Payroll Services
Form 2555, Form 1116, Treaty, 183 Days
Payroll for UK companies with US staff and US companies with UK staff, covering PAYE, US withholding and the social security agreement.
What does Payroll Services involve?
An employee on the other side of the Atlantic brings two income tax systems and two social security systems into one payslip. The treaty and the totalization agreement decide which country collects what, but only if the paperwork is in place. We run the payroll so both countries' requirements are met from the first pay date.
Forms and filings involved
- Form 2555
The election to exclude a capped amount of foreign earnings from US tax, with a separate housing exclusion or deduction.
- Form 1116
The form that turns UK income tax into a credit against US tax on the same income, with carryovers for unused amounts.
- Treaty
How the US-UK income tax treaty allocates taxing rights, and where its saving clause limits what US citizens can claim.
- 183 Days
How the IRS decides whether a non-citizen without a green card is a US resident for tax, and the exceptions that change the count.
- State Returns
Why a move to the UK does not always end a US state tax obligation, and how states decide who remains a resident.
Employing someone in the other country
Social security is governed by the US/UK totalization agreement, not the income tax treaty.
Its general rule is that contributions are paid only in the country where the work is done. An employee sent temporarily to the other country can stay in the home system instead, and the evidence for that is a certificate of coverage issued by the home country: the Social Security Administration for US coverage, HMRC for UK coverage. Without the certificate, both countries may expect contributions on the same pay.
A UK company hiring in the US needs a federal employer identification number, federal income tax and FICA withholding, and quarterly and annual federal payroll returns, plus registration in each state where staff work. State income tax and unemployment insurance rules vary widely. A US employee working for the company can also give it a taxable presence in the US, so the hire is worth reviewing for corporation tax as well as payroll before the contract is signed.
A US company with a UK employee faces PAYE. An employee working in the UK is generally subject to UK income tax and National Insurance on that work, and whether the employer operates PAYE or the employee accounts for the tax directly depends on the employer's UK presence. Where the employee is a US citizen, the employer generally need not withhold federal income tax to the extent UK law requires withholding on the same wages. Social security then follows the agreement, not the passport.
What a cross-border payroll covers
- 01
- Certificates of coverage requested before the employee starts work abroad
- 02
- UK PAYE and National Insurance on salary, benefits and bonuses
- 03
- US federal, FICA and state withholding for staff working in the US
- 04
- Days worked in each country tracked against the short-visit treaty exemption
- 05
- Share awards apportioned between the countries by where the work was done
Who this is for
UK companies making their first hire in the United States
- US businesses employing a remote worker based in the UK
- Employers seconding staff across the Atlantic for a fixed period
- US citizens on a UK payroll whose employer is unsure about withholding
Why US UK Tax Returns
Each return is prepared with the other country's return open beside it, so a credit, election or disclosure on one is supported by the other.
One File
US and UK returns prepared in the same engagement and reconciled line by line.
Primary Sources
Every position traced to the Code, the treaty, IRS instructions or HMRC guidance.
Scope First
Returns, forms, years and fee agreed in writing before work begins.
The Same People
The team that files this year carries the elections and credits into the next.
Questions we are asked
My employer is sending me from London to New York for two years. Do I pay US social security?
Usually not, if the assignment qualifies as a temporary posting under the totalization agreement. An employee sent to work in the US by a UK employer can remain in the UK National Insurance system, provided HMRC issues a certificate of coverage. The employer keeps a copy to show why FICA is not withheld. US federal and state income tax withholding still applies under the normal rules, and the certificate has no bearing on it.
We are a US company. Can we pay a UK employee through our US payroll?
You can pay them from the US, but UK income tax and National Insurance are still due on work done in the UK. The practical question is who accounts for it. Depending on the company's UK presence, that may be the company through PAYE or the employee directly. US withholding generally does not apply to a non-US person working outside the US. Using the wrong route can leave both the business and the employee exposed.
Does the treaty let a visiting employee avoid tax in the country they visit?
For short trips, often yes. The treaty's employment article generally exempts pay for work done in the other country where the visitor is present for no more than a limited number of days in any twelve-month period, the employer is not resident there, and the cost is not borne by a local branch. All the conditions must be met. Many US states do not follow the treaty, and social security is decided separately.
Primary sources
What this page says is drawn from the official material below. Read it yourself; we would rather be checked than trusted.
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