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IRS Issues Guidance on Taxation of Restricted Stock Units to Employees Working in United States and Abroad

by | Aug 18, 2023 |

By Barry Salkin

In a global economy, it will frequently be the case that employees of multinational organizations will be employed in both the United States and abroad. In Chief Counsel Advice Memorandum 202327014 (CCA), a non-precedential document, IRS addressed the income and Social Security (FICA) tax implications of restricted stock units (“RSUs”) issued to an individual who was a common law employee of both a United States corporation and a controlled foreign corporation. There are a number of factors that could affect this recent guidance that were not addressed in the CCA – no tax treaty was applicable; RSUs were paid upon vesting, so the nonqualified deferred compensation rules of Section 409A of the Internal Revenue Code (Code) did not apply; the recipients of the RSUs received stock, not cash; and the country in which the controlled foreign corporation was located did not impose social security taxes on the distribution, so the effects of a totalization agreement were not taken into account. In addition, the CCA presumes that the U.S. residents remain U.S. residents through the time when the RSUs vest, thereby defusing complex issues that arise when RSUs are earned in different countries. The CCA nonetheless provides useful tax information.

With respect to federal income tax withholding, the term “wages” means all remuneration for services performed by an employee for his employer, including remuneration for personal services performed by a citizen or resident of the United States as an employee of a foreign corporation. Therefore, the full amount of income received by the employee, both with respect to services performed as a common law employee in the United States and services performed as a common law employee for the controlled foreign corporation, are wages for federal income tax purposes. For income tax withholding and reporting purposes, the CCA concludes that the U.S. entity would report the wages attributable to the foreign corporation, and there would be no need to source income between the United States and the jurisdiction in which the controlled foreign corporation was located.

However, the rules with respect to FICA wages are different, because employment for FICA purposes does not include services performed outside the United States for a non-U.S. employer. Therefore, any remuneration for services performed that is paid by the controlled foreign corporation is not wages for FICA purposes.

To determine the portion of the RSU income that is wages for FICA purposes, an employer must use a reasonable method of allocation of the employee’s RSU income between the United States company and the controlled foreign corporation. Although the Code only provides sourcing rules for income tax purposes, not FICA purposes, the IRS concluded that the sourcing rules under Code Sections 861 and 862 would provide an appropriate analogy. Since the RSUs are treated as deferred compensation for FICA purposes (but not Code Section 409A purposes), they are includible in income when they vest. Although it is possible that an alternative method of allocation would more accurately reflect the allocation of income between the United States entity and the controlled foreign company, Code Section 861 generally requires allocation to the United States entity on a time-worked basis. Under this approach, the applicable allocation period would be the period from the date when the RSUs were granted to their vesting date. The portion of the RSUs that would be U.S.-source income for FICA purposes would be the amount of RSU income that bears the same relationship to the employee’s total RSU income as the number of days of performance of labor or personal services performed within the United States bears to the total number of days of performance of labor or personal services. If the employee spent 70 percent of his or her time in the United States, then 70 percent of the RSU income would be subject to FICA.