US RSU and bonus taxation for nonresidents [Restricted Stock Units]

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Lazerr
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Joined: Fri Aug 12, 2022 2:41 pm

US RSU and bonus taxation for nonresidents [Restricted Stock Units]

Post by Lazerr »

Do anybody have experience regarding the US federal taxation of RSUs and performance bonuses for US nonresident aliens?
  • The RSUs would be granted while being a US tax resident, then vest after moving away, while a nonresident.
  • The bonus would be paid for work performed for a US employer while living in the US and being a resident, paid out a later date, while a nonresident.
Specifically, I am interested in:
  1. Is the income classified as effectively connected income or FDAP income? ECI taxation seems significantly lower in my specific case.
  2. Is the income subject to medicare and social security taxes?
If anybody has a recommendation for a tax preparer who is good with nonresident taxes (not US citizens living abroad), feel free to PM me.
Last edited by Lazerr on Sat Aug 13, 2022 1:32 pm, edited 1 time in total.
newacct
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Re: US RSU and bonus taxation for nonresidents

Post by newacct »

Bonus is wages. Since it is for work performed while in the US, it is US-sourced income, and taxed as regular income in US federal and state taxes regardless of whether you are a resident or nonresident. It is subject to payroll taxes like Social Security and Medicare tax, like other US-sourced wages.

Vested RSU is also wages. It is stock given to you as compensation for your work. However, I am not really sure whether in this case it would be considered to be for work performed while in the US and/or while a US resident, or for work performed outside the US when nonresident. I am guessing that it vests because you are still working for the company abroad?
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Lazerr
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Re: US RSU and bonus taxation for nonresidents

Post by Lazerr »

Thanks!

The RSUs vest while abroad since I would be working for the same parent company. I was told the sourcing would be split up between the US and the new country on a pro-rated basis. Say there are 330 days between grant and vest date, and my US tax residency ends at day 200. 200/330 of the vested amount would be sourced to the US, 130/330 of the vested amount would be sourced to the new country.

To me that sounds like the US-sourced portion of the income would be limited to the time while I was working in the US. Also ECI then?
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Re: US RSU and bonus taxation for nonresidents [Restricted Stock Units]

Post by LadyGeek »

This thread is now in the Non-US Investing forum (non-US tax question). This forum attracts the attention of members with non-US investing / taxation experience.
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TedSwippet
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Re: US RSU and bonus taxation for nonresidents

Post by TedSwippet »

Lazerr wrote: Sat Aug 13, 2022 3:19 am The RSUs vest while abroad since I would be working for the same parent company. I was told the sourcing would be split up between the US and the new country on a pro-rated basis. Say there are 330 days between grant and vest date, and my US tax residency ends at day 200. 200/330 of the vested amount would be sourced to the US, 130/330 of the vested amount would be sourced to the new country.

To me that sounds like the US-sourced portion of the income would be limited to the time while I was working in the US. Also ECI then?
US nonresident alien, or just US nonresident (US expat)?

Your employer should sort this out for you, since they are responsible for dividing up the RSU income. Mine did as you describe, including W-2. The US sourced portion was ECI, and subject to FICA, Medicare, and CA state taxes, just as if still US resident. Rationalising everything for me required filing an IRS 1040-NR and CA 540-NR at year end (US tax was consistently overwithheld), and then claiming the relevant amounts as UK tax credits.

The FICA part is annoying, since it wasn't locally tax-creditable, but at least it may create a larger US SS payment in retirement. Medicare is effectively just deadweight loss.

Final thought; check out your country's tax treaty, if any, with the US. Most don't cover stock options, but you might get lucky.
Topic Author
Lazerr
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Re: US RSU and bonus taxation for nonresidents

Post by Lazerr »

TedSwippet wrote: Sat Aug 13, 2022 6:47 am US nonresident alien, or just US nonresident (US expat)?

Your employer should sort this out for you, since they are responsible for dividing up the RSU income. Mine did as you describe, including W-2. The US sourced portion was ECI, and subject to FICA, Medicare, and CA state taxes, just as if still US resident. Rationalising everything for me required filing an IRS 1040-NR and CA 540-NR at year end (US tax was consistently overwithheld), and then claiming the relevant amounts as UK tax credits.

The FICA part is annoying, since it wasn't locally tax-creditable, but at least it may create a larger US SS payment in retirement. Medicare is effectively just deadweight loss.

Final thought; check out your country's tax treaty, if any, with the US. Most don't cover stock options, but you might get lucky.
It would be nonresident alien.

