HEART Act treatment of overseas work under federal unemployment tax

UIPL18-10acc.pdf (https://www.dol.gov/sites/dolgov/files/ETA/advisories/UIPL/2010/UIPL18-10acc.pdf)

                                                           CLASSIFICATION
   EMPLOYMENT AND TRAINING ADMINISTRATION                  UI - Tax
               ADVISORY SYSTEM                             CORRESPONDENCE SYMBOL
          U.S. DEPARTMENT OF LABOR                         OUI/DUIO
             Washington, D.C. 20210                        DATE
                                                           March 19, 2010


ADVISORY: UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 18-10

TO:            STATE WORKFORCE AGENCIES

FROM:          JANE OATES /s/
               Assistant Secretary

SUBJECT:       Application of the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act)
               to the Provisions of the Federal Unemployment Tax Act (FUTA)

1. Purpose. To provide information regarding the provisions of the HEART Act as they affect Federal
   employment taxes.
2. References. The Heroes Earnings Assistance and Relief Act of 2008, Public Law No. 110-245,
   enacted June 17, 2008; the Internal Revenue Code (IRC) Section 3121(z) (26 United States Code
   (U.S.C.) 3121(z)); IRC Section 3306(c) (26 U.S.C. 3306(c)); IRC Section 3306(j)(3) (26 U.S.C.
   3306(j)(3)) and the Social Security Act (SSA) Section 210 (42 U.S.C. 410(e)).
3. Background. The HEART Act amended certain sections of the IRC and the SSA to provide tax
   benefits and incentives for military personnel. Among these changes, Section 302 of the HEART
   Act specified that certain foreign subsidiaries of U.S. companies under a contract with the U.S.
   government are treated as U.S. employers for purposes of Social Security and Medicare employment
   taxes. The HEART Act changed the employment tax provisions for the Federal Insurance
   Contributions Act (FICA) by amending IRC Section 3121(z) and the definition of the term
   “American Employer” at subsection (e) of Section 210 of the SSA (42 U.S.C. 410(e)). These
   changes provide for wages of U.S. citizens working outside the U.S. for foreign companies to be
   covered wages, if the foreign companies are controlled by a U.S. company under contract with the
   U.S. government, or any instrumentality of the U.S. government. The HEART Act changed the
   definition of the term “control” applicable to this provision to “more than 50 percent,” from “at least
   80 percent.”
4. Guidance Concerning FUTA Coverage for Services Performed Outside of the United States. The
   HEART Act did not amend FUTA. Section 3306(c)(B), FUTA, exempts certain foreign
   employment from the Federal unemployment tax. It states that, for services performed outside the
   U.S., “employment” means “any service, whatever the nature, performed after 1971 outside the
   United States … by a citizen of the United States as an employee of an American employer.” Thus,
   services are not taxable under FUTA when they are performed by a U.S. citizen outside the U.S. for
   a foreign company, even if the company is controlled by a U.S. company under contract with the
   U.S. government.


RESCISSIONS                                              EXPIRATION DATE
None                                                     Continuing

5. FUTA - FICA Differences. Since the HEART Act amended Federal law to cover these particular
   services for FICA, but did not amend FUTA, differences now exist between FICA and FUTA for
   coverage of these services.
6. Taxation Rules. The following table describes the proper taxation rules for FICA and FUTA that
   apply to services performed outside the U.S.
Table: How to Treat Services Performed Outside the U.S. for FICA and FUTA.
                                                                                 Taxation Rules
                                                Foreign Subsidiary
            Services         Services
 Citizen                                        Controlled by U.S.
           Performed      Performed for a
   of                                            Employer Under               FICA           FUTA
           Outside the        Foreign
  U.S.?                                         Contract With U.S.
             U.S.?          Employer?
                                                  Government?
  No           Yes              N/A                    N/A                Not Covered     Not Covered
  Yes          Yes              Yes                    No                 Not Covered     Not Covered
  Yes          Yes              Yes                    Yes                 Covered        Not Covered
                           No – Services
                           Performed for
  Yes          Yes         U.S. Employer                N/A                 Covered         Covered


7. Action Requested. Administrators are requested to distribute this directive to appropriate staff.
8. Inquires. Direct inquires to the appropriate Regional Office.