with longer-term visas in a foreign country.
Foreign Social Security Taxes
The United States maintains bilateral social security agreements with 30 countries. The US/UK agreement explains in part that an American employee who is working in the United Kingdom for a US company for less than five years remains covered by US Social Security. Neither the employee nor the company would be obliged to comply with National Insurance reporting obligations. Corresponding exemptions from US social security tax would be available for a British national working for a UK company remotely from the US for less than five years.
With social security agreements in place with only a limited number of foreign countries, an extended stay in a country where no such protection exists can pose compliance challenges for both company and employee.
Longer Stays Abroad
While visitor visas will typically limit the stay in a foreign country to 90 or 180 days, many Americans will be able to extend the visitor visa, transition to visas for students or entrepreneurs, or apply for nonlucrative visas that do not grant work privileges. When remote employment from the US is still carried out, income tax will generally be due in that foreign country once residency has been established.
Practical challenges can arise when the plan is to continue working on a long-term basis in a foreign country for a US company. First, nonlucrative or similar visa types that might be appealing to the remote worker generally do not grant work privileges in that country. The remote work arrangement exists in a grey area that could make it difficult to comply with the formality and structure of income tax reporting responsibilities once tax residency is established. Moreover, compliance with social security, unemployment, disability taxes, and similar charges often requires the participation of the employer and can make the project even more challenging for the employee to sort out independently. This element of the compliance can create challenges, not only for visa holders without a work permit, but also those who are permitted to work in that country, but whose US employer has no intention of complying with foreign employment and tax withholding obligations.
Yet some Americans will undoubtedly be able to thread the needle and find an overseas living arrangement offering both limited protection against local taxation and opportunities to take advantage of tax relief available for Americans residing overseas. 1. Relocating to a country with no personal income tax. The options in this category are limited, but countries with no personal income tax include The Bahamas, Cayman
Island, Brunei, Kuwait, British Virgin
Islands, Anguilla, Monaco, UAE, St. Kitts and Nevis, Bermuda, and Qatar. Long-term visas and residency in these countries may be more difficult to secure, but living in a foreign location with no income tax will greatly simplify the ability to qualify for the foreign earned income exclusion and ensure compliance challenges do not arise for a stateside employer. 2. Splitting time between two income tax treaty countries. Each case will be unique here and the facts of the specific living arrangement and the domestic law of the foreign countries involved will drive the outcome. But a plausible strategy could be developed whereby time would be split between two treaty countries in a way that would effectively leverage US income tax treaties to avoid local taxation without sacrificing eligibility for the foreign earned income and housing exclusion.
A long-term living arrangement overseas would also present an opportunity to break state residency if ties are effectively cut to the former state. This decision should not be taken lightly as severing state residency can make it difficult to secure US banking options, obtain or renew a driver’s license, or vote in state-level elections. Complicating matters, several states have implemented
“convenience of the employer” rules that can create additional state tax challenges in the home state of the company when the remote work arrangement is not much more than an employee perk.
If eligibility for the exclusion can be preserved, despite the split living arrangements abroad, meaningful tax savings would follow. The foreign earned income exclusion, combined with the standard deduction, can result in over $120,000 of earnings being protected from income tax in the United States. For someone who has moved from the State of
California, this translates to over $25,000 in annual tax savings. Even if sufficient time can be spent outside the United States to satisfy the 330-day physical presence test, the lesser known qualifications of the foreign earned income exclusion, maintaining a “tax home” and “abode” outside the United States, can throw some additional nuance into the analysis.
Tax home is defined as the location of an individual’s main place of business or work.
If the nature of the work is such that no main place of business exists, the personal home is considered the tax home. If a taxpayer has no main place of business and no main personal home, “itinerant” worker classification would arise. The tax home of the itinerant worker is wherever he or she is working. Abode is defined for this purpose as the location where a taxpayer maintains his or her family, economic, and personal ties.
The tax home and abode analysis would be complicated for an individual splitting time between foreign countries while working for a home office back in the United
States. If considerable ties are maintained back stateside or if even a few days are spent working in the US during the year, eligibility for the exclusion could be undermined. Any such strategy will require careful planning tailored to the specific situation involved. 3. Taking advantage of special tax regimes for foreign nationals. Even in countries with high rates of income taxation, special provisions may be carved out for foreign individuals that can offer limited protection against foreign country taxation. Portugal has enacted tax legislation covering “non-habitual” tax residents who relocate to the country. Under these guidelines, foreign income and earnings are not taxed in Portugal and income earned from specified professions from sources within the country is subject to a tax rate of 21% for the first ten years after having established Portuguese residency. Astounding tax savings could be produced by an American moving to Portugal from the United Kingdom or another higher taxed foreign country, bringing along ten years of foreign tax credit carryovers.
Taxes are unlikely to be the primary driver of any decision to leverage a remote work opportunity for an overseas move. Even so, American expats maintaining longterm remote work assignments in a foreign country will still need to be careful so as not to trigger incremental tax compliance headaches. Nonetheless, with careful planning and a bit of creativity, the possibility of spending some time abroad, funded by tax savings, could become a reality.