What is the impact of tax treaties not covering stock awards, if the sourcing is already prorated? Does that sourcing not solve double taxation, outside excessive withholding? The tax treaty for the destination country (Germany) contains nothing on stock options or deferred compensation, neither does the protocol or technical explanation.
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Re: US RSU and bonus taxation for nonresidents

Post by TedSwippet »

Lazerr wrote: Sat Aug 13, 2022 12:33 pm It would be nonresident alien.
Clear. Thanks.
Lazerr wrote: Sat Aug 13, 2022 12:33 pm What is the impact of tax treaties not covering stock awards, if the sourcing is already prorated? ...
I was thinking more in terms of special rules that might modify, unravel, or otherwise mess with prorated sourcing rules. Either to the benefit of the taxpayer, or (perhaps more likely!) to the benefit of one or more taxing authority.

The US/UK treaty notes have a special section on stock options:
With reference to Article 14 (Income from Employment):

it is understood that any benefits, income or gains enjoyed by employees under share/stock option plans are regarded as “other similar remuneration” for the purposes of Article 14.

It is further understood that where an employee:
a) has been granted a share/stock option in the course of an employment in one of the Contracting States;
b) has exercised that employment in both States during the period between grant and exercise of the option;
c) remains in that employment at the date of the exercise; and
d) under the domestic law of the Contracting States, would be taxable by both Contracting States in respect of the option gain,

then, in order to avoid double taxation, a Contracting State of which, at the time of the exercise of the option, the employee is not a resident will tax only that proportion of the option gain which relates to the period or periods between the grant and the exercise of the option during which the individual has exercised the employment in that Contracting State.
I seem to recall that at the time this treaty was signed, commentators noted that spelling this out for options was "unique". Perhaps these days this is normal. My sense though is that they would have written it into the treaty for a reason, although I can only guess what that might be. Perhaps a way to row back the US's 'saving clause'? Or just clearing up a "similar remuneration" treaty grey area? Who knows.

Anyway, the US/UK treaty is the only one I'm familiar with, and it spelled out a sensible treatment. If your treaty with Germany is silent on options, which it sounds like it is, then you get to run the gauntlet of whatever both countries' tax rules say. It may be that it naturally follows what the US/UK treaty does.

I'm afraid I don't know any more than this. Just confirming that what you suspect (prorated, ECI with all the trimmings; that is, FICA and so on) is anecdotally correct, although for a different non-US country.
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Lazerr
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Re: US RSU and bonus taxation for nonresidents

Post by Lazerr »

TedSwippet wrote: Sat Aug 13, 2022 2:06 pm Anyway, the US/UK treaty is the only one I'm familiar with, and it spelled out a sensible treatment. If your treaty with Germany is silent on options, which it sounds like it is, then you get to run the gauntlet of whatever both countries' tax rules say. It may be that it naturally follows what the US/UK treaty does.
Thanks. For Germany, I have a good tax advisor who will sort this garbage out for me. For the US, if I get a W-2 that shows the prorated amount, can I assume that the prorated amount would be correct? A W-2 that incorrectly displays wages sounds like something the employer would want to avoid.

Edit: I did find this, which confirms the prorated sourcing for the US: https://www.mwe.com/insights/globally-n ... -19-world/

They caveated that the W-2 might be wrong.
TedSwippet
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Re: US RSU and bonus taxation for nonresidents

Post by TedSwippet »

Lazerr wrote: Sat Aug 13, 2022 2:41 pm Thanks. For Germany, I have a good tax advisor who will sort this garbage out for me. For the US, if I get a W-2 that shows the prorated amount, can I assume that the prorated amount would be correct? A W-2 that incorrectly displays wages sounds like something the employer would want to avoid.
It is probably unwise to assume that your employer will get this right, although if you get them to give you the numbers ahead of time it should be easy enough to confirm correctness before stuff gets committed irrevocably to IRS formery.

After a bit of negotiation, my employer's payroll department sent me a (tiny) spreadsheet early, showing the numbers they had used to pro-rate the income, for me to check. These numbers eventually turned up on my US W-2 and UK P60 respectively.
Topic Author
Lazerr
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Re: US RSU and bonus taxation for nonresidents

Post by Lazerr »

TedSwippet wrote: Sat Aug 13, 2022 5:20 pm It is probably unwise to assume that your employer will get this right
Indeed, my 2021 W-2 surely was "interesting", to say the least. I got them to correct it with no issues though. For the RSUs, I can pay closer attention to make sure the numbers are right before they go on the W-2.
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