Lesson 8 - Hiring people who live in the U.S. who aren’t citizens
Small Business Tax Workshop

    Overview

    Hello everyone and welcome to Hiring People Who Live In The U.S. Who Aren't Citizens.

    To help illustrate this important topic, we want you to meet An. An owns a restaurant.

    She employs people from all over the world.

    She wants to make sure that she's meeting her federal tax obligations but is unsure about how to treat different classifications of workers for tax purposes.

    An, help is on the way!

    In this segment you'll learn how to verify an employee's identity and status with proper documentation, withhold federal taxes at the proper withholding or treaty rate, deposit or pay the tax withheld properly, and file accurate and timely withholding tax returns.

    Before we get started though, we’d like to refer you to two IRS publications that can help.

    Publication 519, U.S. Tax Guide For Aliens, and IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

    Determining a worker's tax status

    Whenever you hire someone, the first step is to determine that worker's tax status.

    For this discussion, we're assuming you are hiring individuals.

    There are three possibilities as to their status: 1) U.S.

    citizen; 2) U.S. resident alien; or 3) nonresident alien.

    Individual Tax Identification Number (ITIN)

    Now we're going to talk about tax ID numbers. A U.S.

    citizen's tax identification number is that person's Social Security Number or SSN. Instead of having a SSN however, a foreign individual may have an Individual Taxpayer Identification Number or ITIN.

    ITINs look a lot like Social Security numbers.

    They are nine digit numbers that always begin with the number nine, and have a range of 70 to 88, 90 to 92, and 94 to 99 in the fourth and fifth digit.

    The IRS issues ITINs to individuals who are required to have a U.S.

    taxpayer identification number but who do not have and are not eligible to obtain a SSN from the Social Security Administration.

    ITINs are issued regardless of immigration status because both resident and nonresident aliens may have a U.S.

    filing or reporting requirement under the Internal Revenue Code.

    An ITIN however, is not a work permit.

    Work Eligibility

    All employees must complete Form I-9, Employment Eligibility Verification.

    You can find out if a potential worker is eligible by using the E-Verify system on the U.S.

    Citizenship and Immigration Services web site at wwww.uscis.gov, or at e-verify.gov.

    E-verify compares information from an employee's Form I-9 to data from the Social Security Administration and the U.S.

    Department of Homeland Security to confirm employment eligibility.

    Remember it is against federal law to knowingly employ someone who is not authorized to work in the U.S.

    However, if you do employ illegal aliens, payment you make to them are subject to the same rules as payments you make to aliens who are legal.

    If you hire someone who is not a U.S.

    citizen but who is still eligible to work in the United States, your first step is to find out if they’re a resident or nonresident alien.

    Resident Alien

    A resident is someone who has a "green card” or who has met the Substantial Presence Test.

    A “green card” is USCIS Form I-551, Permanent Resident Card.

    It gives the holder the right to reside permanently in the U.S.

    and to work without restrictions.

    A “green card” holder is also known as a lawful permanent resident.

    Lawful permanent residents who are waiting for their actual “green cards” may have an I-551 stamp on their foreign passport.

    Someone without a “green card” can still claim resident alien status if he or she meets the Substantial Presence Test for the calendar year.

    To meet this test, you must be physically present in the United States when on least 31 days during the current year, and 183 days during the three year period that includes the current year and the two years immediately before that. In other words, the person meets the 183 day test, if the some of the following is at least 183 days. One, the number of days in the United States during the current year; two, 1/3rd the number of days in the United States during the preceding year; and three, 1/6th the number of days in the United States during the second preceding year.

    For example, let's say you were physically present in the United States for 150 days in each of the years 2017, 2018, and 2019.

    To determine if you meet the Substantial Presence Test for 2019, count the full 150 days of presence in 2019, 50 days in 2018, one third of 150, and 25 days in 2017, one sixth of 150.

    Since the total for the three year period is  225 days, you are considered a resident alien under the Substantial Presence Test for 2019.

    There are rules about what kinds of days can and cannot count.

    For example, you do not count days someone is present in the United States as a teacher or trainee under a valid J or Q visa. IRS Publication 519, U.S.

