U.S. Citizens and Green Card holders employed by Foreign Governments or International Organizations (IMF or others) within the United States are exposed to unique tax issues. Foreign governmental and international organization employers are exempt from withholding taxes on its employees. As an employee, this means that no federal and state (depending on where you work/reside) income taxes, as well as social security and medicare taxes, are being withheld from your paycheck. This sounds great, but in reality, come tax time, this can become a tax nightmare.
As a general rule for U.S. Citizens and Green Card holders, the IRS will not lower your tax rate for being employed by a foreign government. If you find yourself in this special predicament, the first thing is to be aware of the law, and budget for your tax bill quarterly by submitting timely federal and state income tax estimates. The law distinguishes between U.S. Citizens, Dual U.S.-Foreign Citizen, Green Card holders, and Nonresident Aliens.
U.S. Citizen Employed by Foreign Government Within the United States
If you’re a U.S. citizen, in addition to the income tax, you will be required to pay self-employment tax on your gross earnings. From the IRS’s perspective, you’re not self-employed therefore will not be allowed to file as self-employed, and under the new tax rules effective 1/1/2018, unreimbursed employee expenses are being disallowed. When your quarterly tax estimates are being prepared, these amounts should account for the income and self-employment tax that will be assessed come year-end time. An exemption applies to self-employment tax if you have dual U.S.-Foreign citizenship for the foreign governmental agency you’re employed by, and there is a social security agreement in place between the U.S. and the Foreign Country.
U.S. Green Card Holder Employed by Foreign Government Within the United States
If you are a Green Card holder employed by a foreign government or international organization, you are generally subject to the same rules that apply to U.S. citizens, however, not subject to self-employment taxes and may not voluntarily participate in the U.S. social security system. Your overall tax bill will be lower as a Green Card holder, but you won’t be receiving social security credits for these specific wages.
Nonresident Aliens Employed by Foreign Government Within the United States
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. Special tax treaties, consular agreements, or international agreements may exempt your income from taxation.
If you are a foreign citizen receiving U.S. source income such as interest, dividends, rents, royalties, or other types you are generally subject to U.S. income tax. Tax treaty exemptions may apply to this income.
Special Rules For Employees of Foreign Governments Within the United States Per the IRS
If you are from a country that has a tax treaty with the United States, you should first look at the treaty to see if there is a provision that exempts your income. The income of U.S. citizens and resident aliens working for foreign governments usually is not exempt. However, in a few instances, the income of a U.S. citizen with dual citizenship may qualify. Often the exemption is limited to the income of persons who also are nationals of the foreign country involved.
If you are a U.S. resident receiving wages and pensions for governmental services performed for the government of France, you are allowed a credit for taxes paid to France on this income
If you are not a U.S. citizen, or if you are a U.S. citizen but also a citizen of the Philippines, and you work for a foreign government in the United States, your foreign government salary is exempt from U.S. tax if you perform services similar to those performed by U.S. government employees in that foreign country and that foreign government grants an equivalent exemption to U.S. government employees.
If you file a waiver (USCIS Form I-508) to keep your immigrant status (green card), you no longer qualify for the exemption from U.S. tax under U.S. tax law from the date of filing the waiver with the Attorney General.