Processing Taxation and Exemption of Employee Payments to Nonresident Aliens

Purpose

The purpose of this document is to provide step-by-step instruction on how to process taxation of employee payments to nonresident aliens in the payroll module of the RF business system.

Background

A separate tax system exists for nonresident aliens within the Internal Revenue Code (IRC) section 1441. Payments to nonresident aliens are subject to very different tax withholding, income reporting and liability requirements than that of U.S. citizens, permanent residents, and resident aliens. Various factors determine if payments are reportable and taxed, depending on the specific circumstances of each nonresident alien's payment and their country of residence.

To ensure taxes are withheld and income is accurately reported on the W-2 statement, IRS forms submitted by employees must be reviewed and information must be correctly entered into the RF business system.

Tax status, withholding allowances, and exemption determination is the responsibility of employees, who will reconcile with the IRS on individual tax liability vs. taxes withheld when they file their individual income tax return at year end.

Refer to "Taxation Guidance on Employee Payments to Nonresident Aliens" for detailed information on employee taxation and exemption.

Information Required from Nonresident Alien Employees

Before processing a payment to a nonresident alien employee, ensure that the following paperwork is on file to document that the nonresident alien can be set up in the RF business system, that he or she is a nonresident alien, and that an exemption (if applicable) applies:

Memo or Form

Purpose and Requirements

RF Business System Input

Request for Alien Information for Employees or Fellows (pdf) (excel)

To gather information about the non U.S. citizen's residency status for entry into the RF's business application and to test the individual’s residency status.

Once residency for tax purposes is determined, it is entered on the People form in the Nationality field or, if the employee is a resident alien, the resident alien status must be entered on the Non Citizen Residency Special Information Type (SIT) form.

Memorandum - Tax Information for Nonresident Alien Employees

To inform the individual of the current tax residency status based on information provided. Provides information on required federal and state tax withholding status and possible exceptions. Outlines available tax exemption claims and requirements. Explains individual’s responsibility to report any changes in residency status. Provides advance notice of the W-2 tax and wage statement and 1042-S that will be sent.

Not applicable.

IRS Form W-4, " Employee's Withholding Allowance Certificate"

Nonresident alien must claim single, 1 allowance, and write "nonresident alien" or "NRA" above the dotted line leading to the "additional withholding" section, unless income tax treaty exemption or an exception applies. Refer to "Taxation Guidance on Employee Payments to Nonresident Aliens" for more information on exemptions and exceptions.

Refer to "Processing Taxation in the RF Business System" below for details on system taxation processing.

NYS IT-2104, "Employee's Withholding Allowance Certificate"

Nonresident alien must claim single, 1 allowance, and write "nonresident alien" or "NRA" above the dotted line leading to the "additional withholding" section, unless income tax treaty exemption or an exception applies. Refer to "Taxation Guidance on Employee Payments to Nonresident Aliens" for more information on exemptions and exceptions.

Refer to "Processing Taxation in the RF Business System" below for details on system taxation processing.

IRS Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual

For income tax treaty exemption. If the individual’s country of residence has an income tax treaty with the U.S. and the income is covered in the treaty, the individual may claim income tax treaty exemption using the form.

For more information, refer to "Completing IRS Form 8233 for Nonresident Aliens Requesting Tax Treaty Exemption ."

Refer to the section "Processing Income Tax Exemption" below for details on system input requirements.

 

Reviewing Required Tax Forms

Before setting up an employee's taxation or exemption information in the RF business system, ensure that the paperwork is on file.

Employees must complete IRS Form W-4, "Employee's Withholding Allowance Certificate" according to specific IRS default rules under IRC 1441. The nonresident alien is restricted under the rules on how they may fill out the W-4. This is generally single, 1, and must write "nonresident alien" or "NRA" above the dotted line leading to the "additional withholding" section. Nonresident aliens are not allowed to claim exemption on IRS Form W-4. Refer to "Taxation Guidance on Employee Payments to Nonresident Aliens" for detailed information on nonresident alien employee taxation and exemption.

If the nonresident alien employee is claiming exemption under a tax treaty, IRS Form 8233, "Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual" form and a supporting statement must be completed. Completing the form and determining if exemption applies is the responsibility of the employee. Employees reconcile with the IRS on individual tax liability vs. taxes withheld when they file their individual income tax return at year end. Operating locations must also review and approve the paperwork. Refer to the procedure "Using Income Tax Treaties and Quick Reference Tables" for information on how to determine if a tax treaty applies and the form procedure "Completing IRS Form 8233 for Nonresident Aliens Requesting Tax Treaty Exemption" for instructions on claiming the exemption and completing the form.

