Category: Compensation & Employee Benefits; International Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background A nonresident alien Mexican national is President of a U.S. corporation. His wages attributable to services performed within the U.S. are subject to U.S. income tax under IRC Sections 862(a)(3) and 872(a)(2). Because the wages are paid from and deducted by a permanent establishment in the U.S., the wages are not exempt from U.S. income taxation under any provision of the U.S./Mexico Tax Treaty. Issue Are the wages attributable to services performed in the U.S. subject to FICA tax? Answer It seems clear that the wages attributable to services performed in the U.S. are subject to FICA tax, both the employer as well as the employee portions. Discussion In general, there are four ways to avoid imposition on FICA tax on a nonresident alien: 1) specific exemption under the IRC; 2) the income tax treaty between the U.S. and the nonresident alien's country of residence; 3) a social security totalization agreement between the U.S. and the nonresident alien's country of residence; and 4) the Multilateral Vienna Convention on Diplomatic Relations (aka, the Vienna Convention). Note that any treaty exemption for FICA taxes generally covers only the employee portion of FICA. The employer is generally liable for his portion of the FICA tax notwithstanding the treaty status of the employee. · There is no specific IRC exemption for this situation. · As we have previously discussed, the U.S./Mexico treaty does not shield the taxpayer from U.S. income taxation. Even if it did, it is not entirely clear that the treaty even applies to social security taxes. · There was no social security totalization agreement in effect with Mexico as of yesterday. ·Apparently, the Vienna Convention only deals with foreign diplomats and their employees. I conclude from all this that both the taxpayer and the employer are fully subject to FICA tax on the portion of the taxpayer's wages attributable to services performed within the U.S. I believe it is a fair assumption that the employer's FUTA liability follows suit. I do not have the resources to pursue any SUTA issues with respect to the State of Texas. I suggest calling the Texas unemployment tax authorities for that. Note that it may be possible for the taxpayer to take a foreign tax credit against his Mexican taxes for the FICA tax paid here. I am not qualified to pursue this issue. I suggest making the taxpayer aware of this issue so he can pursue it with his Mexican tax advisors. |
