U.S. Tax Obligations When Your European Company Sends Workers to America

Last month, a UK fintech's CFO called us in a panic. Their lead developer had been working from their New York office for four months, and suddenly their payroll provider was asking about U.S. tax withholding. Nobody had tracked the days. Nobody knew who owned what. The scramble to fix it cost them weeks and thousands in penalties.

The answer depends almost entirely on one thing most HR leaders don't fully understand until it's too late: U.S. tax residency status. The IRS doesn't care about your passport or visa type. It cares about whether you're a "resident alien" or "nonresident alien" for tax purposes, and that single classification determines whether the U.S. taxes your worldwide income or just your U.S.-source earnings.

Teamed is the unified global employment partner for mid-market companies managing international teams across multiple platforms, vendors, and employment models. We've seen European companies stumble into unexpected U.S. tax obligations because nobody mapped the residency rules to their actual workforce movements. This guide gives you the decision framework to avoid that.

The Numbers HR and Finance Teams Actually Need

If you're paying dividends, royalties, or interest to a nonresident, the starting withholding rate is 30% unless you have treaty paperwork on file that says otherwise.

The IRS counts days using a three-year weighted formula: all current year days, plus one-third of last year's days, plus one-sixth of the year before that. Hit 183 total, and you're a U.S. tax resident. This is the calculation HR should run before any assignment extension.

A person must be physically present in the U.S. for at least 31 days in the current year to potentially meet the substantial presence test.

U.S. federal payroll taxes for employees include Social Security tax of 6.2% and Medicare tax of 1.45% withheld from wages, with matching employer contributions at the same rates.

Nonresidents file Form 1040-NR for U.S.-source income only. Residents file Form 1040 for worldwide income.

If your finance team is paying a non-U.S. person, you'll need a W-8BEN (individuals) or W-8BEN-E (entities) to justify any treaty rate reduction. Without it, you withhold at 30%.

What the IRS Actually Cares About (And What It Doesn't)

A foreigner for U.S. tax purposes is an individual who is not a U.S. citizen and is classified by the IRS as either a resident alien or a nonresident alien for federal income tax rules. This classification has nothing to do with immigration status, visa type, or where your employer is headquartered.

The distinction matters because it determines the scope of U.S. taxation. Resident aliens are generally taxed on worldwide income, just like U.S. citizens. Nonresident aliens are generally taxed only on U.S.-source income and certain income effectively connected with a U.S. trade or business.

Here's where European HR teams often get tripped up: many visa holders become resident aliens under the substantial presence test without realising it. A UK employee on a short-term U.S. assignment can accidentally trigger U.S. tax residency through accumulated days, creating unexpected withholding obligations for the employer.

Two Tests That Decide Whether You're in U.S. Payroll Territory

The IRS uses two primary tests to determine whether a non-citizen is a resident alien: the green card test and the substantial presence test. Meeting either one makes you a U.S. tax resident.

The Green Card Test

The green card test is straightforward. A person is a U.S. tax resident for any calendar year in which they are a lawful permanent resident (green card holder) at any time, unless a treaty position is properly claimed and documented. This applies regardless of how many days they actually spend in the U.S.

The Substantial Presence Test

The substantial presence test catches more people than most expect. You meet this test if you're physically present in the U.S. for at least 31 days during the current year AND at least 183 days using a weighted three-year formula.

The formula works like this: count all days present in the current year, plus one-third of the days present in the prior year, plus one-sixth of the days present in the second prior year. If that total reaches 183, you've met the test.

Consider a German project manager who spent 120 days in the U.S. in 2025, 90 days in 2024, and 60 days in 2023. The calculation: 120 + (90 × 1/3) + (60 × 1/6) = 120 + 30 + 10 = 160 days. Not a resident. But add another 25 days in 2025, and suddenly they've crossed the threshold.

Teamed highlights this as the most common "unexpected tax residency" trigger for short-term U.S. assignments from Europe. The 31-day minimum in the current year is a practical trip-planning control that HR teams should monitor.

What Taxes Do Nonresident Aliens Pay in the USA?

Nonresident aliens face a different tax regime than residents. They're generally taxed only on U.S.-source income, but the rules for how that income is taxed vary significantly by income type.