Processing Taxation in the RF Business System

Graduated rate tables are automatically updated in the payroll module of the RF business system to process the proper federal and New York State income tax withholdings. The graduated rate tables and updates are provided to the RF through a third party software company called Vertex.

The taxes withheld are calculated on federal and state taxable wages. Federal and state taxable wages are gross wages minus pretax deduction minus tax deferred deductions. For example, if an employee's gross biweekly wages are $1,230.00 and the employee has pretax health biweekly deductions of $52.00, then the Social Security and Medicare taxable wages equal $1,178.00 ($1,230.00 minus $52.00). The employee also has a tax deferred biweekly deduction of $ 35.00, therefore the biweekly federal and state income taxable wages are $1,143.00 ($1,178.00 minus $35.00). The federal and state withholdings are calculated using the federal and state graduated rate tables based against taxable wages of $1,143.00.

In addition, effective with wages paid after January 1, 2006, the RF is required to add an amount to the wages of the nonresident alien solely for the purpose of calculating the income tax withholding for each pay period. The specific amount depends on the payroll period (for the RF this is biweekly) and the current standard deduction (for 2006 $2,650/26 pay periods = $102). The amount added to the nonresident alien's taxable income is for tax withholding calculations only and is not reportable to the employee as income. Therefore, the taxable amount is added into taxable wages for the tax calculation, but pulled out of the eventual net pay and reporting amount. The IRS asked for implementation of the new rule as soon as possible but provided a final deadline of December 31, 2006.

Processing Income Tax Exemption

If the employee is exempt per IRS Form 8233 and the supporting statement, the exemption must be recorded on the Federal Tax Rules form and/or the State Tax Rules form in the RF business system. Instructions are provided in the table that follows:

Step

Action

1

On the Assignment form in the payroll module, click the Tax Information button.

2

If the employee is exempt from federal taxes, select the FIT check box in the Tax Exemption region of the form.

AND/OR

If the employee is exempt from state taxes, go to Step 3.

3

Click the State Tax button.

4

On the State Tax Rules form, select the SIT check box in the Tax Exemption region of the form.

Special Information Types

Special Information Types (SITs) are added to an employee assignment in the payroll module to record residency for tax purposes and tax status data.

Non Citizen Residency Information SIT

Operating locations must input any residency for tax status data into the payroll module of the RF business system after reviewing forms submitted by the employee to ensure that they are complete and valid. Once residency for tax purposes is determined, it is entered on the People form.

Non Citizen Reporting Information SIT

The Non Citizen Reporting Information SITs must be completed when the employee is claiming exemption under an income tax treaty. The Non Citizen Reporting SIT data appears on the year-end 1042-S tax statement. It is also very important to enter income tax treaty start and end dates in the Non Citizen Reporting SIT to reflect the income that must be reported on the 1042-S. The tax status must be entered for each calendar year.

Refer to "1042-S Non Citizen SIT Monitoring" for more information on non citizen SITs. Refer to the work instruction, "Enter an Employee Record" for more information on properly entering SIT data.

Residency Changes

During a calendar year a non U.S. citizen's residency for "tax purposes" may change. The majority of situations will be from a nonresident alien to a resident alien (meeting the Substantial Presence Test - SPT) or even possibly to a permanent resident. Tax withholding and reporting requirements are very different for nonresident aliens and resident aliens. It is important to promptly and properly code residency changes in the RF business system. The process is described in the table that follows:

Step

Action

1

Change the residency status on the People form:

  • If the non U.S. citizen is a permanent resident: In the Nationality field, select Permanent Resident.
  • If the non U.S. citizen is a resident alien (meets the substantial presence test): Click the Special Info button, select Non Citizen Residency SIT, and on the Non Citizen Residency Info form select "Y" for Res Alien for tax - meets SPT.

Reviewing Tax Status

Information contained in reports and year-end tax statements is collected from the data stored in the RF's business application. If data are missing or inaccurate, tax statements will be missing or inaccurate. Correcting tax statements after they have been created and distributed is an administrative burden for staff at both the operating locations and at the central office. Corrections are also an inconvenience to the person receiving the corrected tax statement from the RF.

Any errors, such as misclassification or tax withholding errors, may bring significant risk exposure to the RF, and
may result in penalties and fines, which would be passed on to the operating location responsible. Operating locations
should have a procedure in place for reviewing the input in the RF business application so that accurate income tax
withholding or exemption is maintained throughout the year.

Refer to Monitor Employee Income Taxation
for information on monitoring employee income tax withholding or exemptions.

Change History

 

 

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