    Tax Guide For Aliens, has a complete list of the exceptions.

    You can also call the IRS Business And Specialty Tax toll free line at 1-800-829-4933.

    Make sure you have the information on the number of days the person has been in the United States in the current year, the previous year, and the year preceding that.

    In summary, if your potential employee has a “green card,” an I-551 stamp, or passes the Substantial Presence Test, there is nothing more to do. You treat them like a U.S.

    citizen for income tax withholding purposes as well as Social Security and Medicare taxes.

    You also include them when you pay your federal unemployment tax act or FUTA tax.

    To find more information about these tests, go to www.irs.gov, and enter “green card test” or “Substantial Presence Test” in the search box.

    You can also find more information in IRS Publication 519.

    Nonresident Alien

    Now let's turn to nonresident aliens.

    This is defined as someone who is not a U.S.

    citizen or a resident alien. All nonresident aliens however, are not treated the same for tax purposes.

    And in this segment we'll discuss the general rules that apply to non-resident aliens and exceptions that apply to certain non-resident aliens.

    When someone like An hires a nonresident alien from any other country as an employee, she must give them a Form W-4.

    She should verify the form is completed correctly according to the special instructions in Notice 1392 for nonresident alien employees.

    Calculating withholding

    When nonresident aliens file their federal income tax returns, they can not use the standard deduction unless the nonresident is a student or business apprentice from India.

    Some adjustments are necessary before you can use the general withholding tables in IRS Publication 15, Employer's Tax Guide.

    There are two steps required for calculating how much income tax to withhold from the wages of nonresident alien employees.

    For step one, go to IRS Publication 15-T, Federal Income Tax Withholding Methods.

    There are two tables of amounts to add to your nonresident alien employees wages depending on whether you pay them weekly or at some other frequency.

    Table One pertains to nonresident alien employees first paid wages before 2020 and which have not submitted a Form W-4 for 2020 or later.

    Table 2 pertains to nonresident alien employees who have submitted a Form W-4 for 2020 or later, or were first paid wages in 2020 or later.

    For step 2, enter the amount figured in step 1, as the total taxable wages on line 1A of the withholding worksheet that you use to figure federal income tax withholding.

    The amount from tables 1 and 2 are added to wages solely for calculating income tax withholding on the wages of the nonresident alien employee.

    The amounts from the tables shouldn't be included in any box on the employee's Form W-2 and don't increase the income tax liability of the employee.

    The purpose of this adjustment is to figure the amount of federal income tax to withhold from wages of nonresident alien employees.

    Also this procedure only applies to nonresident alien employees who have wages subject to income withholding.

    Exception to General Rules for Withholding

    A nonresident alien may be a resident of a country that has a tax treaty with the United States.

    That treaty may provide for lower tax rates or even exemption from withholding for these individuals working in the United States.

    Remember these employees are nonresidents of the United States.

    If a nonresident alien employee wants to claim a tax treaty exemption from withholding instead of Form W-4, the employee must give you Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual.

    Refer to IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for more information.

    You as the employer, must report wages exempt under a tax treaty paid to a nonresident alien on Form 1042, Annual Withholding Tax Return for U.S.

    Source Income of Foreign Persons, and Form 1042-S, Foreign Person's U.S.

    Source Income Subject to Withholding.

    Any additional wages paid to a nonresident alien over and above the exempt amount, should be reported on Form W-2 in the normal manner.

    Per the tax code, wages or nonemployee compensation are exempt from withholding of federal income tax if all three of the following considerations are met.

    The nonresident alien performing services is present in the U.S. for total not exceeding 90 days in a taxable year.

    The compensation for such services does not exceed $3000 and the nonresident alien performs the services as an employee of, or under contract with, a nonresident alien individual, a foreign corporation, or foreign partnership not engaged in a trade or business in the U.S., or the foreign office of a U.S. citizen or resident alien individual, a U.S. corporation or U.S.

    partnership including from within U.S.

    possession.

