Charles Read, CPA, USTCP, IRSAC
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An individual who is a citizen or resident of the United States.
A partnership, if two-thirds or more of the partners are citizens or residents of the United States.
A trust, if all of the trustees are citizens or residents of the United States.
A corporation organized under the laws of the United States or of any state or the District of Columbia.
In some situations, a foreign country will impose its own Social Security tax on the wages of a US citizen or resident alien employed in that foreign country by an American employer. This could create a situation in which an employee’s wages are subject to Social Security taxes imposed by two different countries. The United States has entered into agreements with some countries in order to avoid this double taxation.
For a list of other exempt services, refer to Publication 15, Circular E, and Employer’s Tax Guide (www.irs.gov/forms-pubs/about-publication-15).
NONRESIDENT ALIEN SERVICES PERFORMED OUTSIDE THE UNITED STATES
Compensation paid to a nonresident alien for services performed outside the United States is not considered wages and is not subject to graduated withholding or 30% withholding.
PAYING NONRESIDENT ALIENS INSIDE THE UNITED STATES
Any employer who hires aliens (non-US citizens or residents) to perform services within the United States must follow these general procedures with respect to the reporting and withholding of federal income taxes:
Identify all aliens (non-US citizens) on the company’s payroll.
Divide the aliens into two groups: “resident aliens” and “nonresident aliens” as defined by Internal Revenue Code section 7701(b), which defines residency status for aliens. Refer to Determining Alien Status (www.irs.gov/individuals/international-taxpayers/determining-alien-tax-status) for more information on the residency status of aliens.
For income tax withholding purposes, treat resident aliens the same as US citizens.
For income tax withholding purposes, treat nonresident aliens according to the following special withholding rules that apply to nonresident aliens, as described in Chapter 9 of Publication 15 (Circular E) (www.irs.gov/forms-pubs/about-publication-15) and Publication 515, Withholding Taxes on Nonresident Aliens (www.irs.gov/forms-pubs/about-publication-515).
A nonresident alien should follow the special instructions in Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens (www.irs.gov/forms-pubs/about-notice-1392) to complete Form W-4.
A nonresident alien needs to consult Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens before completing a new Form W-4.
Some nonresident aliens are eligible for exemptions from federal income tax withholding on wages because of tax treaties (www.irs.gov/individuals/international-taxpayers/claiming-tax-treaty-benefits). To claim the exemption they must file Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual (www.irs.gov/forms-pubs/form-8233-exemption-from-withholding-on-compensation-for-independent-and-certain-dependent-personal-services-of-a-nonresident-alien-individual) with the employer.
Nonresident aliens who fail to file, or file an invalid Form W-4, as required by IRS regulations shall have federal income taxes withheld at the rates pertaining to single status with no adjustments.
Employers must report wages exempt under a tax treaty paid to a nonresident alien on Form 1042, Annual Withholding Tax Return for US Source Income of Foreign Persons, and Form 1042-S, Foreign Person’s US Source Income Subject to Withholding. Any additional wages paid to a nonresident alien over and above the exempt amount are reported on Form W-2 in the normal manner. Even in situations in which all of a nonresident alien’s wages are exempt from federal income tax under an income tax treaty, and in which all his federal wages would be reported on Form 1042-S, the filing of a Form W-2 for such an alien is usually also required in order to report state and local wage amounts and state and local income taxes withheld on such alien’s wages.
Some income tax treaties allow alien students and scholars who have become resident aliens of the United States to exempt part or all of their US source wages from US taxation. Treaty-exempt wages paid to a resident alien in these situations should be reported on Form W-2, and not on Form 1042-S. In these situations, block 2 (Federal Income Tax Withheld) of Form W-2 may show zero or a reduced amount of federal income tax withheld because of the tax treaty exemption. Refer to Publication 519, US Tax Guide for Aliens, for instructions on how a resident alien claiming a tax treaty benefit should file his/her US federal individual income tax return.
EXCEPTIONS TO MANDATORY WITHHOLDING OF FIT ON NONRESIDENT ALIENS
Wages or nonemployee compensation are exempt from withholding of federal income tax (FIT) if all three of the following conditions are met (per IRC 861(a)(3) and 864(b)(1)):
- The nonresident alien performing services is present in the United States for a total not exceeding 90 days in a taxable year.
- The compensation for such services does not exceed $3,000.00.
- The nonresident alien performs the services as an employee of, or under contract with, a nonresident alien individual, a foreign corporation, or a foreign partnership not engaged in a trade or business in the United States or the foreign office of a US citizen or resident alien individual, a US corporation, or a US partnership (including from within a US possession).
Wages or nonemployee compensation are exempt from withholding of federal income tax if both of the following two conditions are met (per IRC 872(b)(3)):
- The nonresident alien is present in the United States in F, J, M, or Q nonimmigrant status.
- The compensation for services is paid by a nonresident alien individual, a foreign corporation, or a foreign partnership or the foreign office of a US citizen or resident alien individual, a US corporation, or a US partnership (including from within a US possession).