Last month we discussed the circumstances under which a Bermuda national could have a US tax filing requirement. Today, we will discuss the US tax filing requirements of a Bermuda company which sends its employees to the United States on business.

Doing Business in The United States If a Bermuda company sends an employee to the United States to meet with a client, attend a seminar or to purchase goods for sale in Bermuda, is the Bermuda company deemed to be "doing business'' in the United States? In most cases, the answer would be no. Having a representative in the United States does not necessarily translate into the Bermuda company having a "permanent establishment'' in the United States, wherein it would become subject to US income tax.

What If A Local employee Does Go To The United States On Business? The United States income tax law requires an "employer'' who pays compensation to an "employee'' who performs services for said employer in the United States to withhold the proper amount of income and social taxes from the employee, and to remit the taxes withheld from the employee, as well as the employers share of various social taxes to the Internal Revenue Service within a few days of the withholding taking place.

The tax law does not define the word "employer'', and the Courts have not limited the definition of the term to US "employers'' only. It applies to all global employers who have employees working in the United States.

What Taxes Are Required To Be Withheld? At a minimum, Federal income taxes, Social Security and Medicare taxes, and Federal unemployment taxes. Dependent on the state in which the employee works, state and city income taxes, and state unemployment and disability taxes will probably also need to be withheld.

What Procedures Need To Be Followed? The Bermuda company should first obtain a US Federal employer identification number. This can be accomplished by filing Form SS-4 and faxing or sending it to the Internal Revenue Service. The next step would be to make arrangements with the Internal Revenue Service to deposit the taxes withheld. While the tax law requires all employers to withhold taxes, the Regulations are silent as to how a foreign employer should remit these taxes to the Internal Revenue Service.

Dependent on the amount of income taxes withheld, they may have to be remitted to the Internal Revenue Service as soon as three days after they are withheld, to once every three months. All deposits made must be accompanied by a Federal tax deposit coupon, which will be sent to the employer when you obtain your employer identification number.

What Forms Need To be Filed? Form 941 must be filed each quarter. This form summarises the compensation which you paid to each employee and the tax which you withheld during the quarter. Annually, a Form 940 is filed which summarises the quarterly Forms.

At year end, the employer is required to furnish each employee with a Form W-2, which summarises the compensation paid to the employee, the income and social taxes withheld, as well as State and City tax information. Two or more copies of the Form W-2 must be given to the employee by January 30, and a copy sent to the IRS.

What Happens If I Do Not Withhold Or Remit Income Taxes? Penalties and Interest A three tier penalty structure is imposed on failure to file the aforementioned returns. The penalties range from $50 per statement to a maximum of $100,000 per payer per calendar year, at each tier. Interest is also assessed on the penalty at a rate approximating three points over the prime rate. Two additional penalties (and interest) apply to the negligence and disregard of rules and substantial underpayment of tax. Simply, if a company chooses to ignore the requirement to withhold taxes, the eventual penalties and interest can readily exceed 100 percent of the tax due.

Criminal Penalties Criminal penalties may be incurred where the taxpayer wilfully fails to make a return, keep records, supply required information, or pay any tax, or wilfully fails to collect and pay over the tax. In addition to the felony charges, misdemeanour charges can also be brought against the responsible person. The criminal penalties are in addition to the civil penalties. A criminal prosecution can be started at any time up to six years after the offence is committed.

Who will the criminal penalties be levied against? Usually the Chief financial officer or the treasurer of the company. Or, if there is doubt as to who was responsible, any officer of the company. Does anybody really go to jail? Every day. One method that the Internal Revenue Service uses to encourage continued compliance with the income tax laws, is to criminally prosecute high profile cases.

The tax advice given in this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of Expatriate Tax Services LLC, P.O.

Box 617, Bernardsville, NJ, and is associated with GulfStream Financial Ltd.

in Bermuda.