Approaching Year End
Which holiday do you dread the most? For me, it has always been, and likely will always be, Labor Day. Of course, with each passing year, anything that I describe as “always” is less meaningful than it was the year before, at least to the extent it relates to me. That said, there is something about entering the final “stretch” of the year that makes me more anxious than usual.
After years of trying to determine the root cause of this condition, I recognized that it had nothing to do with the beginning of the school year, as I had initially surmised,[i] nor with the pressure to collect delinquent accounts before the year end,[ii] which I find to be the most unpleasant of responsibilities.[iii]
As it turns out, my uneasiness arises from the anticipated arrival on my desk of two categories of projects that invariably appear as we get ever closer to December 31, the day that represents the close of the taxable year for most taxpayers.
The first is the suddenly “urgent” need for two businesses to complete the acquisition of one by the other before the end of the year.[iv]
Although a transaction described in the first category can be very trying,[v] a project that falls within the second category is often the more frustrating exercise of the two because it asks you to determine whether a policy or practice that a business has already been following for most of the year – if not for several years – was proper and, if not, whether there are any steps that might still be taken before the end of the year to avoid or reduce any adverse tax consequences arising therefrom.
At the end of last week, I received a set of inquiries from a domestic employer-corporation (“US Corp”) regarding an item described in the second category of projects; specifically, what portion of the compensatory income arising from a restricted stock unit (“RSU”) that was granted to a U.S. employee[vi] for services performed (i) within the U.S. for US Corp, or (ii) outside the U.S. for a foreign corporation that is wholly owned by US Corp (“CFC”), is subject to (a) U.S. federal income tax withholding (“FITW”), and (b) Federal Insurance Contributions Act (“FICA”) tax withholding, by US Corp?
The domestic employer had not considered the impact of the services provided by the employee overseas. Fortuitously, a fairly recent Chief Counsel Advisory discussed various aspects of this issue.[vii]
Basic Facts
US Corp was a domestic corporation that owned all the equity of several foreign corporations (each a “Controlled Foreign Corporation” or “CFC”), which were treated as separate taxpayers from US Corp.
US Corp granted restricted stock units (“RSUs”) to certain of its key employees;[viii] the grantees were all either U.S. citizens or residents.
RSUs
An RSU is a form of equity-based compensation. In the present case, each RSU corresponded to one share of US Corp stock. At the time of grant, the RSU was not vested; meaning, it did not entitle an employee-grantee to any present economic value. Instead, the employee’s right to receive any such benefit was conditioned upon the employee’s having rendered a specified number of continuous years of service to US Corp or to one of its subsidiaries following the grant of the RSU, at which point the RSU would become vested in the hands of the employee.[ix] Until then, however, the RSU represented an unfunded promise by the employer corporation (US Corp) to pay compensation (in the form of stock) to the employee-grantee in the future.
Upon satisfaction of this post-grant service-based condition, the RSU would become vested, and the employee-grantee would be entitled to receive an actual share of US Corp stock,[x] the then fair market value of which would be included in the employee’s income as compensation.
Transfer Overseas
Sometimes, after US Corp had granted an RSU to a key employee, the employee-grantee would transfer to a CFC before the RSU had vested. According to the CCA, this employee performed services for US Corp solely in the U.S., and for the CFC solely outside the U.S.[xi]
Moreover, an employee who transferred to a CFC provided services to the CFC under its direction and control and not that of US Corp. Thus, the CFC was the common law employer of the transferred employee after the transfer took place.
The CCA further stated that the employee was not exempt from U.S. FICA taxation due to a “certificate of coverage” in place under a totalization agreement[xii] for the stock compensation.
The vesting of an RSU required continued active service from the grant date through the applicable vesting date, which could occur while the employee was overseas. US Corp, upon vesting of the RSUs, initiated payment of such RSUs and the employee received shares of US Corp stock.[xiii] The net number of shares of such stock credited to an employee upon vesting depended upon the number of shares in which the employee vested at the time, the fair market value of the US Corp stock on the vesting date, and any applicable adjustments, including tax withholding.
