Are you working for a US company remotely or looking for a job? Hiring independent contractors outside of the US and managing remote workers has become a trend at the start of the pandemic, but seems to be a norm now. US companies more often hire remote abroad employees to reduce payroll costs.
Foreign employees of US companies working and living abroad aren’t taxed in the US. Foreign contractors working for US companies should pay taxes where their self-employment is registered and in the country of residence. US citizens remain to be taxed for their worldwide income in the US.
If you are looking for a remote job with a US company, your chances are higher than ever before. Besides that, it’s also relatively easy for compaines to hire a foreign contractors for projects or long-term employment. Yet, you and your US employer should keep in mind the complications with the taxation and payroll in mind.
How to pay taxes while working for a US company abroad?
Nowadays, many employees enjoy working for American companies while living in other countries. Some are looking for an affordable cost of living, better weather, or for new adventures and experiences.
Yet, you need to consider different implications of remote work, especially your tax and social security liabilities.
Non-US citizens working for US companies
The income is taxed in the US when it is earned within the country. Hence, taxes are paid in the state where the work is performed. If you work remotely, from another country, your income isn’t US-sourced, thus, isn’t taxed in the US.
Therefore, employees of US companies, who are non-US citizens, working and living abroad won’t have US tax liability. This is quite obvious for someone who has never ever lived in the US.
Yet, employees who previously worked in the US and have relocated somewhere else, need to make sure they don’t owe taxes there and that their employer doesn’t include them in the US payroll.
It is worth your time to consult a tax professional and clear your tax obligations in the country where you reside. Most likely some additional paperwork will be required.
Foreign employees working for a US company from abroad are paying taxes where they are residing. Technically the income gained from American employment will be considered as regular employment in that particular country.
The local income tax rates of your country of residence will apply. The income will be taxed 100% in one country, according to the 183 days taxation rule.
Meaning, a person residing in one country for over 183 days in a year is taxed on whole worldwide income, unless you are a US citizen. Hence, you don’t pay taxes in the US at all.
You should pay social security in the country where you are residing even when working for a US company. Nonetheless, US citizens must check with the social security in the US and their agreement with the company, since they still might owe social security tax in the US.
Contractors working for US companies
If you want to work for a US company from abroad, becoming self-employed, a freelancer, or a business owner will be the best option for you. You can register as self-employed either in the US or in various European countries, for example. This also allows you to find work as a contractor for the US or any other foreign company.
It’s very common when US companies of all sizes hire independent contractors abroad. They can be US or non-US citizens. Hiring contractors also brings many benefits to organizations such as:
- the possibility to easily employ foreign or short-term workers
- savings on labor costs
- ease of contractor relationships
- limited responsibility
For that reason, we also are hiring contractors with IT skills residing anywhere in the world. You can apply to work with us as a remote IT Technician! Visit this page to apply and we will get in touch!
Who are Independent contractors?
Independent contractors are professionals offering their services to clients, usually companies. Usually, they are self-employed or own a small business that you hire for a fixed period of time or on a per-project basis.
In the US, the IRS defines a contractor as “an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
Paying taxes as a contractor is easy too. Independent contractors are responsible for their own taxes. It will depend on where you are living and where your self-employment is registered.
You will pay taxes for your self-employment where it’s registered and your income taxes where you are residing most of the time in the year.
As a result, you will pay taxes where your business activity is registered. Finally, a contractor will need to file just a few forms with the local government and the US government to declare that the work is legitimate.
Therefore, your company doesn’t have to worry about how and where to do payroll taxes for you. The responsibility of reporting self-employment tax falls solely on the contractor. Consequently, becoming a contractor is advantageous when looking for a remote job. This way you will get hired easier.
However, even though as a contractor you pay your own taxes, depending on the country, the company might still be responsible for compiling and reporting the total compensation on the appropriate tax slips.
Moreover, self-employed contractors can write off some costs, depending on where they are registered. However, as a self-employed, you will take care of things like taxes, social security, immigration, employment law, and organizing your own life insurance, medical coverage, pension, etc.
Should you pay taxes in the US or not?
