APA APA Global Payroll & International Compliance 1 — Questions and Answers
Question 1: When a US company pays a non-resident alien employee for services performed entirely outside the US, what is generally true about US federal income tax withholding?
- Full US federal withholding applies
- No US federal income tax withholding is generally required (Correct answer)
- Only state tax withholding applies
- FICA taxes still apply in full
Correct answer: No US federal income tax withholding is generally required
Wages paid to a non-resident alien for services performed entirely outside the US are generally not subject to US federal income tax withholding.
Question 2: What is a totalization agreement between the US and another country designed to prevent?
- Double payment of income taxes
- Dual social security/social insurance tax obligations for internationally mobile employees (Correct answer)
- Currency exchange losses on payroll
- Duplicate W-2 filings
Correct answer: Dual social security/social insurance tax obligations for internationally mobile employees
Totalization agreements prevent employees from paying social security taxes to both the US and a foreign country simultaneously for the same work.
Question 3: Which IRS form is used by a US employer to report wages paid to non-resident alien employees subject to withholding?
- W-2
- 1042-S (Correct answer)
- 1099-NEC
- 941
Correct answer: 1042-S
Form 1042-S is used to report US-source income paid to foreign persons, including wages subject to NRA withholding tax.
Question 4: When calculating a hypothetical tax (hypo-tax) for an expatriate employee, what is the primary goal?
- To ensure the expat pays no taxes abroad
- To make the expat no better or worse off tax-wise than if they had stayed home (Correct answer)
- To maximize the expat's take-home pay
- To calculate state income tax only
Correct answer: To make the expat no better or worse off tax-wise than if they had stayed home
Hypothetical tax equalizes the expatriate's tax burden so they pay approximately what they would have paid at home, with the employer absorbing additional foreign taxes.
Question 5: What does the term 'shadow payroll' mean in global payroll management?
- A payroll processed in secret
- A payroll run in the host country for compliance purposes while the employee is still paid via home country payroll (Correct answer)
- A duplicate payroll for auditing
- An automated payroll system
Correct answer: A payroll run in the host country for compliance purposes while the employee is still paid via home country payroll
Shadow payroll is maintained in the host country to meet local tax withholding and social security compliance obligations without actually paying the employee through that payroll.
Question 6: Which document does a US employee working abroad typically need to claim the Foreign Earned Income Exclusion (FEIE)?
- Form W-4
- Form 2555 (Correct answer)
- Form 1042
- Form 8233
Correct answer: Form 2555
Form 2555 is filed with the US tax return to claim the Foreign Earned Income Exclusion, allowing qualifying US citizens abroad to exclude a portion of foreign-earned income.
APA APA Global Payroll & International Compliance 1
When a US company pays a non-resident alien employee for services performed entirely outside the US, what is generally true about US federal income tax withholding?