Is a Bermuda employer who sends a Bermuda national to work in the United States responsible for withholding and paying U.S. Federal and State income tax, Social Security and Medicare tax and Federal Unemployment tax? Definitely.

 

 

Under the Internal Revenue Code nonresident aliens are subject to United States Federal income tax on two types of income. United States source income not connected with the conduct of a trade or business, such as a dividend paid by a U.S. company, is subject to a flat tax of 30%. Income that is effectively connected with the conduct of a trade or business is taxed in the same manner as the income of a U.S. citizen that is graduated rates of tax.

 

Under the Internal Revenue Code compensation for labor or services performed in the United States is treated as income from United States sources, with limited exceptions. The Internal Revenue Code states that the performance of personal service within the United States is treated as the conduct of a trade or business.

 

Treasury Regulations provide that in the absence of an accurate allocation of compensation for personal services performed in the United States, the amount to be treated as U.S. source wages:

 

Shall be determined on the basis that most correctly reflects the proper source of income under the facts and circumstances of the particular case. In many cases the facts and circumstances will be such that an apportionment on the time basis will be acceptable.

 

As an example, suppose a Bermuda national has compensation of $120,000, works 220 days a year and during 2009 has 22 of these workdays in the United States. Under the above regulation this individual has U.S. source income of 22/220 x $120,000 = $12,000.

 

Usually a tax treaty allows nonresident alien business visitors from a country such as France to visit the United States for up to 183 days per year, and earn any amount of compensation for services rendered in the United States, without being subject to U.S. income tax. Unfortunately, the tax treaty between the United States and Bermuda does not contain such a clause. And no one has ever been able to explain why it does not.

 

Hence, wages earned by most Bermuda national employee attributable to their business visits to the United States will likely be subject to income tax in the United States, and may also be subject to income tax in the State or States in which the services are performed.

 

 

Over the past 30 years we have heard multiple creative excuses for not claiming a business day in the U.S. One local attorney that we know carries his tennis racket with him every month when he goes to the U.S. and he considers the fact that he only plays tennis with clients tangential to a vacation trip. As a rough rule of thumb, if the employer pays for or reimburses the employee for the airplane fare, if the employer pays for or reimburses the employee for the hotel, transportation and incidental expenses, and/or the employee receives his salary for that day and is not receiving vacation pay, the employee is in the United States on business. The reason for the business trip is not relevant. It could be to attend a convention, it could be to take an insurance exam, it could be to buy office furniture, and it could even be to play tennis with a client.

 

 

Absolutely. The employee is required to file U.S. Federal Form 1040-NR, report the income they earned in the United States, and pay tax on that income. And depending on the State and City in which business was conducted, the employee may also be required to file State and City individual income tax returns. Failure to do so could lead to civil and criminal penalties being levied.

 

 

Is a Bermuda employer who sends a Bermuda national to work in the United States responsible for withholding and paying U.S. Federal and State income tax, Social Security and Medicare tax and Federal Unemployment tax? Definitely. The Bermuda employer is also responsible for furnishing the local employee with a U.S. Federal Form W-2.

 

 

Taxes withheld by an employer must be deposited with the United States Treasury within 3 days of being withheld.

 

 

The Internal Revenue Code also requires that both a Bermuda employer and the Bermuda national employees who perform services in the United States must obtain taxpayer identification numbers.

 

 

 

A failure to withhold taxes will result in a 100% penalty being imposed on the employer. Further, the corporate officer responsible for such withholding is liable to criminal charges for failure to do so.

 

 

Given the current global focus on tax haven countries and the U.S. government’s need for additional revenue, on March 26, 2009 the Treasury Department announced a renewed focus on offshore noncompliance. Bermuda based employers should examine their compliance with United States tax law before such information is requested by the United States Treasury under the Bermuda/United States Information Sharing Agreement.

 

 

The Bermuda employee’s requirement to file U.S. tax returns and the Bermuda employer’s requirement to withhold U.S. income taxes are mutually exclusive. If the Bermuda employer fails to withhold U.S. income taxes the Bermuda employee has a separate obligation to file the required U.S. tax returns and pay the tax due.