Federal Income Tax on U.S.-Source Income

Nonresidents deal with two income buckets: wages and business income from U.S. work (called ECI), and passive payments like dividends, interest, and royalties (called FDAP).

Effectively connected income is income connected with the conduct of a U.S. trade or business. This includes wages for work performed in the U.S., even if paid by a foreign employer. ECI is taxed at graduated federal income tax rates (10% to 37% in 2026), and the nonresident can claim deductions against this income.

FDAP income (fixed, determinable, annual, or periodical income) includes U.S. dividends, certain interest, rents, royalties, and similar passive payments. FDAP is typically subject to a flat 30% withholding tax on the gross amount, with no deductions allowed. Tax treaties can reduce this rate significantly.

When Do Nonresidents Owe State Taxes?

Here's what catches European employers: states don't care about federal residency tests. They look at where the work happens. Work in California for a week? California wants its cut, regardless of your federal status.

California and New York are particularly aggressive. A nonresident who works even a few days in these states may trigger filing requirements and withholding obligations. California requires 7% withholding on California-source payments to nonresidents exceeding $1,500 annually.

For European companies, state tax creates a practical problem: you need state withholding registration, payroll infrastructure, and W-2 capability. Without a U.S. entity, that often means working through a U.S. payroll provider or EOR to handle the compliance properly.

What Taxes Do Resident Aliens Pay in the USA?

Resident aliens face the same tax obligations as U.S. citizens. This means worldwide income reporting on Form 1040, including income earned outside the U.S.

Federal Income Tax on Worldwide Income

Resident aliens report all income from all sources, whether earned in the U.S., the UK, Germany, or anywhere else. Federal income tax rates for 2026 range from 10% to 37%, depending on taxable income and filing status.

The good news: resident aliens can claim the Foreign Earned Income Exclusion (up to $132,900 in 2026) if they meet certain requirements, and they can use the Foreign Tax Credit to offset U.S. taxes with taxes paid to other countries. This prevents true double taxation in most cases.

Payroll Taxes (FICA)

Both resident and nonresident aliens working as employees in the U.S. generally owe payroll taxes. Social Security tax is 6.2% of wages up to the annual wage base ($184,500 for 2026). Medicare tax is 1.45% on all wages, with an additional 0.9% on wages exceeding $200,000.

Some nonresident aliens are exempt from FICA under specific visa categories (F-1 students, J-1 scholars for limited periods) or under totalization agreements between the U.S. and their home country. The UK, Germany, France, and most EU countries have such agreements.

How Does U.S. Tax Treatment Vary by Income Type?

The practical reality for most foreigners is that U.S. tax outcomes are driven by withholding at payment time, not by year-end tax computation. Understanding which income types trigger which withholding rules is essential for HR and Finance teams managing cross-border payments.

For U.S. federal self-employment tax, the combined Social Security and Medicare rate is 15.3% (12.4% Social Security + 2.9% Medicare) on net self-employment income. Teamed uses this figure when comparing U.S. employee versus contractor cost models for European companies expanding into the U.S.

What's the Difference Between Tax Withheld and Tax Owed?

Federal income tax differs from withholding tax because federal income tax is the final liability computed on a tax return, while withholding tax is a prepayment mechanism collected at the time of payment that can exceed or fall short of the final tax owed.

This distinction creates reconciliation problems for HR and Finance teams. A nonresident alien who had 30% withheld on U.S. dividends may owe less (if a treaty applies) or may have other income that wasn't subject to withholding. Either way, they typically must file a U.S. tax return to reconcile.

Nonresident aliens file Form 1040-NR. Resident aliens file Form 1040. The filing deadline is generally April 15 for residents and June 15 for nonresidents (with extensions available).

Which Forms Control U.S. Tax Withholding for Foreigners?

The document that controls withholding is often more important than the tax return filed months later. Getting this wrong creates immediate compliance exposure.

W-8BEN and W-8BEN-E

Form W-8BEN (for individuals) and W-8BEN-E (for entities) document foreign status and claim treaty benefits. Payers use these forms to determine whether to withhold at 30% or a reduced treaty rate. Without a valid W-8, payers must withhold at the full 30% rate.

These forms are critical for FDAP payments: dividends, royalties, certain interest, and similar passive income. They're also used for independent contractor payments to foreign persons.