Well, to determine whether you should pay taxes in the US or not we should look at more detail. According to the IRS, the source of the income gained by offering services is determined by the location where the services are performed.
Hence, if you are working overseas for a US company as an independent contractor the income you receive isn’t considered US-sourced as long as every aspect of the service is performed outside of the US.
Based on that a contractor doesn’t pay taxes in the US and so the US company doesn’t perform payroll for them in the US.
Yet, when some of the work by the foreign independent contractor is completed within the US, the following criteria should be met in order to avoid tax liability in the US:
- The contractor was present in the US for less than 90 days in a tax year
- The payment to the contractor is lower than $3,000
- The payment to the contractor is for services performed for an entity or office maintained in a foreign country
If all points are met, a US company doesn’t have to withhold or report taxes in the US.
US Citizen contractors
As a US contractor (US citizen) you are subject to the same tax rules as employees regardless of your location. Therefore, US contractors are tax liable for their worldwide income in the US.
The hiring company should continue to issue a Form 1099-NEC (if contractors earn more than $600 within a year), the same as it would to its US-based contractors.
Paying taxes while working for a US company from Europe
Many Americans or people employed in the US companies are living in Europe. The taxation system is quite similar in all EU countries so people often move from country to country within the EU thanks to remote jobs in the US.
The general rule for the EU is that you become a tax resident when spending more than 183 days in one country. Hence, legally you should file a tax return and pay your taxes in the state when only spending over 183 days. You will be liable for all worldwide income in that case.
While staying less than 183 days in the year, a person will be only taxed on the income earned in that country. Therefore, your salary from the US won’t be taxed there. However, remote work can also fall into this category, because legally you are working where you are physically located.
If you don’t want to pay taxes during these first six months, you need to keep a residency in some other state (or the US), so you can continue to pay taxes there. After the initial 183 days, the residence won’t matter, and you will pay taxes in that country anyway. This rule doesn’t apply to US citizens though, they pay taxes in the US regardless.
Social security in the EU
Also when working remotely from one of the EU countries you will be liable to pay social securities taxes after three months of staying and working remotely in one place.
Double taxation agreements
People working for US companies can benefit from various double taxation treatments so that they won’t pay income taxes twice. When working for a US company and living abroad you can use taxation agreements to simplify the process of paying taxes.
Most countries have established taxation treaties with each other, so you for sure won’t pay taxes twice. For example, when working for a US company abroad as a US citizen you will pay the majority of taxes in the country where you are living.
The rest will go to your liabilities in the US if you are an American.
Paying taxes while working for the US company from other countries
Most countries will allow foreign remote workers to stay and work remotely for up to 183 days in a year without becoming tax liable. After that period, a person becomes a tax resident in that country on their worldwide income. Yet, US citizens will be responsible for paying taxes in the US in any case.
Benefit from Income exclusion as a US citizen
As you can see, there are many solutions for working for a US company from abroad. Furthermore, US citizens can save up on taxes while living and working abroad.
Americans who live and work abroad for the US or foreign companies can profit from the income exclusion available in the US. It’s called the foreign earned income exclusion, but the income doesn’t have to be foreign and can be earned in the US. By claiming this exclusion, you can reduce your US tax bill to zero.
The amount that can be excluded from taxation in the US is up to $108,700 in 2021. US citizens have to pass one of the IRS tests to claim the foreign earned income exclusion. These tests prove the fact that you are actually living abroad.
They will test your physical presence in a particular country where you need to demonstrate your permanent residency in another country. At the same time, the physical presence test requires you to verify that you spent at least 330 full days outside the US in 365 days.
A digital nomad or work visa in another country will be sufficient to prove that you reside abroad.
Want to work remotely from any country in the world?
Complications with taxes can scare many employers from allowing their staff to work remotely abroad. Here at Support Adventure we have been hiring talented people worldwide to enable them to work from anywhere thanks to the fully remote job.
Support Adventure is an expat outsourcing company. Our employees specialize in IT, in particular, the IT help desk. If you have experience or background in IT, don’t wait and apply for a remote job with us!
You can see our current position here. Working with us will make your dream of living and working remotely from abroad come true!