But query the extent of US Corp’s withholding obligation. Before considering this issue and the CCA’s conclusion, let’s review the basic withholding rules applicable to compensation.
FITW
The Code[xiv] generally defines the term “wages” for FITW purposes as all remuneration for services performed by an employee for their employer, with certain specific exceptions.[xv] Thus, salaries, fees, and bonuses are wages for FITW purposes if paid as compensation for services performed by the employee for their employer. The basis upon which the remuneration is paid is immaterial in determining whether the remuneration is wages.[xvi]
The term “wages” includes remuneration for services performed by a U.S. citizen or resident as an employee of a foreign employer whether or not such foreign employer is engaged in trade or business within the U.S.[xvii] Any person paying wages on behalf of a foreign employer not engaged in trade or business within the U.S. is subject to all the statutory and regulatory provisions applicable with respect to an employer. For instance, every employer making payment of wages is required to collect tax by deducting and withholding the tax from the employee’s wages[xviii] as and when paid, either actually or constructively.[xix]
Moreover, an employer is generally required to deduct and withhold the tax notwithstanding the wages are paid in something other than money (for example, wages paid in shares of employer stock) and to pay over the tax in money.[xx] In that case, the employer has to make the necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment in money.
In general, the term “employer” means the person for whom an individual performs or performed any service as the employee of such person (the common law employer).[xxi] However, in the case of a person paying wages on behalf of a foreign employer that is not engaged in trade or business within the U.S., the term “employer” means such person.[xxii]
FICA Taxes
FICA taxes consist of “social security” taxes[xxiii] and “Medicare” taxes.[xxiv] The social security portion of FICA tax is only imposed on wages up to the social security wage base for the year. There is no such wage base for the Medicare portions of FICA tax.[xxv]
FICA taxes are computed as a percentage of “wages” paid by the “employer” and received by the employee with respect to “employment.” In general, all payments of remuneration by an employer for services performed by an employee – including the cash value of all remuneration paid in any medium other than cash[xxvi] – are subject to FICA taxes, unless the payments are specifically excepted from the term “wages” or the services are specifically excepted from the term ““employment.”[xxvii]
The term “employment” is generally defined[xxviii] as any service performed by an employee for the person employing him, regardless of the citizenship or residence of either, within the U.S. or performed outside the U.S. by a U.S. citizen or resident as an employee of an “American employer.”[xxix]
In general, the employer is required to withhold and pay to the IRS the employee share of FICA taxes from wages when paid to the employee, and to pay to the IRS the employer share of FICA taxes with respect to wages when paid to the employee.[xxx] If the employer fails to withhold the tax, the employer is nevertheless liable for payment of the tax.[xxxi]
In general, wages are considered to be paid by the employer and received by the employee at the time they are actually or constructively paid.[xxxii]
Accordingly, wages are subject to FICA taxes at the time that they are actually or constructively paid.[xxxiii]
The FICA tax treatment of nonqualified deferred compensation (“NQDC”) plans is governed by regulation.[xxxiv] In general, an NQDC plan means any plan or other arrangement that is established by an employer for one or more of its employees, and that provides for the deferral of compensation.[xxxv]
To the extent that remuneration deferred under an NQDC plan constitutes wages for FICA purposes, the remuneration is subject to a special timing rule,[xxxvi] under which an amount deferred under a NQDC plan is required to be taken into account as wages for FICA tax purposes as of the later of (A) the date on which the services creating the right to that amount are performed,[xxxvii] or (B) the date on which the right to that amount is no longer subject to a substantial risk of forfeiture.[xxxviii]
Services creating the right to an amount deferred under a NQDC plan are considered to be performed as of the date on which, under the terms of the plan and all the facts and circumstances, the employee has performed all of the services necessary to obtain a legally binding right[xxxix] to the amount deferred.[xl]
A plan under which an employee obtains a legally binding right to receive property in a future year may provide for the deferral of compensation and, accordingly, may constitute an NQDC plan, even though benefits under the plan are or may be paid in the form of property.[xli]
In general, an amount deferred under an NQDC plan for any employee is treated, for purposes of withholding and depositing FICA tax, as wages paid by the employer and received by the employee at the time it is taken into account.[xlii]
That said, how is the application of the foregoing rules affected if the employee’s services are rendered overseas to a foreign corporation, such as CFC?
