Presentation Transcript

1. Nonresident Alien Tax Compliance Monday, January 25, 2010 Mary Alice Boyd
2. Agenda Overview of the Tax System Federal Income Taxes State Income Taxes Social Security/Medicare Taxes Determining Residency Characterizing Income Sourcing Income Withholding Reporting Taxpayer Identification Numbers Recap (6-Step Procedure) Resources Questions
3. Overview of the Tax System SystemResidency Status US Tax System US Citizens Lawful Permanent Residents Resident Alien for Tax Purposes Nonresident Alien Tax Nonresident Alien for Tax System Purposes
4. Federal Income Taxes General Rule All withholding agents must withhold federal income tax from all income payments made to or on behalf of a nonresident alien If the withholding agent does not withhold the appropriate amount of tax at the time of payment, the withholding agent will be liable for the tax, plus any penalties and interest – regardless of whether the individual pays the tax on his or her tax return Withhold at 30% unless An exception is available (14%, wage withholding), and The requirements for exceptions are met
5. Federal Income Taxes Compensation paid to nonresident alien employees Subject to the graduated withholding rates in the same manner as wages to US citizens with two major exceptions: Standard deduction is built into withholding tax tables, employer must add an amount to the wages of a nonresident alien Making Work Pay Tax Credit is built into withholding tax tables, employer must determine an additional amount of withholding to offset built in credit Publication 15-T Form W-4 must be completed in a special manner Single or married filing separately rates 0 or 1 personal exemption (with a few exceptions ) No standard deduction with one exception Treaty exception for business apprentices and students from India
6. Federal Income Taxes 30% Withholding Applies unless an exemption or reduction is available and the requirements are met Applies to rents, royalties, prizes and awards, gambling winnings, etc. Applies to self-employment including honorarium payments
7. Federal Income Taxes 30% Withholding Does not apply to foreign-source income No Taxpayer Identification Number (TIN) required for payment But a TIN is a required for an exemption from tax under a treaty $50 penalty for no TIN on a reporting document (1042-S) No penalty if withhold at the statutory rate – 14% or 30%
8. Summary of Federal Income Taxes All US source income payments to NRAs are subject to 30% withholding except for: Wages subject to wage withholding 14% for non-service scholarships/fellowships (qualifying F, M, J, or Q status only) Exceptions under the tax code or a treaty No TIN is required unless a treaty exemption is claimed (but will have a penalty if not withheld at a statutory rate)
9. State Income Taxes Not all states honor federal tax treaties, but North Carolina does Non-wage compensation of more than $1,500 during the calendar year to a nonresident contractor for personal services performed in NC in connection with a performance, an entertainment or athletic event, a speech, or the creation of a film, radio, or television program, you must withhold NC income tax at the rate of 4% from this non-wage compensation States have their own definitions of resident, part-year resident, nonresident, etc, and they generally do not follow federal residency rules
10. Social Security/Medicare Taxes FICA tax (Federal Insurance Contributions Act) Applies to compensation for employment services performed in the US Social Security = 6.2% of wages, up to a limit of $106,800 (2010) Medicare = 1.45% of wages with no limit
11. Social Security/Medicare Taxes Exceptions for Social Security/Medicare taxes: Student FICA Exception Students working on the campus of the institution where they are enrolled and regularly attending classes Same rules for US citizens NRA FICA Exception Nonresident aliens In F-1, J-1, M-1, or Q-1/Q-2 status Engaged in employment consistent with the purpose of the visit Totalization agreement exception with a certificate of coverage
12. Determining Residency A non-US citizen who passes one of two tests is a resident alien (RA) US Lawful Permanent Resident (LPR) Test (Green Card Test) Substantial Presence Test (SPT) All other non-US citizens are nonresident aliens (NRAs)
13. Determining Residency General Substantial Presence Test 31 countable US days in the current calendar year, and 183 countable US days based on a 3-calendar year formula All of the current year’s countable days 1/3 of the prior year’s countable days 1/6 of the 2nd preceding year’s countable days A partial day counts as one day
