U.S. Tax Implications and Compliance for Business Travelers

Business travelers are employees who travel for a variety of reasons, including project-based travel, visits to suppliers or customers, or to attend training or business meetings.

The destinations for such travel can be as varied as the length of the trip. The duration of a business traveler’s trip may be a day, several weeks or several months, but due to policy and tax requirements, typically not more than a year.

Business travelers frequently are not on a company’s radar for tracking by human resources or payroll because they are not covered by a different compensation policy and have not been identified as presenting compliance risks to the employer. Operating without a proper tracking mechanism can expose the employee to unexpected tax liabilities in the host location and the company to exposure related to its corporate tax liability as well as payroll and withholding requirements.

Employers who are aware of the tax complexities presented by both domestic and international business travelers often struggle to identify who their business traveler population even is. In most cases more needs to be done to proactively manage these risks if the employer wants to limit corporate tax risks and potential penalties for noncompliance in its payroll withholding processes.

Questions

1. Does the company have employees who travel outside their home state or country as a part of the regular job duties?
2. What is the typical length of the business trips and how are employees compensated for expenses incurred while away from the home location?
3. What is the typical business purpose of the travel?
4. Who bares the salary cost associated with the duties performed by the employees while away from home?
5. Is business travel tracked for purposes of tax compliance associated with deferred or equity compensation?
6. Have all home and host locations been identified to determine if there is treaty protection for both federal income and social security tax and to see if there are state income tax obligations resulting from the U.S. presence?

General Rules

1. Federal Income Taxes – An individual is subject to U.S. tax if they work in the U.S. for more than 90 days during a calendar year or if the wages attributable to such work exceed $3,000. However, under most income tax treaties, national income taxation on employment income will be owed only to the country in which the individuals resides provided the following conditions are met:
   • The individual spends less than 183 days in a rolling 12-month period in the host country.
   • The cost of the remuneration is not borne by an employer resident in the host country.
   • The remuneration is not borne by a permanent establishment (PE) that the employer has in the host country.
2. Social Security Taxes – Wages allocable to services performed in the U.S.
   FICA: Social Security and Medicare Tax – Wages are allocable to services performed in the U.S., unless the employee is covered by a Certificate of Coverage. etc.
   FICA and Medicare Taxes – there is no de minimis threshold for taxable earnings. However the employee is exempt if a certificate of coverage under a social security treaty (i.e. Totalization Agreement) from the home country is in place.
3. State Taxes – Whether a business traveler is subject to state income tax is dependent upon whether a tax treaty is available to provide relief from federal income tax and whether the destination state recognizes the treaty relief. Some states honor the provisions of tax treaties and others do not. Although states are not permitted to enter into agreements with nations, many states use federal taxable income as the starting point for determining state income tax liability.

Are a Business Traveler’s Travel Expense Reimbursements Taxable?

In general, expenses incurred by business travelers (e.g. airfare, hotels, meals, and local transportation) are considered to be deductible business expenses and thus are not considered taxable income to the employee when the employee is working “away from home”. However, the determination of whether an employee is “away from home” is dependent upon whether the work location is considered temporary. If the destination is considered a non-temporary work location, expenses incurred in traveling there would be considered nondeductible commuting expenses and all local travel, housing and meals would be considered taxable benefits in kind.

What is Required to File a U.S. Tax Return?

All individuals filing a U.S. tax return must have obtained a U.S. tax identification number (TIN). Most U.S. citizens and residents use their social security number as their TIN. However, business travelers to the U.S. are not always eligible to obtain a social security number, depending on the type of visa used to enter the U.S. and conduct business. If they do not have a social security number, they must request an individual taxpayer identification number (ITIN) from the IRS.

Why Should Employers Take Action Now?

Tax authorities both at the federal and state levels are targeting business travelers and their employers due both to the high level of noncompliance and to raise additional revenue. By leveraging corporate data available during routine audits, such as travel records and expense reports, the tax agents are identifying nonresident business travelers within their borders. Of particular interest to companies with business travelers inbound to the US, the IRS Foreign Payments Practice group is focused on enforcing the withholding and information reporting rules and regulations pertaining to nonresident aliens and foreign entities. With increased communication and coordination between immigration and tax authorities, individual business travelers are also facing increased enforcement activity.