W-4: Federal Payroll Tax Withholding

The IRS requires that all employers withhold federal taxes from the income of nonresident employees. Any compensation received, including grant funds, for services performed is considered taxable income.

On October 31, 2005 the IRS issued new rules for for withholding on wages of nonresident alien employees. The goal of the new rules is to provide withholding on wages that more closely approximates an NRA's income tax liability. The new rules accomplish this with new Form W-4 rules and special payroll computations for withholding on wages.

If an income tax treaty exists, no tax withholding may be required based upon the treaty agreement. Determination of a tax treaty will be made by the Office of International Taxation.

Whether someone is a NRA employee depends upon the results of the 183-day residency formula—the Substantial Presence Test. This is determined by listing the immigration status/history and all days in the United States over a number of years.

The new ruling avoids over-withholding on NRA employees whose pay is less than the personal exemption amount. For further details, including a calculation chart, see a report from Paula Singer, Esq. at Windstar.

The withholding will be lower based on the new Form W-4 because an NRA does not have to include an additional withholding amount.

The W-4 remains valid until facts change that would make it invalid. It is not necessary to collect a new W-4 every year.

Completing the W-4

The specifics NRA rules for completing the Form W-4

• Must not claim exemption from withholding
• Must use single status, even if married
• Must claim only one allowance
• Must write "NRA" on the dotted line on Line 6
• Additional withholding may be withheld at the NRA's request

The "NRA" indication on Line 6 of Form W-4 notifies the payroll computer program to add an additional amount to the wages of an NRA employee to offset the assumed standard deduction that is incorporated into the wage tables.

• The wage amount varies by pay period (weekly, bi-weekly, monthly, etc.)
• The amounts DO NOT affect income for Form W-2 purposes (the form used to report annual income at year end)
• Nor do the amounts affect Social Security, Medicare (FICA), or Federal Unemployment tax (FUTA)

FICA

The Federal Insurance Contributions Act (FICA) imposes two taxes, one on the employee and the other on the employer. These taxes are known as FICA taxes or Social Security taxes. The FICA taxes finance the old age/survivors/disability insurance and the Medicare insurance provided under the Social Security Act.

The FICA tax is calculated based on the amount of wages paid to an employee with respect to employment. Employers are required to pay matching amounts.

The tax for old age/survivors/disability portion of FICA is 6.2%. The Medicare portion of FICA is 1.45%.

FICA, as a general rule, is applicable to salary or wages made by U.S. employers to nonresident alien employees, unless one of the exemptions discussed below applies:

• Exemption under Internal Revenue Code Sec. 3121 (b)(19) requires that an individual must be:
  • A nonresident Alien (a nonresident for tax purposes)
  • Present in the U.S. under an F-1, J-1, M-1 or Q-1 visa
  • Performing services in accordance with the visa's issuance
• Exemption under Internal Revenue Code Sec. 3121 (b)(10)
  • A student who is enrolled and regularly attending classes.
  • Applies to nonresident alien students and U.S. students
• Social Security "Totalization" Agreement is an agreement between the U.S. and another country that eliminates dual Social Security Coverage and taxes for social security programs.

When to File

If an NRA's total wages are less than the personal exemption amount ($3,500 for 2008 and $3,650 for 2009) there will be ZERO federal withholding under the new rules. If the only U.S. source income for the year is wages that are less than $3,500 (2008), an NRA does not have to submit a Form 1040NR-EZ.

If an NRA's total wages exceed $3,500 (2008), the NRA must file a 1040 NR-EZ and report the wages. Taxes, interest and penalties may be owed if the NRA withholding procedure listed above was not followed.

NRAs are in most instances not allowed to claim additional personal exemptions. The IRS expects employers of NRAs to apply due diligence over the W-4s of NRAs. If the W-4 is filled out incorrectly, it is deemed invalid.

An NRA individual's eligibility to claim exemptions is based on the individual's status, not that of their spouse or child. For example, an NRA individual from Turkey who has a child who is a U.S. citizen can't claim the child on this W-4.

U.S. citizens and resident alien taxpayers are allowed to claim personal exemption for children who meet the requirements of being dependents as specified in section 151. One of the requirements is that the dependent be a U.S. citizen, U.S. resident, U.S. national, or a resident of Canada or Mexico.