Executive options under Clinton.

The Internal Revenue Service recently issued a revenue ruling outlining the obligations of U.S. and foreign employers to U.S. citizens or residents working in a foreign country and to nonresident aliens employed in the United States.

Revenue ruling 92-106 discusses employers' obligations under the Federal Insurance Contribution Act (FICA) and the Federal Unemployment Tax Act (FUTA), as well as under the income tax withholding provisions. It applies to situations in which there is no applicable international treaty.

The ruling summarizes the relevant requirements by referring to four situations. The first two involve the performance of services by a U.S. citizen or resident outside the United States and its possessions. The first involves a U.S. employer and the second involves a foreign employer.

In either case, remuneration for services performed by a U.S. citizen is considered wages for income tax purposes to the extent it exceeds the amount of the section 911 exclusion and the amount subject to withholding under foreign laws. Section 911 generally allows certain U.S. individuals who establish a tax home in a foreign country to exclude from gross income up to $70,000 of foreign earned income, as well as certain housing costs. The exception from withholding for the section 911 exclusion is not available to U.S. residents.

With respect to FICA and FUTA, withholding and employer-level taxes are required in the case of a U.S. employer. No withholding or tax is required when individuals perform services outside the United States and the employer is a foreign entity.

Situations three and four both involve services performed in the United States by a nonresident alien; the third situation involves a U.S. employer while the fourth concerns a foreign employer.

In both cases, income withholding, FICA and FUTA withholding and employer-level taxes are required. The amount of income tax withholding in situation four depends on whether the employee is considered engaged in a trade or business in the United States. If so, withholding is required at the graduated rates. If not, withholding generally is at a flat 30% rate.

In most cases, the performance of services in the United States constitutes a U.S. trade or business. However, there is an exception when the nonresident alien is an employee during the taxable year and compensation for services performed in the United States is $3,000 or less.

Observation: The ruling does not change or reinterpret existing laws or regulations. Rather, it gives an orderly summary of the relevant provisions. Nevertheless, it points out the existence of certain exceptions to income tax withholding that some employers may overlook, such as the section 911 exclusion.

Edited by Robert Willens, CPA, senior vice-president at Lehman Brothers, New York City (corporate); Marianne Burge, CPA, director of international tax services, Kenneth Kral, CPA, international tax partner, and Jack Serota, Esq., international tax consultant, at Price Waterhouse, New York City