14. Determining Residency SPT exceptions for exempt (from counting days) individuals for F, J, and M Students (includes J Student Interns) Must wait 5 calendar years before counting days J and Q “Teachers and Trainees” (includes all J nonstudents) Must wait 2 calendar years before counting days A and G Foreign Government-related Individuals
15. Characterizing Income You must determine the income type in order to apply the correct tax rules Misclassification can lead to failure to withhold income and FICA taxes (this is true for NRAs and US citizens) Substance controls over form The name given to the payment by the payer is not controlling A scholarship requiring services to be performed is compensation A stipend may be either a scholarship or fellowship grant or compensation
16. Characterizing Income Type of income Compensation for services Dependent personal services: wages, service- related payments, travel reimbursements Independent personal services: consulting fees, guest speaker, honorarium, travel reimbursements Scholarships and fellowship grants Other income Prizes and awards Royalties
17. Characterizing Income – What income is taxable? Compensation Dependent Wages / Salary / Stipend Taxable / Treaty Exempt Travel Reimbursement / Payment “Accountable Plan” Independent Ind Per Services / Consulting Fees Taxable / Treaty Exempt Honorarium / Guest Speaker Fees Taxable / Treaty Exempt Travel Reimbursement / Payment “Accountable Plan” Scholarships/Fellowships Tuition / Fees Excluded under Section 117 Room / Board Taxable / Treaty Exempt Stipend Taxable / Treaty Exempt Book Allowances Excluded under Section 117 Travel Reimbursement / Payment Taxable / Treaty Exempt Prizes and Awards Taxable Royalties Taxable / Lower Treaty Rate
18. Are travel expenses taxable? The “Accountable Plan” rules only apply when there is a compensatory relationship Employees and Independent Contractors who receive compensation The “Accountable Plan” rules do not apply if there is not a compensatory relationship Students and scholars who receive non-service scholarships and fellowships
19. Sourcing Income Determining whether the income is foreign- source income or US-source income Source of income matters because NRAs are not taxed on foreign-source income
20. Sourcing Income Rules for Compensation Compensation for services performed in the US is US-source Compensation for services performed abroad is foreign-source Location and currency of payroll are not controlling
21. Sourcing Income Scholarship and fellowship grants US-source if The grantor is a US resident and The study, research, or training is in the US Foreign-source if The grantor is foreign or The study, research, or training is outside the US A grant paid by a US paying agent for a foreign grantor remains foreign-source
22. Sourcing Income Prizes and awards US-source if provided by a US resident Foreign-source if provided by a foreign resident
23. Sourcing Income Royalties Based on where the property is used Keep separate records for property used both within and without the US Avoids having to withhold on total income Must differentiate between Payment for use of intangible property (royalties) Payment for creating intangible property (services) Sales of all substantial rights in intangible property (sale proceeds)
24. Withholding All income paid to a nonresident alien or a third party on his or her behalf are either: Exempt Foreign source Internal Revenue Code Tax Treaty OR Taxable Graduated withholding with adjustments (employee compensation) 14% (Scholarships/Fellowships to F, J, M & Q status) 30% (Non-employee compensation and all other payments)
25. Withholding No withholding certificate is required if a withholding tax reduction is not claimed Best to collect Form W-9 as a certificate of US status Form W-8BEN as a certificate of foreign status
26. Withholding Withholding certificates for exemptions Form 8233 for compensation for personal services Form W-9 for RA exempt from tax under a treaty Form W-8ECI for effectively connected income But cannot be used for compensation for personal services Form W-8EXP for income of a tax-exempt entity Form W-8BEN for all other US income
27. The General Rule Withhold at the highest rate (30%) unless An exception is available (14%, wage withholding), and The requirements for exceptions are met Withhold at the highest rate (30%) if Documentation is unreliable or not provided
28. Reporting A nonresident alien should receive: Form 1042-S and/or Form W-2 Never Form 1099
