Taxability of US employment income – Reply to readers’ queries published by Taxation magazine in September 2023

Reply to readers’ queries published by Taxation magazine in September 2023.

Reader’s query

My client received employment income from the US after reacquiring UK tax residency. The income was subject to deductions for Medicare, Medicare Additional and social security. My question concerns whether these deductions can be offset against UK income tax along with the federal and state taxes paid?

Reply to reader’s query

Based on the brief facts provided by Uncle Sam, my approach to the client’s US employment income is as follows.

First, Uncle Sam should check into which tax year the employment income falls. It is possible that the employment income has been paid towards the employment duties carried out by the client in the tax year before he became UK tax resident.

Second, if the employment income falls into the tax year that the client is UK tax resident, check whether the client could be treaty resident in the US for the year in question.

Third, check whether the client is eligible for a split-year treatment. If so, Uncle Sam can then decide whether any of the US employment income falls into the overseas part of the tax year.

Fourth, proper regard must also be given to Article 14 of the UK/US DTA, Income from employment, which, in summary, states that:

1) Employment income earned by the UK tax resident client is taxed in the UK only.

2) However, if the employment duties have been carried out in the US, then UK has the primary taxing right on the employment income received by the UK tax resident client.

3) If the following conditions are satisfied, the employment income is only taxable in the UK (if so, this takes priority over the earlier two points) – the client’s US presence does not exceed 183 days in any 12-month period and his employer is not US tax resident nor has a permanent establishment there.

Of course, do check the provisions in Articles 15, 17 and 19 in case the client’s employment income falls into one of these categories.

As for the deductibility of US federal and state taxes paid against UK income tax, hmrc internal double taxation relief manual at DT19851 has given clear guidance. Federal income tax suffered can be relieved in the UK, whilst social security taxes are not admissible. Uncle Sam must check with the client which state he is from so that the deductibility for state taxes suffered can be ascertained.

This article is provided for general information only. It does not constitute tax, legal or other professional advice, and should not be relied on as a substitute for specific advice based on your particular circumstances.