How To File Taxes for Work done for an International Company?
By Jaden Miller , April 2 2021
The question of the season is on everyone's mind. How do I file taxes for work done internationally. Do you earn money from a company outside the US? Maybe you teach English for a Chinese company or are working as a tour guide in Europe. Or, perhaps you work for a US company but transferred to a branch in a foreign country?
If any of these scenarios apply to you, then you might be asking yourself, “how do I file taxes for work done for an international company?” No one likes to do taxes. The rules are confusing, especially when it comes to international taxes. But it’s important to get things right when you’re filing taxes. You don’t want to incur any penalties or pay the same taxes to two different countries.
Keep reading to learn more about what you are responsible for taxes in the US and taxes overseas, how to file internationally, and how to make sure you’re not paying more than you should.
What Income Does The United States Tax?
As a US citizen, resident alien, or nonresident alien, all your income is subject to US income tax. It doesn’t matter where you are living at the time you earned it. You must report all your worldwide income to the US Internal Revenue Service (IRS). Even if the company you work for doesn’t issue you a W2 or 1099, you must still report it.
There are two types of income – gross income and foreign earned income. If you work abroad, both of these incomes figure into your taxes. Be sure to include both types of income when you're answering the question of how do I file taxes for work done for an international company. Gross Income includes all income you receive, whether it is money (such as wages) or goods (such as housing).
It includes income from services performed, self-employment, and rental property. If you work in a foreign country and meet the residency requirements, either through a bona fide residence test or physical presence test, any work performed there is foreign earned income. It doesn’t matter where your permanent address is or your bank account. What matters is where you are when you’re doing the work.
How Do I File Taxes For Work Done For An International Company?
In general, the US tax filing deadline is the same for everyone, April 15th. However, if you live and work abroad, you received an automatic two-month extension to June 15th. If you need more time, you can apply for another extension to October 15th. Regardless of which deadline you choose, however, your taxes are still due on April 15th.
If you don’t pay your taxes on April 15th, you may need to pay late fees and interest. Report any income you earn in another country, in another currency, to the IRS as US dollars. You can do this by taking the yearly average exchange rate or translating each payment with the exchange rate on the day you received it.
Using Estimated Taxes
If you work in the US for a US employer, they will withhold taxes on your behalf from each paycheck. If you are an independent contractor or are working for a foreign company, they do not withhold US taxes, and you need to pay estimated taxes. Estimated taxes are exactly that – an estimate of the income and self-employment tax you will owe for the year.
Divide the total estimated tax quarterly payments throughout the year. If you do not file taxes to IRS on time or estimate them incorrectly, you may need to pay a penalty.
Avoid Double Taxation
When working abroad, you are likely paying taxes to the country where you’re living and earning money. However, you’re also required to report this income in the US and pay your taxes there. So, are you paying taxes twice? Not exactly. The US offers two options to avoid double taxation – the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE).
The Foreign Tax Credit
The Foreign Tax Credit reduces your US income tax liability for each dollar you paid in foreign income taxes. This is only for tax paid on income or profit. Any taxes you paid for foreign real estate, social security, or property taxes are not included. The IRS has instituted four criteria to judge if a tax qualifies for this credit:
- The tax is imposed on you.
- You must have paid or accrued the tax.
- The tax must be the legal and actual foreign tax liability.
- The tax must be an income tax (or a tax in lieu of an income tax).
With the FTC, you prepare your tax return as usual and include all of your income regardless of where it was earned. Then at the end, after you calculate your income tax, you apply any taxes you already paid to a foreign government. This credit of taxes already paid then reduces what you currently owe to the US government.
This is most beneficial if you are earning income in a high tax rate country. If the country where you are residing and paying taxes has a higher rate than in the US, this works to your advantage as a credit against what you owe in the US.
Foreign Earned Income Exclusion
With the Foreign Earned Income Exclusion, you can exclude up to $107,600 (2020 figure) of your foreign earned income from your US taxes. You can qualify for this exclusion either through the bona fide residence test or physical presence test. Unlike the Foreign Tax Credit, which is a credit applied at the end of your income tax return.
The FEIE lets you subtract a portion of your foreign earned income (up to $107,600 in 2020) from your total income. This reduces the income shown on your US tax return and then reduces the taxes you may owe. This is usually best if you earned your income in a low or no-income-tax country. It allows you to pay a lower income tax in your country of residence and shield that portion of your income from US taxes.
Protect Yourself by Paying All of Your Taxes Correctly
Taxes can be confusing, but all of the answers are available with a little research. Whether you’re asking yourself how do I file taxes for work done for an international company or how do I protect myself from double taxation, you can find out everything you need to know to pay your taxes correctly. Visit our site to create all of the paystub templates you need and learn more about international taxes and other useful information on our blog section.