    Wages or nonemployee compensation are exempt from withholding a federal income tax if both of the following two conditions are met per the tax code: the nonresident alien is present in the U.S.

    in F, J, M, or Q, nonimmigrant status and the compensation for services is paid by a nonresident alien individual, a foreign corporation, or foreign partnership, or the foreign office of a U.S citizen or resident alien individual, a U.S. corporation or a U.S.

    partnership including from within a U.S.

    possession. Nonresident aliens who fail to file or file an invalid Form W-4, as required by IRS regulations, shall have federal income tax withheld at the rates pertaining to single status zero exemptions.

    In summary, remember that nonresident alien employees who received wages from you, must follow special rules in Notice 1392 when completing Form W-4.

    If a non-resident alien claims tax treaty benefits, he or she must use Form 8233 instead of Form W-4 and you must make an adjustment to your nonresident alien employee's wages before using the withholding tables.

    Employment Taxes

    Just like resident aliens, nonresident aliens are generally subject to Social Security taxes, Medicare taxes, and FUTA Tax.

    But there are exceptions.

    We've already covered the filing of a Form 8233 if an employee wants to claim tax treaty benefits.

    Remember though that wages not exempt by a tax treaty are usually subject to Social Security and Medicare taxes.

    There is however a way for a nonresidential alien employee to be exempt from Social Security and Medicare taxes.

    It is called a totalization agreement.

    These are agreements between the Social Security Administration and various foreign countries.

    They address the situation where dual Social Security taxation might occur.

    That is when a nonresident employee works within the United States and must also pay these same kinds of taxes to their country of residence on the same wages.

    The nonresident worker who claims an exemption under a totalization agreement, needs to give you a certificate of coverage or similar statement from the appropriate agency of the foreign country or if unable to obtain such a certificate or statement from the foreign country, obtain a statement from the U.S.

    Social Security Administration that their wages are not subject to U.S. Social Security taxes.

    You must keep a copy of the certificate for your records in case the IRS questions why you didn't withhold Social Security taxes.

    Nonresident alien independent contractors

    Now that we've covered employees, let's move on to independent personal services.

    “Independent personal services” is a tax treaty term and it refers to work performed by a nonresident alien independent contractor.

    This category of pay includes payments for professional services, such as fees of an attorney, physician, or accountant made directly to the person performing the services.

    The difference here is that you might have to withhold taxes on payments to them even though they are not your employees.

    This makes nonresident alien independent contractors very different from independent contractors who are U.S. citizens or resident aliens.

    The general rule is that you must withhold 30 percent of each payment you make to nonresident alien independent contractors unless they show proof they have entered into a withholding agreement with the IRS.

    They must provide you with two copies of a letter from the IRS that states the amount of the final payment (up to $5,000)

    is exempt from withholding; or they must give you a Form 8233 to claim a tax treaty exemption from all or part of the required withholding.

    Also there are special rules if you yourself are a nonresident alien. If so, please call the IRS Business and Specialty Tax Line at 1-800-829-4933 or ask your tax professional.

    Let's review how nonresident alien independent contractors are different from independent contractors who are U.S. citizens or residents.

    Generally you must withhold 30 percent of the money you pay them for their personal services unless the nonresident alien provides an IRS approved withholding agreement or Form W-8 for reduced withholding.

    Nonresident alien independent contractors use Form 8233 — not Form W-4 — to claim their tax treaty benefits and any allowable withholding exemptions.

    Once you're done calculating withholding, then it's time to deposit or pay the tax withheld.

    How does An determine if a nonresident alien is an employee or an independent contractor?

    She would do this using the same rules as with any US citizens who work for her. For more information, review the video in this series called “Hiring Employees or Contractors” or IRS Publication 15, Employer's Tax Guide.

    When it comes to making tax deposits or paying the tax withheld for nonresident aliens, the rules are the same as they are for taxes withheld for U.S. citizens or resident aliens.

    For more information on depositing and paying business taxes, see the video in this series called “Tax Deposits and Filing a Return to Report Payroll Taxes.” You can also go to www.irs.gov/smallbiz and click on filing/paying taxes.

    Remember IRS Publication 15 can also provide you with more information.

