Companies generally take one of four approaches to handling taxes for their expatriate workers:

• Laissez-faire. In this approach, the company is not actively involved in managing U.S. and foreign taxes. Essentially, the employee is responsible for any taxes incurred. However, often the employer increases the expatriate’s compensation to cover the additional tax expense.
• Ad hoc. In an ad hoc approach, the employer determines tax reimbursement on a case-by-case basis. Essentially, each expatriate employee negotiates his or her own deal with the company. This approach may work when a company’s international workforce is small, but as the international program grows, the negotiation process can become cumbersome.
• Tax protection. In the tax protection approach, the company figures the expatriate’s hypothetical U.S. income tax and compares it with actual taxes paid. At the end of a year, the company reimburses any disparity. If the expatriate pays less in taxes than he or she would have paid in the United States, the expatriate keeps the difference. A disadvantage of this program is that it can create inequities between expatriates in low-tax-cost countries and those in high-tax-cost countries.
• Tax equalization. In a tax equalization program, the expatriate’s tax situation is neither better nor worse than it would have been in the United States. A hypothetical U.S. tax is withheld from each paycheck. Foreign taxes are either paid by the employer or reimbursed. Although this program ensures equity among expatriates, it requires more administrative resources than the other methods.

Please Note: This material is provided as general information and is not a substitute for legal or other professional advice. Contact the Knowledge Center for more information.

Express Request

SHRM’s Express Request (ER) service allows members to request and receive resources on over 100 timely HR topics via e-mail. Available Express Requests are listed on the web site, and responses are sent immediately.