What are the rules for taxing employees who work abroad?
Taxes on wages earned by employees who work abroad vary from state to state and may be subject to different rules. In California, employees who are working abroad are subject to federal income taxes, but may be exempt from state income tax. When calculating federal income taxes on wages earned abroad, the Foreign Earned Income Exclusion (FEIE) may be available to reduce the amount subject to taxation. This exclusion allows individuals to exclude up to $105,900 in 2020 of foreign earned income from their taxable income. To qualify for this exclusion, the taxpayer must have a foreign tax home and either reside in a foreign country for an entire tax calendar year or qualify for the physical presence test. If an employee is a resident of a foreign country, there may also be foreign taxes that must be considered. To ensure that the employee does not pay taxes twice on the same income, the United States has many foreign tax credit agreements with foreign countries. This allows taxpayers to offset the foreign taxes they are subject to with a credit that they can use to reduce their U.S. taxes. In addition, California taxes nonresidents on their income earned in the state, regardless of where they live. However, this income is only subject to state taxes if it is taxable under federal law. It is important for employees who are working abroad to understand the tax laws of their home state and the country of employment. This will help them ensure they are paying all of the proper taxes and claiming the proper deductions or credits.
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