Sourcing
Compensation for personal services performed in the U.S. is treated as U.S. source income, regardless of the place or time of payment.[xliii]
Compensation for personal services performed outside the U.S. is treated as income from foreign sources.[xliv]
In the case of compensation for personal services performed by an employee partly within and partly outside the U.S., the part that is attributable to personal services performed within the U.S., and that is therefore included in gross income as income from U.S. sources, is determined on a “time basis” – the amount of compensation for personal services performed within the U.S. is the amount that bears the same relation to the individual’s total compensation as the number of days of performance of the personal services by the individual within the U.S. bears to their total number of days of performance of personal services.[xlv]
Similarly, the source of multi-year compensation arrangements is generally determined on a time basis over the period to which the compensation is attributable.[xlvi] Multi-year compensation means compensation that is included in the income of an individual in one taxable year but that is attributable to a period that includes two or more taxable years. The determination of the period to which such compensation is attributable, for purposes of determining its source, is based upon the facts and circumstances of the particular case.
For example, an amount of compensation that specifically relates to a period of time that includes several years is attributable to the entirety of that multi-year period. The amount of such compensation that is treated as from sources within the U.S. is the amount that bears the same relationship to the total multi-year compensation as the number of days that personal services were performed within the U.S. in connection with the project bears to the total number of days that personal services were performed in connection with the project.
In general, the facts and circumstances will be such that the applicable period to which the RSU-derived compensation is attributable is the period between the grant of an award and the date on which it vests.[xlvii]
Totalization Agreements
Generally, an income tax treaty applies to income taxes in the U.S. and the other contracting state. A “social security totalization agreement” applies to U.S. Social Security and Medicare taxes, as well as the social taxes in the other contracting state. The U.S. has entered into totalization agreements with several foreign countries for the purpose of avoiding double taxation of income with respect to social security taxes.[xlviii] These agreements are considered when determining whether any U.S. citizen or resident alien working abroad is subject to U.S. FICA taxes or the social taxes of a foreign country.
The U.S. enters into totalization agreements with foreign countries to coordinate coverage and taxes under the U.S. social security program with comparable programs of other countries. The agreements work by assigning social security coverage and, in turn, social security tax liability, to only one country. The general principle of all totalization agreements is that a worker should pay taxes and be covered only under the social security system of the country in which the individual actually works.[xlix] All other coverage provisions of totalization agreements constitute exceptions to this general rule.
Totalization agreements, generally, eliminate double social security taxation of the same earnings for the same work. Thus, for example, wage income that is subject to both FICA and foreign social security taxes will be exempt from FICA taxes to the extent that, under a totalization agreement with the foreign country, the wage income is subject solely to taxes imposed under the social security system of the foreign country. Conversely, if, for example, the compensation is subject to FICA tax in the U.S., but not social security taxes in the foreign country, then the totalization agreement’s provisions on taxes would not apply to eliminate double social security taxation and only FICA tax would apply.
CCA’s Analysis
Under the facts considered by the CCA, at the time of grant each employee-grantee was a common law employee of US Corp. for federal employment tax purposes and was performing services for US Corp. within the U.S.; after the worker transferred to a CFC, they were a common law employee of the CFC performing services for the CFC outside the U.S. until the time of vesting.
The shares paid in settlement of the RSUs were taxable income and this income was considered wages when it was actually or constructively paid to the employee. Because payment of the RSU shares was initiated on the date of vesting, at that time there would no longer be a substantial limitation or restriction, since the employee would have beneficial ownership of the stock. Therefore, upon initiation of payment of the vested RSUs, the RSU income constituted wages that were actually or constructively paid to the employee and were subject to FITW at that time.
At the time of vesting, the RSU income was comprised of an amount attributable to services performed during the portion of time that the worker spent employed by working within the U.S. and an amount attributable to services performed during the portion of time that the worker spent employed by the CFC working outside the U.S. Regardless that RSU income was comprised of an amount attributable to time a worker spent employed by a CFC and working outside the U.S., wages included the remuneration for services performed by a citizen or resident of the U.S. as an employee of a foreign corporation, whether or not such foreign corporation was engaged in trade or business within the U.S. Therefore, the full amount of the RSU income would be wages for FITW purposes.