W-9

Form W-9 is for U.S. persons, including resident aliens. If someone provides a W-9, the payer treats them as a U.S. person for withholding purposes. This means no automatic 30% withholding, but it also means the person is certifying U.S. tax status.

W-2 and 1099

Form W-2 reports wages paid to employees. Form 1099 (various types) reports payments to non-employees. Both are information returns that help the IRS match reported income to tax returns.

How Do Tax Treaties Affect What Foreigners Pay?

Tax treaties between the U.S. and other countries can significantly change tax outcomes, but they don't change everything. Understanding what treaties typically modify, and what they don't, prevents costly assumptions.

What Treaties Usually Change

Treaties commonly reduce FDAP withholding rates. The U.S.-UK treaty, for example, reduces dividend withholding from 30% to 15% (or 0% for certain pension funds). The U.S.-Germany treaty has similar provisions.

Treaties also provide exemptions for certain categories: students, trainees, teachers, and researchers may be exempt from U.S. tax on specific income types for limited periods. And treaties provide "tie-breaker" rules when someone might be considered a tax resident of both countries.

What Treaties Usually Don't Change

Treaties don't eliminate the need for documentation. You still need valid W-8 forms to claim treaty benefits. Treaties don't override state tax obligations, which operate independently. And treaties don't change payroll tax requirements unless a totalisation agreement specifically addresses social security.

Pull in tax counsel when someone's claiming treaty benefits for: reduced dividend or royalty withholding, student or trainee exemptions, residency tie-breakers, or the short-term business visitor exemption. These situations need careful documentation to hold up under scrutiny.

Common Scenarios: Which Taxes Apply?

F-1 Student Working Part-Time

F-1 students are generally exempt from the substantial presence test for five calendar years. During this period, they're nonresident aliens with specific IRS classification rules taxed only on U.S.-source income. They're also exempt from FICA on wages paid for on-campus employment or employment authorised under their visa.

H-1B Worker

H-1B workers are not exempt from the substantial presence test. Most H-1B holders become resident aliens within their first or second year in the U.S. and are then taxed on worldwide income. They owe FICA like any other employee.

Short-Term Business Visitor

A UK executive visiting the U.S. for a two-week client meeting generally remains a nonresident alien. If they receive no U.S.-source wages (their salary continues from the UK employer for UK-based duties), they may have no U.S. tax obligation. But if they're paid specifically for U.S. work, that income is U.S-source ECI.

Foreign Investor with U.S. Rental Property

Rental income from U.S. real property is U.S-source income. Nonresident aliens can either accept 30% gross withholding or elect to treat the rental income as ECI, allowing deductions and graduated rates. Most choose the net election because it typically results in lower tax.

What Should European Employers Do About U.S. Tax Compliance?

Most search results explain IRS residency tests and filing forms but don't provide a CFO-ready map linking residency status, income category, default withholding rate, and the specific document that controls withholding in a single decision flow. That's the gap that creates compliance failures.

Your U.S. tax checklist: Track cumulative U.S. days for each worker (HR owns this). Determine state payroll registration needs based on work location (Finance/Legal owns this). Coordinate UK/EU payroll with U.S. withholding to avoid gaps (Payroll owns this). Collect W-8 forms before any payments (Finance owns this).

Don't stop UK PAYE just because someone's working in the U.S. You'll often run both countries' withholding simultaneously, at least until you sort out the tax treaty position and residence status.

Getting U.S. Tax Compliance Right

The complexity of U.S. taxes for foreigners isn't the rules themselves. It's the interaction between residency status, income type, withholding requirements, treaty positions, and state obligations. Getting any one of these wrong creates exposure for both the individual and the employer.

Mid-market companies managing international teams across multiple countries face this challenge constantly. Contractors in one system, EOR employees in another, owned entities somewhere else, and tax compliance scattered across all of them. The operational reality is that U.S. tax outcomes for nonresidents are often driven by gross withholding at payment time rather than by year-end tax computation, which is the key reconciliation problem HR and Finance teams face when paying non-U.S. workers or vendors.

If you're making decisions about U.S. employment structures without a clear map of the tax implications, you're taking on risk you don't need to carry. Talk to the experts at Teamed to see how unified global employment operations can give you visibility and control across your entire international workforce.