nonresident alien taxation irs compliance risks when paying foreign persons

nonresident alien taxation irs compliance risks when paying foreign persons PowerPoint PPT Presentation


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2. Agenda. IRS Tax StatusWhat is a Nonresident Alien

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nonresident alien taxation irs compliance risks when paying foreign persons

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1. 1

2. 2

3. 3 IRS Tax Status For IRS withholding purposes you are either… US Citizen Green Card Holder Other…..?

4. 4 IRS Tax Status…Other You Are Either a (RA) Resident Alien or You are a (NRA) Nonresident Alien for US Tax Withholding Purposes

5. 5 What is a (NRA)…Nonresident Alien? A NRA is an IRS Tax Term For a Specific Tax Status…Not an Immigration Status NRA Status is Determined via The IRS Formula for Substantial Presence in The US…(SPT Test)

6. 6 IRS Tax Status…NRA VS RA RA… taxed like US Citizens NRA… Special W-4 Required Special Withholding Rates Required NRAs…No Exemptions for Spouse or Dependents

7. 7 Importance of Nonresident Alien (NRA) Tax Compliance Provide tax benefits to students, teachers, professors and independent contractors Avoid unnecessary assessments, fines and penalties Be prepared for an IRS audit – where is the audit trail?

8. 8 IRS Requirements andTax Status Determinations In making payments such as wages, nonservice fellowship grants, honoraria and other independent contactor fees, pensions, royalties, and miscellaneous payments, you need to know: US citizen, green card holder, or other Character of the income paid Tax residency status of income recipient Source of the payment under U.S. tax rules Conditions allowing exemption from tax

9. 9 IRS Requirements and Tax Status Determination The Starting Point: Tax Residency Status Resident Alien (RA) or Nonresident Alien (NRA) determines Income subject to tax - RA Worldwide, NRA US only Form W-4 and FIT rules Internal Revenue Code tax exemptions NRA FICA Exception for F-1 and J-1 NRAs Whether certain treaty exemptions apply Withholding certificates for treaty benefits (8233, W-8BEN or W-9)

10. 10 IRS Requirements and Tax Status Determination Federal Tax Structure for Nonresident Aliens Two-tier structure 30 percent withholding tax on gross US source fixed or determinable annual or periodic (FDAP) Income14 percent on taxable grants of F and J status recipients

11. 11 IRS Requirements and Tax Status Determination Substantial Presence Test (SPT) – 183- day formula based on: Current status and date of entry (and expected departure date) 3-calendar year history of US visits Longer history if any visits in 3 years are/were in F, J, M, or Q status

12. 12 IRS Requirements and Tax Status Determination Substantial Presence Test (SPT) 183 U.S. days based on a 3-calendar year formula All of the current year’s US days 1/3rd of prior year’s US days 1/6th of 2nd preceding year’s US days

13. 13 IRS Requirements and Tax Status Determination Exception to counting days for “Exempt Individuals” (not exempt from tax!) F and J Students (5 exempt calendar years) J Nonstudents (2 exempt years out of 7 current calendar years)

14. 14 Treaty Benefit Eligibility andPayments to NRAs The U.S. has treaties affecting payments to foreign nationals with over 60 countries around the world Treaties offer tax exemptions for foreign nationals who were or are tax residents (not citizens) from a treaty country Many foreign nationals understand and expect these benefits The IRS expects organizations to comply with its rules and procedures when granting treaty benefits

15. 15 Treaty Benefit Eligibility andPayments to NRAs Tax status: NRA or RA Prior treaty benefits received Primary purpose of visit as evidenced by DS-2019 for Exchange Visitors I-129 petition and letters for H-1B, O-1 I-20 and EAD for F-1 during OPT Status of the organization (educational, medical, scientific or public research, foundations.) Studying, teaching, conducting research, training, other paid activities (honorarium activity)

16. 16 Treaty Benefit Eligibility andPayments to NRA’s Payment types Payroll Nonservice fellowship grants Accounts payable

17. 17 Treaty Benefit Eligibility andPayments to NRA’s“Payroll” New W-4 Rules and their effect on NRA’s IRS Notice 2005-76 Requires employers to augment wages with an amount that reflects the standard deduction built into the wage withholding tables Underwithholding penalties will be applied in 2007

18. 18 Treaty Benefit Eligibility andPayments to NRAs“Payroll” Wages paid to foreign nationals Treaty benefits (tax exemption): 8233 for NRA, W-9 for RA if due diligence indicate eligibility and availability Treaty benefit end date for research (usually 2 years from date of arrival) Form 1042-S (Income Code 18) – not W-2

19. 19 Treaty Benefit Eligibility andPayments to NRAs“Scholarship/Fellowship” Non-service fellowship for research No Treaty-14% withholding if paid to NRA in F or J status Form 1042-S (Income Code 15) If no employment income, can use a withholding allowance (deduction) not to exceed the personal exemption amount

20. 20 Treaty Benefit Eligibility andPayments to NRAs“Accounts Payable” A/P payments to a foreign national in NRA status No treaty benefit available – withhold 30% Treaty benefit but no TIN - withhold 30% Form 1042-S (Income Code 16) – never a 1099 Honorarium: due diligence before you can legally accept the services

21. 21 Treaty Benefit Eligibility andPayments to NRAs“Accounts Payable” A/P payments to foreign nationals Treaty benefits (tax exemption): 8233 filing if due diligence indicates eligibility and availability Treaty benefit due diligence: SPT for tax status and eligibility as a NRA, treaty analysis for availability (No self-employment benefit for a RA.)

22. 22 Forms, Filing, and Immigration Risks Withholding certificates W-4 under new NRA rules 8233 for treaty benefits for NRA compensation (required annually) W-8BEN for treaty benefits for all other payment types W-9 for treaty benefits for RAs

23. 23 Forms, Filing, and Immigration Risks Year-end Reporting 1042-S information return for NRAs 1042 tax return required if any Forms 1042-S are issued (even if all are for treaty exemption and have no tax withholding)

24. 24 Forms, Filing, and Immigration Risks Nonresident Aliens W-2 reporting for wages subject to wage withholding and FICA wages and taxes—not 1042S 1042-S for treaty-exempt income (including treaty-exempt wages) 1042-S reporting for all other income payments (not 1099!)

25. 25 Forms, Filing, and Immigration Risks Immigration risks for organization from unauthorized workers performing services Non-sponsored employees performing services for the organization Foreign nationals not authorized to perform independent services

26. 26 Summary Determine the foreign national’s U.S. tax status via Substantial Presence Test Perform due diligence with NRA Apply applicable treaty benefits Complete and file all required IRS forms

27. 27 Summary Best practices in making payments to NRAs Implement policies and procedures for meeting IRS due diligence AP…No I-9….ask the question? Keep up-to-date on rules and forms procedures – they change frequently

28. 28 Where To Find More Information Easy-to-read tax treaties and View from the Crow’s Nest archives at www.windstar.com www.irs.gov click on Individuals, click on International Taxpayers www.nafsa.org for information on government procedures affecting foreign students and exchange visitors

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