Upon initiation of payment of the vested RSUs, it was the responsibility of the employer to deduct and withhold income taxes on the RSU income. US Corp., as the common law employer of the workers before the transfer took place, would be responsible for deducting and withholding on the RSU income attributable to the work performed for US Corp.
Additionally, because the term “employer” means the person paying wages on behalf of a foreign corporation not engaged in trade or business within the U.S. Although the CFC was the common law employer of the workers after the transfer took place, US Corp., was the statutory employer since it was making payments on behalf of the CFC, which was not engaged in a trade or business within the U.S. Accordingly, US Corp. was also responsible, as the statutory employer, for deducting and withholding income taxes on the RSU income attributable to the work performed for the CFC. Because US Corp. would be responsible for withholding income taxes on the full amount of RSU income, a reasonable allocation of the compensation between U.S. and foreign sources was unnecessary for income tax purposes.
RSU Income Subject to FICA Taxes?
Under the facts being considered, at the time of grant, each employee at issue was a common law employee of US Corp. and performing services for US Corp. in the U.S., and that after the worker transferred to a CFC, they were a common law employee of the CFC and performing services for the CFC outside the U.S. until the time of vesting.[l]
The grant of the RSUs constituted a legally binding right to receive property in a later year conditioned upon the future performance of substantial services by each worker; thus, the RSUs provided for the deferral of compensation for FICA tax purposes. Generally, any plan or other arrangement established by an employer for one or more of its employees that provides for the deferral of compensation is an NQDC plan. Because the RSUs were an arrangement established by US Corp. for its employees that provided for the deferral of compensation, the RSUs were an NQDC plan for FICA purposes, and were therefore subject to FICA tax under the special timing rule. In this case, the RSUs were taken into account as wages for FICA tax purposes on the vesting date because it was the later of the date on which services creating the right to the RSUs were performed or the date on which the RSUs were no longer subject to a substantial risk of forfeiture.
For purposes of withholding and depositing FICA tax, the RSUs were wages paid by US Corp. and received by the workers at the time they were taken into account. Therefore, US Corp. was required to treat the vesting date as the date the RSUs were paid by US Corp. for purposes of withholding and depositing FICA tax because that was when the RSUs were taken into account.
Wages mean all remuneration for employment, and employment means any service performed by an employee for the person employing him, irrespective of the citizenship or residence of either, performed within the U.S. or outside the U.S. by a citizen or U.S. resident as an employee of an American employer. Employment does not include services performed outside the U.S. for a non-U.S. employer. Accordingly, any remuneration received for services performed for the CFC outside of the U.S. is not wages, making an allocation necessary to determine which portion of the RSU income was wages for FICA purposes and which portion was not.
Sourcing Wages for FICA Taxes
The CCA explained that the Code’s income sourcing rules provide an acceptable set of principles that can be used for determining the portion of the RSU income that was U.S. source income, and thus, attributable to services performed in the U.S. for US Corp., which aid in establishing US Corp.’s withholding obligations on the RSUs for FICA purposes.
The employees at issue performed services for US Corp. solely in the U.S. and for the CFC solely outside of the U.S. Furthermore, the RSUs were granted while these employees were employed by US Corp. and later vested while they were employed by the CFC. As a result, it was reasonable to rely on the sourcing rules regarding income from services performed partly within and partly without the U.S. to determine the extent to which the RSU income was attributable to services performed for US Corp. within the U.S. for purposes of determining US Corp.’s FICA obligations.
