Small Business Taxes & Management^TM--Copyright 2007, A/N Group, Inc.

Any employer who hires aliens to perform services within the United States should comply with the following general procedures with respect to the reporting and withholding of federal income taxes:

• Identify all aliens (non-U.S. 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 for more information on the residency status of aliens.
  
• For income tax withholding purposes, treat resident aliens the same as U.S. Citizens.
  
• For income tax withholding purposes, treat nonresident aliens according to the following special withholding rules that apply to nonresidents as described in IRS Publication 15 (Circular E) and Publication 515, Withholding Taxes on Nonresident Aliens.

1. A nonresident alien cannot write "exempt" on line 7 of Form W-4.
   
2. A nonresident alien may claim only "single" filing status on line 3 of Form W-4, even if he is married.
   
3. With certain exceptions, a nonresident alien cannot claim more than one personal exemption on Form W-4. For an explanation of the exceptions, refer to the "Exemptions" section on Figuring Your Tax. .
   
4. or wages paid prior to January 1, 2006, a nonresident alien (NRA) was required to write in an additional withholding amount on line 6 of Form W-4. For wages paid after December 31, 2005, NRA employees are required to fill out Form W-4 in the special way described at " Withholding Exemptions--Personal Exemptions--Form W-4". In addition, see the instructions for NRA Forms W-4 contained in Chapter 9 of Publication 15.
   
5. Some nonresident aliens are eligible for exemptions from federal income tax withholding on wages because of tax treaties. To claim the exemption they must file Form 8233 (PDF) with the employer.
   
6. 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, zero exemptions.
   
7. Employers must report wages exempt under a tax treaty paid to a nonresident alien on Forms 1042 (PDF) and 1042-S (PDF). 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 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 U.S. source wages from U.S. 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, U.S. Tax Guide for Aliens for instructions on how a resident alien claiming a tax treaty benefit should file his/her U.S. federal individual income tax return.

Exceptions to Mandatory Withholding of Federal Income Tax on Nonresident Aliens:

1. IRC 861(a)(3) / IRC 864(b)(1)-Wages or Nonemployee Compensation are exempt from withholding of federal income tax if all 3 of the following conditions are met:

• The nonresident alien performing services is present in the U.S. for a total not exceeding 90 days in a taxable year;
  
• The compensation for such services does not exceed $3,000; and
  
• 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 U.S. or the foreign office of a U.S. citizen or resident alien individual, a U.S. corporation, or a U.S. partnership (including from within a U.S. possession).

2. IRC 872(b)(3)- Wages or Nonemployee Compensation are exempt from withholding of federal income tax if both the following 2 conditions are met:

• The nonresident alien is present in the U.S. in F, J, M, or Q nonimmigrant status; and
• The compensation for services is paid by a nonresident alien individual, a foreign corporation, or a foreign partnership or the foreign office of a U.S. citizen or resident alien individual, a U.S. corporation, or a U.S. partnership (including from within a U.S. possession).

--Last Update 09/05/07