Consider an American employee onboarding at a new US company overseas that tells her they will take hypotax from her paycheck. If the employee already has a) SOFA status in that country; b) is not obligated to pay local country taxes; c) will be in the country for the entire year, what happens at tax time when no federal income tax is due?
- Does the company just keep the hypotax withholding?
- Does the company refund the hypotax withholding to the employee?
- Or, does the company send it to the IRS which then refunds it to the employee as a tax refund?
Please don’t tell me it is #1
Thanks!
It is #1, assuming that the employee agreed to the company’s policy of tax equalization when they signed on. The whole point of tax equalization is that the employee is compensated by the company with a net amount that equals what the employee would end up with if they were working in the U.S. The company pays the actual taxes due, which may be more or less than this. It’s not usually structured as the employee getting the better of their hypothetical U.S. tax liability or their actual liability.
But to be clear - there is no issue of tax law here. It’s just a question of the employer’s policy, and whether the employee agreed to this. If it’s not clear exactly what the arrangement was, there may be room for negotiation.