29. Reporting Form W-2 Wages subject to federal income tax (not treaty-exempt wages) Social Security/Medicare wages and taxes State wages and taxes Special fringe benefit reporting
30. Reporting Form 1042-S All compensation payments exempt from tax under a tax treaty All income, other than qualified non-service scholarships, paid to a nonresident alien regardless of whether the payment is taxable Foreign source income (exemption code 03) if you wish to report, but not required
31. Taxpayer Identification Numbers No TIN required to pay an employee if I-9 employment authorization is satisfied Required for W-2 reporting or $50 penalty Employers participating in e-verify must have TIN on I-9 No TIN required for non-employee payments subject to withholding Only required for Form 1042-S reporting if withholding is not at the statutory rate (30% or 14%) $50 penalty if do not withhold at statutory rate
32. Taxpayer Identification Numbers TIN required to exempt income from withholding tax Form 8233 special exceptions If SSN applied for, and receipted by SSA, or ITIN application submitted with Form 8233 copy to ITIN Unit Form W-8BEN – no exceptions
33. Procedures for Paying or Compensating Nonresident Aliens Step 1 – Payee-Payment Eligibility and Tax Residency Status Step 2 – Type of Payment Step 3 – Source of the Income Step 4 – Is the Payment Subject to Income Tax Withholding? Step 5 – Is the Payment Subject to FICA? Step 6 – Reporting Payments
34. Step 1 – Payee-Payment Eligibility and Tax Residency Status Foreign national information gathering form should be completed and presented with copies of specified immigration documentation Used to determine: Eligibility for payments to be made based on the type of visa issues Determine if the Payee’s tax status is NRA or RA NRA or RA determines: Income subject to tax – NRA (US only) or RA (worldwide) Whether certain treaty exemptions apply http://finance.uncc.edu/Forms/FormsHome.html
35. Step 2 – Type of Payment Primary categories: Dependent personal services: wages, service related scholarship/fellowship/assistantship payments, travel reimbursements Independent personal services: consulting fees, guest speaker, honoraria Scholarship/Fellowships: qualified, nonqualified Other Income Types: prizes and awards, royalties, etc.
36. Step 3 – Source of the Income Nonresident Alien – Subject to tax only on US-source income Compensation is sourced to the country where services are performed Non-compensation payments such as scholarships/fellowships, grants, prizes and awards, are sourced based on the residence of the payor regardless of who actually disburses the funds
37. Step 4 – Is the Payment Subject to Income Tax Withholding? Graduated withholding rates with restrictions for compensation 14% for scholarships/fellowships to F, J, M and Q status 30% for non-employee compensation and all other payments Income exempt from tax – 0% Foreign source Internal Revenue Code Tax Treaty
38. Treaty Benefit Eligibility The US has tax treaties with over 60 countries Treaties offer tax exemptions for foreign nationals who were or are tax residents (not citizens) of a treaty country and meet specific criteria as defined by the treaty Many foreign nationals understand and expect these benefits
39. Considerations When Granting Treaty Benefits US tax status: NRA or RA Social Security Number or ITIN Country of tax residency Primary purpose of visit as evidenced by DS-2019 for J exchange visitors I-129 petition and letters for H-1B, O-1, Q I-20 for F and M visitors Conducting research, teaching, training, other paid activities Status of the organization (educational, research, medical, etc.) Type of income paid
40. Step 5 – Is the Payment subject to FICA taxes? Is the payment employment income (wages)? Student FICA Exception Student is employed with the same institution where enrolled and regularly attending classes NRA FICA Exception Nonresident aliens in F-1, J-1, M-1, or Q-1/Q-2 status
41. Step 6 – Reporting Payments Payments are reported in following manner Form W-2 – taxable employment income Form 1042S – treaty-exempt income, not limited to wages Form 1042S – nonemployee compensation and other US-source income
42. Resources Windstar User Website Windstar List Service OSC Foreign National Tax Compliance Program http://www.osc.nc.gov/Foreign_Nationals/ IRS Publications 15T, Employer’s Tax Guide 515, Withholding on Nonresident Aliens and Foreign Entities 519, US Tax Guide for Aliens
43. Mary Alice Boyd UNC Charlotte (704) 687-5819 mboyd37@uncc.edu Questions