Taken from article originally published 3 Feb 2024

As a US tax practitioner in New Zealand, and assisting mostly migrants or individuals with international tax considerations, we do frequently get to see trends occurring in the field.

One which has become easy for all to see over the recent years, is the switch to remote working. Whilst this has become common through work-from-home, what is less visible is the amount of workers operating in one country, but being paid in another.

This article contains a contribution from Julia Johnston of Johnston Law Ltd. A Christchurch based NZ Tax Law Practice.

At The US Tax Team, we have seen a considerable increase in clients based in New Zealand, but retaining employment or contracting work in the USA.

However, unfortunately it is also common that tax considerations are not correctly assessed when performing this work.

Here we’ll give a brief overview of possible tax considerations:

Remote work for an employer

This is likely the fastest growing form of overseas income that we’re seeing for New Zealand based workers.

Since the pandemic, many economies have found themselves short on skilled labour. But, the pandemic has also given many businesses the confidence to not only recruit employees remotely, but to begin looking overseas to different labour markets.

As a result, a significant number of our clients are based and living in New Zealand, but working remotely each day as an employee of a US company.

But, where does one pay tax in this instance? A US employee, but resident in NZ?

Fortunately, this is easily resolved with the NZ-US double taxation treaty, which (subject to other conditions), generally means the country where the individual is ordinarily resident has the right to tax this income.

This would mean that an NZ resident employee, working for a US company, pays their tax in NZ just the same as any other salaried employee here. The same rules apply vice versa for an employee of an NZ company who resides in the USA.

This is one perfect example of the double taxation treaty in place between the US and NZ, preventing double taxation. Tax would generally be owed to the country where you are resident, rather than the country where the employer is based.

These rules are in essence, intended to protect a country’s tax base, whereby work physically performed on the ground in any country is treated as local taxable income. This should also be noted for immigration purposes, that work performed in a country, even if it is for a foreign employer, is considered local work by most immigration agencies (be sure to check your visa conditions)

It should be noted that that I have generalised the term “ordinarily resident”, and specific conditions must be met before a foreign salary is recharacterised as NZ wages (in the case of an NZ resident employee).

Social Security

Here’s one catch however…

For US citizens who are working for a US employer, social security tax is imposed and withheld from wages paid. This applies regardless of whether you are physically working in the United States, or as a remote employee from New Zealand.

This is in essence a form of double taxation, however social security is of course a system that does eventually pay out in the form of retirement benefits.

For any US citizen planning on working remotely for a US employer, you will need to factor in both NZ taxation, plus social security tax to the USA.

This does not need to be considered for non-US citizens.

Contracting

Essentially the same rules as above govern the tax rules for contracting work (ie sole trader). For an NZ based employee who contracts work to a US company, generally speaking the tax would be owed in NZ as the work was performed here and the individual is resident here.

Whilst this is governed by a different section of the NZ-US double taxation treaty, the outcome is essentially the same.

A US worker who contracts work from an NZ company, would pay their tax in the USA, and vice versa for an NZ worker contracting to the USA.

Again, a US citizen contracting from NZ would need to consider social security tax, which would still apply in the US (citizens only).

Considerations must be made for GST on the New Zealand tax side, and advice should be sought.

Tax Process

The actual method of how tax is paid in NZ (or vice versa) on income from the US is usually handled through the NZ and US tax returns.

In most cases (especially when employed), tax will be withheld by the US payor of income on payments made to the employee.

However, there are special tax procedures that must be followed by an NZ resident working for a US employer, as they are required to advise Inland Revenue and then effectively step in to the employer’s shoes which can lead to cash flow issues.

The employee then reports this income on their NZ tax return, and pays tax on the income in NZ.

This tax is then applied as a credit in the US tax return, to offset the US tax bill, resulting in a refund from the IRS.

This process can be different in the case of a non-US citizen working in NZ for a US based payor.

Forms to file with US Employer/Payor:

• US Person (citizen/green card holder) – Form W-9

• Non-US Person – Form W-8-BEN

• Non-US Company/trust – Form W-8-BEN-E

It should be noted that these forms are provided to the employer/payor of income, for their own tax purposes. The individual will still have their own filing obligations.

LLCs

LLC’s…Limited Liability Companies, this is where things can get complicated. This section is relevant to both US citizens and non-US citizens.

We frequently see US citizens who reside in New Zealand, who contract to US based companies through an LLC. This can be either for simplified tax compliance obligations (discussed below), or in some cases we see that US business prefer to engage a US LLC rather than just a sole trader who lives overseas.

As a result, we do see individuals from NZ set up US LLCs, to give themselves a US legal entity to operate from.

An LLC offers the benefit of having limited liability when conducting business, but (for a single member LLC) the tax advantage of being considered a disregarded entity (commonly termed look-thru in New Zealand).

In basic terms, this means that an individual can operate as a business, but on their annual US tax return, the business income is treated as sole-trader income. No complex corporate filings, but rather that the company is disregarded for tax purposes, as if it didn’t exist and the individual was acting as a sole trader.

But, here’s the catch, whilst the company is treated as disregarded for tax purposes in the US, this is not always the case in NZ.

Here’s comment from Julia Johnston of Johnston Law on the issue:

“An LLC is treated as a company for New Zealand tax purposes. If the company is controlled in New Zealand, then the company may be subject to tax in New Zealand. It is also possible that the LLC could be treated as a controlled foreign company (CFC) for New Zealand tax purposes. The CFC tax regime is part of the international tax avoidance rules, and can deem income in cases where there may not be income. It is important to consider the proposed structure from all jurisdictions when working internationally.”

So, now lets go back to the basic principles we discussed earlier…

We know that an NZ resident worker/contractor is generally taxed in NZ on work they physically perform here. So, all of the income earned through the LLC is taxable in NZ.

But, if NZ is treated the LLC as a company (ie not disregarded), then this means that the company is paying taxes here, not the individual.

This can cause complications in the US tax return, and even double taxation.

Looking back at the tax process paragraph, we see that to prevent double taxation, NZ tax is used as a credit on a US tax return to get a refund of withholding taxes in the USA.

But, you can only claim a credit for taxes which you have personally paid.

So, in the case of an LLC being taxed as a company in NZ, and thus the company has paid the tax bill, then you have no credit to use yourself.

To clarify:

• USA – LLC – Taxes the income in your personal name

• NZ – US LLC – Can tax the income in the company name

This can result in tax bills to both NZ and the US.

This however can be prevented, and advice should be sought when setting up an LLC, to ensure it exists in such a way that foreign tax credits between NZ and the USA can be used to offset each other.

At The US Tax Team, we work with NZ based US lawyers whom are able to set up a US LLC with NZ tax considerations taken into account.

Other considerations to also need to be taken into account, such as permanent establishment (which we’ll cover in an article later this year).

Again, it must be noted that the above is generalised, and NZ company treatment is not the same in all cases.

Summary

Working remotely for a foreign employer or as a contractor should absolutely not be turned down on the basis of tax.

Whilst the above might seem complicated, it can be handled fairly simply by professionals such as The US Tax Team and NZ tax professionals who assist clients with this frequently.

Overall, double taxation is preventable, but it does require careful planning first.

The US Tax Team offer tax consulting to help prevent tax issues before they arise. If you’re offered employment or contracting work from overseas, reach out for advice before beginning work, and we’ll be happy to help.