FUTA Tax Responsibility of Foreign Employers

Involuntary unemployment can happen at any time, and the United States government has programs in place to lighten the load for Americans who are affected. Established in the 1930s, the Federal Unemployment Tax Act (FUTA) requires employers to pay taxes to the federal government based on their number of employees. These taxes are not withheld from employee paychecks but paid directly by the business.

FUTA and Foreign Employers

When calculating FUTA taxes, an employer must usually pay a percentage of the first $7,000 of wages paid to each employee. So, are foreign employers in the United States responsible for paying federal unemployment taxes? The government says yes – if they have employees that are U.S. citizens, resident aliens or nonresident aliens receiving wages for services performed within the United States. On the other hand, wages paid to U.S. citizens, resident aliens or nonresident aliens are not subject to FUTA taxes if services are performed outside of the United States for a foreign employer.

FUTA taxes must be filed annually using Form 940 from the Internal Revenue Service. Quarterly payments are required if the employer’s payroll liability exceeds $500 in that quarter. Whether domestic or foreign, employers will need their Employer Identification Number (EIN) and detailed information on employee payments. EINs can be acquired with Form SS-4.

Exemptions apply to certain types of services, so not every foreign employer with employees in the United States is responsible to pay FUTA taxes. These special cases can be found in Publication 15 Circular E, Employer’s Tax Guide and include employers who pay:

  • Compensation to agricultural workers
  • Compensation to household employees (unless the compensation to a resident alien exceeds a certain dollar amount during any calendar quarter of the current year or prior year)
  • Compensation to employees of tax-exempt organizations
  • Compensation to nonresident aliens temporarily present in the U.S. in F-1, J-1, M-1, Q-1 or Q-2 nonimmigrant status

    • According to the IRS, wages paid to aliens in F-1, J-1, M-1, Q-1 or Q-2 nonimmigrant status are subject to standard FUTA taxes if they have become resident aliens for tax purposes. If you’re an employer managing payroll taxes, be sure to contact our professional team to help keep you on friendly terms with the IRS.

    Other FUTA Special Circumstances

  • U.S. Citizens and Resident Aliens Abroad
  • Aliens in the U.S.
  • Persons Employed in U.S. Possession/Territory
  • Persons Employed by a Foreign Government or International Organization

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    This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.