Employees working for a foreign government or an international organization in the U.S. are subject to some special tax rules. The tax treatment of their compensation can vary according to whether the employee is a U.S. citizen, a dual citizen, a green cardholder (lawful permanent resident), or a foreign citizen without a green card.
If you are a U.S. citizen working in the U.S., you must report self-employment income under the Self-Employment Contributions Act (SECA). Self-employment tax is computed on Schedule SE, Self-Employment Tax, and reported on page 2 of the Form 1040.
However, if you are a U.S. citizen working for foreign governments and organizations outside of the U.S., you are not subject to self-employment tax.
U.S. citizens working in the U.S. must pay self-employment tax because the foreign government or organization is not liable for the employer’s portion of the contribution to the U.S. system. However, you are not “self-employed” for any other federal tax purposes. You may not claim deductions for expenses on Schedule C and are not qualified to establish a Simplified Employee Pension (SEP) Plan and there is no allowable deduction on line 28 of Form 1040 for contributions to any such plan. Rules of contributing to SEP/IRA plans are explained in IRS Publication 560, Retirement Plans for Small Business, and Revenue Ruling 73-384 for additional information.
You may also claim deductions for unreimbursed employee business expenses arising from your employment on Form 2106, Employee Business Expenses. The deduction is claimed on line 21 of Schedule A, Itemized Deductions, on the Form 1040. These expenses are miscellaneous itemized deductions subject to the 2 percent of adjusted gross income limitation.
If you expect to have tax due at the end of the year you must file estimated tax payments because your compensation is not subject to withholding. The estimated payments ensure that you have paid your proper amount of tax throughout the year. Estimated payments are made using Form 1040ES, Estimated Tax for Individuals. Forms are filed quarterly: April 15th, June 15th, September 15th, and January 15th. There is a penalty for failure to make estimated tax payments.
Same rules applied as U.S. Citizens for the period residing in the United States.
Green Card Holders (Lawful Permanent Resident) Working in the United States
If you are a green card holder employed by a foreign government or international organization, you are not subject to self-employment taxes and may not voluntarily participate in the U.S. social security system.
If you expect to have tax due at the end of the year, you must file estimated tax payments because your compensation is not subject to withholding. The estimated payments ensure that you have paid your proper amount of tax throughout the year. Estimated payments are made using Form 1040ES, Estimated Tax for Individuals. Forms are filed quarterly: April 15th, June 15th, September 15th, and January 15th. There is a penalty for failure to make estimated tax payments.
Foreign Citizens without Green Cards
If you are a foreign citizen working in the U.S. for foreign governments and international organizations, you are generally exempt from U.S. income tax and self-employment tax on compensation. Exemptions can be found in section 893 of the Internal Revenue Code, tax treaties, consular agreements, or international agreements. You should check with your embassies and/or your tax preparers to find out if any exemptions apply.
If you are a foreign citizen receiving U.S. source income other than compensation (such as interest, dividends, rents, royalties, etc.), you are generally subject to U.S. income tax. Tax treaty exemptions may apply to this income. This income is reported on Form 1040-NR, U.S. Individual Income Tax Return Non-resident. Estimated payments may be required depending upon the amount received.
Note: The term “international organization” means a public international organization entitled to enjoy privileges, exemptions, and immunities as an international organization under the International Organizations Immunities Act (22 U.S.C. 288-288f).