It is very common for U.S. parent companies to include key non-resident alien employees of their foreign subsidiaries in their stock option plans. What happens when the non-resident exercises the options or sells the options? Is the non-resident subject to withholding tax? Is there a U.S. tax filing requirement?
In frustration a client asked me this question recently as we concluded our meeting. Our meeting began as the client proudly announced that their Company’s sales department was expanding by hiring a new sales person living in Florida. The new sales person would cover clients in Florida and come to Company headquarters in California for two weeks a month. I asked how the employee felt being subject to California tax withholding living in “tax-free” Florida. The client replied by asking why would the employee be subject to California tax being a resident of Florida, working in Florida and servicing clients in Florida? Welcome to the confusing world of payroll taxes.