The most common immigration status for entry into the United States for business is the B-1, Visitor for Business, which includes the visa waiver for business status. A foreign national who enters the United States in B-1 visitor status can work temporarily in the United States in connection with a foreign employer’s international transactions. Such a visitor may not perform employment services in the United States for a U.S. employer. Except for very limited exceptions for payments such as directors’ fees, a B-1 visitor may not be paid for U.S. services from U.S. sources. The majority of B-1 visitors entering the United States are generally unaware of the U.S. tax implications of their mere physical presence in the United States.
U.S. Source Services Income
Economic activity is generally taxed where the activity occurs. The United States follows this general rule and designates the source of income for services to be where the services are performed. Even if payment is made on a foreign payroll in a foreign currency, the pro rata portion of a B-1 visitor’s compensation for U.S. workdays is U.S. source income unless an exception applies. One such exception is the “commercial traveler rule” that treats compensation as foreign source if 1) the individual is temporarily in the U.S. for 90 days or less during the calendar year, 2) the compensation for the U.S. services does not exceed $3,000 in the aggregate and 3) the services are performed as an employee of a foreign corporation. As a practical matter, few individuals will be able to meet these conditions.
Income Tax Treaty Exemptions
If the visitor is tax resident in a country with which the United States has an income tax treaty, the compensation for the U.S. workdays may be exempt from tax under the treaty. All treaties include articles exempting employment compensation from U.S. tax if the individual meets the treaty conditions. Although the conditions vary by treaty, Article 15 of the treaty with France is typical. To be exempt from U.S. tax, 1) a resident of France must be present in the U.S. less than 183 days in a 12-month period, 2) the compensation must be paid by an employer that is not tax resident in the U.S., and 3) the compensation cannot be taken as a tax deduction by a U.S. entity. An employee who exceeds the commercial traveler limits, and who is not from a treaty country, is subject to U.S. income taxes on his or her compensation for U.S. services.
183-Day Tax Residency Rule
Under the U.S. tax rules, a visitor who spends 183 days or more in the United States in the calendar year or 183 days based on a formula is a resident for U.S. tax purposes. The formula adds all of the current year’s U.S. days, 1/3 of the prior year’s U.S. days, and 1/6 of the U.S. days in the second preceding year.
Vacation days count as well as business days. Partial days, such as the arrival day and departure day, count as a full day in the formula.
If the visitor’s U.S. days exceed 30 days in the current year, and the result of the formula is 183 days or more, the visitor is a resident for U.S. tax purposes. For example, a visitor who spends on average 5 months a year in the United States becomes a resident under the formula as follows: 150 + 150/3+ 150/6= 225. A resident is subject to U.S. income taxes on worldwide income. In order to avoid this result, a business visitor must average less than 122 U.S. days per calendar year unless an exception applies.
One exception allows a visitor who is present less than 183 days in the calendar year but whose presence over the current year and two prior years equals or exceeds 183 days to avoid U.S. tax resident status if the visitor has a tax home in a foreign country for the full calendar year, and the visitor can prove a closer connection to a foreign country for the calendar year. An individual who is in the United States for a period expected to last more than a year cannot meet this exception because the visitor’s tax home has shifted to the United States. Also, to meet this exception, the visitor must submit a completed Form 8840 to the IRS Center in Philadelphia, PA by June 15th of the following year.
An individual who is tax resident in a treaty country may be able to claim nonresident status under a residency tie-breaker rule of the treaty even if his U.S. presence exceeds the 183-day residency test. To claim an exception under a treaty, the individual must submit a statement or Form 8833 to the IRS stating the facts supporting a claim for nonresident status under a treaty. A visitor who can typically meet the typical residency tie-breaker conditions maintains all substantial social and economic contacts with the treaty country, and is unaccompanied to the United States by a spouse or children.
Conclusion
B-1 visitors who wish to avoid exposure to U.S. income taxes must plan their U.S. presence carefully to maintain nonresident status. Foreign employers from treaty countries need to avoid the transfer of costs to a U.S. entity to preserve available treaty benefits. Visitors planning an eventual transfer to the United States need to be aware of these tax rules when they and their employers plan such a transfer.
