# Living abroad, working for a US company



## CorkyScotland (May 12, 2016)

Hello all,

I recently relocated from the US to the UK. I work remotely so I have stayed working for my US employer. My employer has asked me if they are still required to pay me as a W2 employee or as a 1099 contractor. 

I know if I start getting paid as a contractor I will still have to file US taxes and I will be responsible for all of the payroll taxes. 

so, my question is should my employer continue to pay me on a W2 or can they pay me on a 1099? If I'm paid on a 1099 am I required to pay federal income tax or just social security and medicare? 

Thanks in advance!


----------



## accbgb (Sep 23, 2009)

Are you legally resident in the UK? 

If so, you are almost certainly supposed to be paying UK income taxes, regardless of the fact that you are working remotely.

Perhaps you can tell us more about your situation.


----------



## BBCWatcher (Dec 28, 2012)

In this answer I'm assuming that you're a U.S. citizen and that you have legal residence in the United Kingdom with work permission there. If those assumptions are incorrect, please advise.

Your U.S. employer can pay you either way. The overall tax liabilities don't change either way, although who pays those taxes might.

Social Security

You (and possibly also your employer) will pay into only one social insurance system: U.K. National Insurance or U.S. Social Security. The U.S. and the U.K. have a social security treaty that decides which system will receive your contributions. Take a look at the table for your situation and figure out which system gets your contributions. If it's the U.S. system then you can continue on your U.S. employer's payroll without any change to your/their Social Security contributions. If it's the U.K. system then either your employer's payroll system needs to stop deducting FICA taxes (which they should be able to do once you submit proof of U.K. National Insurance enrollment) or you need to shift to a 1099 arrangement, if legally permitted. You will then start paying U.K. National Insurance contributions.

Income Taxes

You should instruct your employer either to stop withholding U.S. income tax -- the payroll system should have a code for that -- or shift to a 1099 arrangement, if legally permitted. You should start making U.K. income tax estimated payments (assuming that system has them, which I believe it does). The U.K. income tax rate is generally equal or higher than the U.S. rate, so this approach should work well. You file U.K. income tax returns, and you also file U.S. income tax returns. When you file a U.S. income tax return you can either take or skip the Foreign Earned Income Exclusion (IRS Form 2555), and you can take the Foreign Tax Credit (IRS Form 1116) for any non-excluded income. That'll adjust your U.S. income tax to account for your work and income tax in the U.K. (You are working in the U.K., not in the U.S.)

That's, believe it not, the short summary. If you have any follow-up questions, please let us know.


----------



## CorkyScotland (May 12, 2016)

BBCWatcher said:


> In this answer I'm assuming that you're a U.S. citizen and that you have legal residence in the United Kingdom with work permission there. If those assumptions are incorrect, please advise.


Your assumptions are correct so thank you for such helpful advice! 

I guess I need to figure out which system I should be paying into first. 

If it's the US system that I am required to pay into then that opens up the question if I should legally be paid by a W2 or a 1099. I guess I'll start with figuring out who should be getting the money to begin with. Thanks I may be back with extra questions!


----------



## accbgb (Sep 23, 2009)

CorkyScotland said:


> Your assumptions are correct so thank you for such helpful advice!
> 
> I guess I need to figure out which system I should be paying into first.
> 
> If it's the US system that I am required to pay into then that opens up the question if I should legally be paid by a W2 or a 1099. I guess I'll start with figuring out who should be getting the money to begin with. Thanks I may be back with extra questions!


As to which social security system you should be paying into, one big question to be answered is how long do you plan to remain in the UK? If "forever" then the answer might lean one direction; if you plan to return to the US in a few years, then the answer would lean the other way.

As to income taxes, I suggest you get the details worked out as soon as possible. Otherwise, you place yourself at risk for some serious penalties.


----------



## CorkyScotland (May 12, 2016)

I do plan to remain in the UK indefinitely. I just got off the phone with the SSA and they advised me that it's basically up to my employer if they want to continue to withhold and pay my SS taxes and if not I should just pay into the UK system. 

I guess the best thing to do is to become a contractor, pay my payroll taxes to the UK and just show proof of that when I file my US tax return. 

Would the foreign earned income exclusion apply to my situation in any way?


----------



## Bevdeforges (Nov 16, 2007)

You don't get to choose which system to pay into. If you are legally resident in the UK, you should be paying into the UK system unless your employer puts you on a "temporary" status (which usually is limited to something like 5 years max). You should also be making payments into the UK income tax system (if your US employer has a UK office, they can pay you through the UK payroll - which might be simpler all around).

But yes, your work is still eligible for the FEIE - the requirements are outlined in Pub 54 under either the physical presence test (probably what you'd use your first year in the UK) or the bona fide resident test (the first full calendar year you are resident in the UK).

You don't actually need to show proof of your registration in the UK system when you file your US taxes. You just need to have a certificate or some sort of attestation that you're enrolled in the system handy, if the question is ever raised. (To be honest, it rarely comes up.)
Cheers,
Bev


----------



## CorkyScotland (May 12, 2016)

Thanks for the response Bev! I will have to take a look at that pub!


----------



## BBCWatcher (Dec 28, 2012)

....But, if your U.S. employer is willing to classify you as "temporary," and if that fits the facts (or at least could), that would be...nice. The U.S. system tends to be the better system -- more "bang for the dollar" (or pound). Bev is quite correct that you don't get to choose which social insurance system you contribute to for a particular set of facts, but you do get to choose the underlying facts at least to some degree.


----------



## Bevdeforges (Nov 16, 2007)

It's not necessarily preferable to remain in the US system. You have to evaluate your own situation. If you are intending to remain outside the US for the long haul, it can be advantageous to accumulate as many credits as possible (with attached salary) in your "local" social insurance system - particularly if they will count your US work experience (as with most countries that have a social security treaty with the US).

Americans tend to think of "social security" as being only retirement, but there are advantages to having credits and history in the local system for other social benefits (health care, family allocation, etc.) or proving "integration" should you want to later take nationality.
Cheers,
Bev


----------



## BBCWatcher (Dec 28, 2012)

I don't think those factors apply in the United Kingdom. As examples, NHS entitlement does not, and naturalization qualification does not.


----------



## Sardonicus (Mar 23, 2015)

I won't hijack this thread for my own subject, but will relate it here and start a separate one about SS while living overseas.


----------