Time Basis Method
To determine which portion of the RSU income was from sources within income from services performed as an employee partly within and partly without the U.S., like the RSUs, were sourced on a time basis using the method (the “time-basis method”).[li] The U.S. source portion of employee compensation under the time-basis method is generally determined based on the number of days the employee performed services in the U.S. relative to the total number of days the employee performed services, domestically or abroad, during the taxable year. In this case however, because the payment of RSU income was includible in a single taxable year (when the RSU vests) but was attributable to a multi-year period beginning on the grant date and ending on the vesting date, the time-basis method had to be applied over the course of the vesting period.[lii]
Applying similar principles in US Corp.’s case, the U.S. sourced portion of the RSU income would be the ratio of days during the vesting period that the employee worked for US Corp. (i.e., before the CFC employed them abroad) to the total number of days the employee worked during the vesting period for the US Corp.
Thus, the applicable allocation period would be between the date the RSUs were granted and the date the RSUs vested. Therefore, within this period, the portion of the RSUs that is U.S. source income, and attributable to services performed for US Corp. within the U.S., was the amount of RSU income that bore the same relation to the individual’s total RSU income as the number of days of performance of personal services for US Corp. within the U.S. bore to the total number of days of performance of personal services for the US Corp.
Observations
You can see why consideration of the foregoing issues should not be deferred by a U.S. employer. The applicable rules are complicated.
Notably, the CCA did not address the impact on US Corp’s withholding responsibility with respect to a U.S. employee-grantee transferring to a CFC in a country that has a totalization agreement in place with the U.S.
The existence of a totalization agreement between the U.S. and the country in which the employee worked when the RSUs vested may have resulted in the compensation being treated as exempt from FICA tax. The determination of how, if at all, a totalization agreement may have impacted this scenario would have required an understanding of the terms of the applicable totalization agreement and how the other party country treated the compensation from a social security tax perspective.
We start from the premise that the RSU income attributable to services performed for US Corp. within the U.S. was considered wages for FICA purposes and was subject to FICA taxes. If the laws of the foreign country where the employee was working when the RSU vested also subjected the portion of the RSU income attributable to services performed for US Corp. within the U.S. to social security taxes in the foreign country, then there was the potential for double social security taxation on the same earnings. Under such circumstances, the totalization agreement’s provisions preventing double social taxes might have applied to exempt the RSU income from FICA taxes.
However, if the foreign country did not impose social taxes on the U.S.-source portion of the RSU income, then there was no double social security taxation on the same earnings and the totalization agreement’s provisions on social taxes would not apply. In that case, the U.S.-source portion of the RSU income would remain subject to FICA taxes.
If the U.S.-source portion of the RSU income were subject to social insurance taxes in the foreign country, then the terms of the particular totalization agreement would have to be analyzed to confirm which country may apply its social taxes to such compensation. An employer seeking to exclude compensation from FICA under a totalization agreement is required to obtain a certificate of coverage from the country that is applying its social security taxes to the compensation in order to substantiate that non-U.S. social taxes applied to the income. If the taxpayer provides a certificate of coverage proving that social taxes were paid to the foreign country on the U.S. source-portion of the RSU income, then the totalization agreement should be analyzed to confirm that such compensation is exempt from U.S. FICA tax.
Absent a determination that the compensation is exempt from FICA under the totalization agreement, the U.S.-source portion of the RSUs should be treated as wages for FICA purposes.
Like I said earlier, not the sort of issue that should be brought to an adviser in the latter part of the year.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.
[i] Seeing the first school bus of the season reminds me of how little life changes as we age. Deadlines, volumes of work, the pressure to succeed, dealing with some nasty people, helping others, watching some take credit for your efforts, the occasional “pizza party” or its equivalent.
[ii] Don’t try to deny that you haven’t experienced this. We all have.
[iii] That said, it is amazing how many business folks fail to appreciate that we lawyers are in business, just as they are. We have overhead, etc.
[iv] Over the years, I have found that this is sometimes driven by the desire of their respective principals to start holiday vacations without the concerns of a transaction weighing on them.
[v] Especially as you watch others enjoying holiday parties and spending time with family.
[vi] I.e., a U.S. citizen or permanent resident. An individual who is a U.S. citizen or a U.S. resident alien is subject to U.S. federal income tax on their worldwide income from all sources regardless of where they are living and must report all such income on their annual federal income tax return.
[vii] IRS CCA 202327014 (July 7, 2023). The text of the CCA has been heavily redacted. A tax attorney’s education is a daily affair.
