Processing Taxation and Exemption of Employee Payments to U.S. Citizens, Permanent Residents, and Resident Aliens

Purpose

The purpose of this document is to provide step-by-step instruction on how to process taxation of employee
payments to U.S. citizens, permanent residents (Green Card holders), or resident aliens (those who meet
the criteria of the IRS's Substantial Presence Test) in the payroll module of the RF business system.

Background

United States (U.S.) citizens, permanent residents (Green Card), and resident aliens (Substantial Presence
Test) are subject to taxation on their worldwide income. Therefore, no matter where in the world the services
are performed, the income is subject to taxation and reporting at calendar year end on a W-2, "Wage and
Tax Statement."

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 U.S. Citizens, Permanent Residents, and Resident
Aliens" for detailed information on employee taxation and exemption.

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 and
NYS IT-2104, Employee's Withholding Allowance Certificate to choose tax status and the number of allowances.

Additional forms may be required to claim exemption from federal or New York State income tax. Refer to
Taxation Guidance on Employee Payments to U.S. Citizens, Permanent Residents, and Resident Aliens
for detailed information on employee taxation and exemption.

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 tax withholdings. The graduated rate tables and updates are provided to the RF
through a third party software company called Vertex.

Processing Income Tax Exemption

If the employee has claimed exempt from income taxes, the exemption must be recorded on the Federal Tax Rules
form and/or the State Tax Rules form. 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 Visa and Residency SIT

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

Non Citizen Reporting SIT

The Non Citizen Reporting SITs must be completed when a resident alien or nonresident alien
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, Entering 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, so it is important to regularly monitor residency status and make
changes in the system promptly when a residency status changes. Refer to "Processing Taxation and Exemption
of Employee Payments to Nonresident Aliens" and to How to Monitor Residency Determination for Tax Purposes
for more information on residency changes.

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.

Change History

 

 

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