Helping Employee’s Relocation Go Smoother Tax-Wise
The following article was kindly provided to BAB by Nathalie Goldstein, Enrolled Agent and CEO of MyExpatTaxes – an award-winning tax software for US Expats.
The UK has always been an attractive spot for American companies to base their European Headquarters. So, it’s no wonder that there is such a large population of Americans living and working in the UK.
Despite the upcoming political changes, the need to source and hire great talent for business will not stop. As companies are ramping up hiring for the new year, here are some tips to make sure your US employees’ relocation to the UK goes smoothly tax-wise.
1) US Citizens and Long-term Residents Have to File US Taxes from Abroad
The US is one of two countries that imposes citizen-based taxation along with strict foreign account monitoring regulations (FATCA). This makes the US possibly the strictest country, tax-wise (oh, the irony).
When preparing your new employee’s relocation package, make sure you are aware of their double tax filing obligations.
US Citizens and Long-term Residents (LTR) normally need to annually file:
- US Federal Tax Return
- Sometimes a State Tax Return
- FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR)
The US Tax Returns are normally due April 15th of the following year; however, US expats can extend their filing deadline up to October 15th.
US expat tax filing services start at about 1,000 GBP per individual and can significantly increase if they have a complicated tax profile. Outside of traditional tax firms, expat tax software can help corporates save big when it comes to relocation packages for US talent. If your company is not covering the US tax filing side, make sure you have some affordable recommendations ready for your new employee to save them the additional stress.
2) Employer-Paid Relocation Expenses are Taxable to the Employee
Recently, the Tax Cuts and Jobs Act law created the largest US tax reform in thirty years. Particularly concerning the deductions for moving expenses for non-military employees that were went into effect for the 2018-2025 tax years.
This means that any relocation costs paid to move your new US Employee overseas is fully taxable to them. Even if your company allows employees to track payments and give back any excess amounts, the payments are still taxable to the employee.
This is different from the UK tax rules, where up to 8,000 GBP of qualifying costs can be tax-exempt from UK taxation.
During tax season 2018, this new change caused chaos for Global Mobility teams, as US employees questioned why they incurred higher US income tax than originally planned. Almost all relocation packages include moving expenses, which US employees are not traditionally used to paying income taxes on.
So, what is the best way to optimize moving expenses without having to pay more from the company’s side? Read on.
3) Time the Relocation to Optimize US Expat Tax Benefits
Moving mid calendar year (June-December) can cause issues for US employees with large relocation packages, as they will most likely end up paying more US income tax than necessary.
For every day later in the calendar year that an employee relocates abroad, their Foreign Earned Income Exclusion (also known as FEIE) from the US will be lower. This is because their FEIE maximum amount is prorated by the number of qualifying days in the US tax year (January 1st to December 31st).
The Foreign Earned Income Exclusion is the most common expat tax benefit that allows qualifying US expats to exclude up to approximately $100,000 USD (adjusted for inflation per year) of foreign earned income from US taxation.
As an example: If John, a US citizen, were to move to London on October 31, 2019, this would only allow for him to exclude a maximum of $17,992 of foreign earned income from US taxation in the tax year.
Qualifying Days = 62 days out of 365 days = 0.1699
2019 FEIE Maximum Allowed = $105,900 * 0.1699 = $17,992
Anything over that amount (UK salary and relocation benefits) would be taxed at ordinary US income tax rates.
It is possible to use UK income taxes paid to offset any US income tax owed on their foreign income, however with the more favorable taxation of relocation benefits in the UK this might not be enough.
Therefore, when possible, it would be advantageous for US employees to relocate towards the beginning of the calendar year to increase their allowed amount of the US foreign earned income exclusion.
4) US Employees require Calendar Year-End Statements
As we alluded to in the previous point, the tax period in the UK is a different than the traditional US tax period.
In the UK, the tax period ends in April, while the US standardizes a calendar year-based tax period.
Therefore, in order for US employees to properly declare their annual worldwide income to the IRS, your company should either provide them with an adjusted January to December year-end statement or monthly pay slips. These statements should include total wages earned and income tax paid.
5) US Employees may be Double Taxed during Business Trips to the US
When sending US employees back stateside for business, you should be aware of the additional US income tax they might be incurring. Income is sourced based on where the employee performs their work and the US states take this very seriously.
Therefore, if your US employee (employed by your UK company) is working out of California for a few weeks, expect that they may need to file a California Non-Resident Tax Return in addition to their Federal Tax Return to report CA sourced income.
States like California and New York do not allow US expats to use the Foreign Earned Income Exclusion or Foreign Tax Credit tax benefits, therefore they will most likely owe US state income tax on their UK income.
This additional state income tax should be calculated and hopefully deductible on the UK side.
6) Added Compliance when US Employees have Signature Authority on Company Accounts
If a US Employee has signature authority on a UK company bank account, they will most likely need to report this account along with their personal ones to the US government on the FBAR and FATCA forms.
The information required to be reported includes, but is not limited to:
- Financial institution name and address
- Account number
- Maximum account balance during the calendar year
What is the FBAR
The FBAR (or Foreign Bank Account Report) is an annual form that Americans abroad are required to fill out if they have a bank (or any other financial) account established overseas. US expats won’t be taxed on their foreign bank account because of this specific form. It is informational only and not used for tax calculation purposes.
The reporting threshold for an FBAR is if they have over $10,000 combined from all their non-US financial accounts at any one time throughout the year. Non-US financial accounts include their UK bank accounts, UK pension accounts and your UK company financial accounts if they have signature authority on it.
What is FATCA
FATCA is the Foreign Account Tax Compliance Act, which requires foreign financial institutions to report the data of their US account holders. US citizens also have to disclose this information themselves as well.
Form 8938 is required to report the US employee’s foreign financial assets if the total value of all the specified foreign financial assets in which they have an interest is more than their reporting threshold (starting at $200,000 for US expats).
The US is a great place to source talent from, however UK based companies should be aware of the additional compliance requirements that come with hiring US citizens and LTRs.
When negotiating their relocation package, make sure that both sides are aware of any US tax implications on top of the UK ones. US Expat tax filing can be extremely expensive and time-consuming for both your company and US employees.
However, it does not have to be with US expat tax software such as MyExpatTaxes, which automates US expat tax filings in an innovative, efficient and affordable way.
For US Expat Employee Packages please reach out to email@example.com directly for a personalized plan.