    Filing employment tax returns

    An would also need information on how to file employment tax returns. She would give a Form W-2, Wage and Tax Statement, to both her resident alien employees and nonresident alien employees who did not use Form 8233 to claim tax treaty benefits.

    She would include them on her Form 941, Employer's Quarterly Federal Tax Return, and any other employment tax returns.

    You'll need to review Form 8233 and — if it's correct — certify in Part IV, Withholding Agent Acceptance and Certification.

    As you are responsible for withholding, you are considered the withholding agent.

    Then mail one copy to the IRS within five days after you receive it.

    Give one copy to the nonresident alien and keep one copy for your records.

    See Form 8233 instructions for the mailing address and wait at least ten days to see if the IRS has any objections.

    If the IRS notifies you that it objects to the nonresident alien's claim for exemption from withholding, you must immediately begin withholding.

    Obtain a new Form 8233 every year as long as you pay this person to work for you.

    For your Form 8233 filers, you will have new employment tax return filing requirements with the IRS.

    They are Form 1042, Annual Withholding Tax Return for U.S.

    Source Income of Foreign Persons; Form 1042-S, Foreign Person's U.S.

    Source Income Subject to Withholding; and Form 1042-T, Annual Summary and Transmittal of Forms 1042-S.

    And remember, this is for your nonresident alien employees who claim tax treaty benefits as well as for any nonresident alien independent contractors you paid.

    By March 15 of the year following the calendar year during which the nonresident alien performed the services, you must file Form 1042 and 1042-S with the IRS.

    Let's start with Form 1042-S.

    File a separate Form 1042-S for each person and each type of income you paid that person whether you actually withheld the money or not.

    You must also issue a Form W-2 for any amounts that are not covered by a treaty exemption. For example, if you live in a state or other locality that taxes this income and that might even require withholding, you will need to file a Form W-2 with those taxing authorities for the income and any withholding.

    Those taxing authorities do not take Form 1042-S.

    Give a copy of the Form 1042-S and any Form W-2 you filed for each nonresident alien employee who claimed tax treaty benefits and to each nonresident alien who provided independent personal services whether you withheld taxes or not.

    If you file your Forms 1042-S on paper, you must also include a Form 1042-T — that's the transmittal form — with the copies you send to the IRS. Finally, if you must file Form 1042-S for even one person, then you must also file an annual return on Form 1042.

    You do not need to give a copy of this form to the individuals who worked for you, but you do need to keep a copy for your records.

    Review

    Hiring people who are not U.S.

    citizens usually requires some additional procedures.

    The penalties for not meeting your withholding requirements can be quite substantial, just as they can be for not withholding or reporting properly when you pay U.S. citizens.

    Here are the important points to remember: treat employees and independent contractors who are resident aliens the same way you treat U.S. citizens.

    For nonresident alien employees who are not claiming tax treaty benefits, use Form W-4, following the instructions in Notice 1392 and Publication 515. Include them on the Form 941, Employer's Quarterly Federal Tax Return, that you file with the IRS and give the IRS and any localities taxing them a Form W-2 showing the withholding and payments.

    For nonresident alien employees who are claiming tax treaty benefits, use Form 8233 instead of Form W-4 and withhold according to the treaty; include them on Form 1042 you file with the IRS; give them and the IRS a Form 1042-S and give them and any localities taxing them a Form W-2.

    For nonresident alien independent contractors who are not claiming tax treaty benefits, use Form 8233 instead of Form W-4 and withhold 30 percent.

    Include the withholding amount on the Form 1042 you file with the IRS.

    Give them and the IRS a Form 1042-S and give them and any localities taxing them a Form W-2.

    For nonresident alien independent contractors who are claiming tax treaty benefits, withhold at 30 percent.

    Include them on the Form 1042 you file with the IRS; give them and the IRS a Form 1042-S and give them and any localities taxing them a Form W-2.

    If you would like more information, please see IRS Publications 15, 515, and 519, as well as www.irs.gov.

    Information is also available at the U.S.

    Citizenship and Immigration Services website at www.uscis.gov.

    Thank you for joining us for this video workshop and best wishes on your business.