Chief Counsel Advice (CCA) materials are written advice prepared by the Office of Chief Counsel and issued to field or service center employees of the IRS or the Office of Chief Counsel.
[viii] A “top hat” arrangement.
[ix] The number of units subject to award, the vesting commencement date, and the vesting schedule were established on the award date. The facts of the CCA did not contemplate an RSU award being granted, vested, and paid all in the same calendar year.
[x] The RSU was “settled” in shares of US Corp stock.
[xi] Generally, services performed by a U.S. citizen or resident outside the U.S. for a foreign subsidiary of their U.S. employer are not covered by FICA. However, IRC Sec. 3121(l) provides for an agreement between the IRS and a U.S. employer whereby the U.S. employer agrees to report and pay an amount equivalent to the employer and employee FICA taxes that would be due for employees of its foreign subsidiary who are U.S. citizens or residents performing services outside the U.S. so that such employees may be covered by the U.S. social security system.
[xii] A totalization agreement applies to U.S. Social Security and Medicare taxes, as well as the social taxes in the other contracting state. The U.S. has entered into totalization agreements with several foreign countries for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements are considered when determining whether any U.S. citizen or resident alien working abroad is subject to FICA taxes or social taxes of a foreign country. a certificate of coverage issued by one country serves as proof of exemption from social security taxes on the same earnings in the other country. See Rev. Rul. 80-56.
[xiii] The terms of the RSU provided that the payment of the stock would occur upon or within a short period of time following the satisfaction of the vesting condition. For income tax purposes, if payment occurred no later than two-and-one-half months after the end of the taxable year in which the vesting condition was satisfied, then the payment was not considered deferred compensation. See Reg. Sec. 1.409A-1(b)(4). If the payment occurred more than two-and-one-half months after the end of the taxable year in which the vesting condition was satisfied, then the RSU provided for a deferral of compensation and was subject to the requirements of IRC Sec. 409A. See Reg. Sec. 1.409A-1(b)(1).
[xiv] IRC Sec. 3401(a).
[xv] IRC Sec. 3401(a)(8)(A) provides that the term “wages” does not include remuneration paid for services for an employer that are either (a) performed by a citizen of the U.S. if, at the time of the payment of such remuneration, it is reasonable to believe that such remuneration will be excluded from gross income under IRC Sec. 911, or (b) performed in a foreign country or in a U.S. possession by such a citizen if, at the time of the payment of such remuneration, the employer is required by the law of any foreign country or possession to withhold income tax upon such remuneration.
[xvi] Reg. Sec. 31.3401(a)-1(a)(3).
[xvii] Reg. Sec. 31.3401(a)-1(b)(7).
[xviii] IRC Sec. 3402(a). The amount of tax is determined in accordance with tables or computational procedures prescribed by the Secretary of the Treasury.
[xix] Reg. Sec. 31.3402(a)-1(b). To constitute payment in such a case, the wages must be credited to or set apart for the employee without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, must be made available to the employee so that they may be drawn upon at any time, and their payment must be brought within the employee’s own control and disposition. Reg. Sec. 31.3402(a)-1(b).
[xx] Reg. Sec. 31.3402(a)-1(c).
[xxi] IRC Sec. 3401(d).
[xxii] IRC Sec. 3401(d)(2).
[xxiii] Old-Age, Survivors, and Disability Insurance taxes. These include an employee portion imposed at a rate of 6.2% of wages received by employees and an employer portion imposed at a rate of 6.2% of wages paid by employers. IRC Sec. 3101(a). IRC Sec. 3111(a),
[xxiv] These also include an employee portion imposed at a rate of 1.45% of wages received by employees (IRC Sec. 3101(b)(1)) and an employer portion imposed at a rate of 1.45% of wages paid by employers (IRC Sec. 3111(b)).
Effective for tax years beginning after December 31, 2012, employees are also subject to Additional Medicare tax (“AdMT”) imposed at a rate of 0.9% upon wages received by an employee in excess of enumerated dollar thresholds that are dependent upon each employee’s filing status in a calendar year. See IRC Sec. 3101(b)(2).
[xxv] IRC Section 3121(a)(1).
[xxvi] IRC Section 3121(a)
[xxvii] This includes the payment of remuneration after the relationship of employer and employee no longer exists.
[xxviii] IRC Sec. 3121(b)
[xxix] IRC Sec. 3121(h).
[xxx] IRC Sec. 3102(a),Sec. 3111
[xxxi] IRC Sec. 3102(b).
[xxxii] Wages are constructively paid when they are credited to the account of or set apart for an employee so that they may be drawn upon by him at any time although not then actually reduced to his possession. To constitute payment in such a case, the wages must be credited to or set apart for the employee without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, must be made available to the employee so that they may be drawn upon at any time, and their payment must be brought within the employee’s own control and disposition.
[xxxiii] Reg. Sec. 31.3121(a)-2(a). This is referred to as the general timing rule. Reg. Sec. 31.3121(v)(2)-1(a)(1).
[xxxiv] Reg. Sec. 31.3121(v)(2)-1(a)(2)(i).
[xxxv] Reg. Sec. 31.3121(v)(2)-1(b)(3)(i). A plan provides for the deferral of compensation with respect to an employee only if, under the terms of the plan and the relevant facts and circumstances, the employee has a legally binding right during a calendar year to compensation that has not been actually or constructively received and that, pursuant to the terms of the plan, is payable to (or on behalf of) the employee in a later year. An employee does not have a legally binding right to compensation if that compensation may be unilaterally reduced or eliminated by the employer after the services creating the right to the compensation have been performed. For this purpose, compensation is not considered subject to unilateral reduction or elimination merely because it may be reduced or eliminated by operation of the objective terms of the plan, such as the application of an objective provision creating a substantial risk of forfeiture (within the meaning of IRC Sec. 83). Similarly, an employee does not fail to have a legally binding right to compensation merely because the amount of compensation is determined under a formula that provides for benefits to be offset by benefits provided under a plan that is qualified under IRC Sec. 401(a), or because benefits are reduced due to investment losses.
[xxxvi] IRC Section 3121(v)(2)(A) and Reg. Sec. 31.3121(v)(2)-1(a)(2).
[xxxvii] Within the meaning of Reg. Sec. 31.3121(v)(2)-1(e)(2).
[xxxviii] Within the meaning of Reg. Sec. 31.3121(v)(2)-1(e)(3).
The determination of whether a substantial risk of forfeiture exists must be made in accordance with the principles of IRC Section 83 and the regulations thereunder. Reg. Sec. 31.3121(v)(2)-1(e)(3). Reg. Sec. 1.83-3(c)(1) generally provides that a substantial risk of forfeiture exists only if rights in property that are transferred are conditioned, directly or indirectly, upon the future performance (or refraining from performance) of substantial services by any person, or upon the occurrence of a condition related to a purpose of the transfer if the possibility of forfeiture is substantial.
[xxxix] Reg. Sec. 31.3121(v)(2)-1(b)(3)(i).
[xl] Reg. Sec. 31.3121(v)(2)-1(e)(2).
[xli] Reg. Sec. 31.3121(v)(2)-1(b)(4)(iii).
[xlii] In accordance with Reg. Sec. 31.3121(v)(2)-1(e). Reg. Sec. 31.3121(v)(2)-1(f)(1).
[xliii] IRC Section 861(a)(3); Reg. Sec. 1.861-4(a)(1).
[xliv] IRC Section 862(a)(3).
[xlv] Reg. Sec. 1.861-4(b)(2)(ii)(E).
[xlvi] Reg. Sec. 1.861-4(b)(2)(ii)(F).
[xlvii] Reg. Sec. 1.861-4(b)(2)(ii)(G) Example 6.
[xlviii] https://www.ssa.gov/international/agreements_overview.html.
[xlix] This rule is known as the “territoriality rule,” meaning the territory in which a person is working determines tax liability.
[l] I.e., when the substantial risk of forfeiture has lapsed because the required services have been performed.
[li] IRC Sec. 1.861-4(b)(2)(ii)(E).
[lii] IRC Sec. 1.861-4(b)(2)(ii)(F).
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