Title
Tuyet's Story
Hi, I'm Tuyet.
I own a restaurant where I serve food
from all over the world.
I also employ people from all over the world-
chefs, assistants, wait staff, and maitre-de's.
I want to make sure
that I'm meeting my federal tax obligations,
but there's a lot to understand
about how to treat different classifications of workers
for tax purposes.
I could sure use some help.
Help is on the way, Tuyet.
Hello everyone, and welcome to Hiring People
Who Live in the U.S.
but Who Aren't U.S. Citizens.
It's probably not a surprise that hiring people
who are legally in the U.S.
but who are not U.S. citizens
can require treating them differently
for federal income tax purposes.
Overview
In this lesson,
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 accurately and timely-
withholding tax returns.
Publication 519, U.S. Tax Guide for Aliens
Before we get started, though,
we'd like to refer you to IRS Publication 519,
U.S. Tax Guide for Aliens,
Publication 515, Withholding of Tax on Nonresident Aliens & Foreign Entities
as well as IRS Publication 515,
Withholding of Tax on Nonresident Aliens
and Foreign Entities.
I have both publications,
and I'm ready to get started.
Determining a worker's tax status
Whenever you hire someone,
the first step is to determine that worker's tax status.
For this lesson,
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.
Tax identification numbers
Now, we're going to talk about tax identification numbers.
I've heard about ITINs.
What are they?
Individual Taxpayer Identification Number (ITIN)
A U.S. citizen's tax identification number
is that person's Social Security number, or SSN.
Instead of having a Social Security number, however,
a foreign individual
may have an Individual Taxpayer Identification Number, or ITIN.
ITINs look a lot like Social Security numbers:
They are 9 digit numbers
that always begin with the number 9
and have a range of 70-88, 90-92,
and 94-99 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 Social Security Number
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.
Determining if someone is eligible to work in the U.S.
An ITIN, however, is not a work permit.
If the ITIN isn't a work permit,
then how do I know if someone is eligible
to work in the U.S.?
Form I-9, Employment Eligibility Verification
All employees must complete Form I-9,
Employment Eligibility Verification.
USCIS-E-Verify
You can find out if a potential worker
is eligible by using the e-Verify system
on the US Citizenship and Immigration Services' Website
at www.uscis.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,
payments you make to them are subject to the same rules
as payments you make to aliens who are legal.
What if I decide to hire someone
who is not a U.S. citizen-
but who is still eligible to work in the United States?
Then, Tuyet, your first step is to find out
if they're a resident or non-resident alien.
What's the difference?
Resident Aliens
A resident alien is someone who has a "green card"
or who has passed the Substantial Presence Test.
I've heard about green cards,
but what are they, exactly?
What is a green card?
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 in their foreign passports.
That sounds easy enough to check.
What is the Substantial Presence Test?
But what is the Substantial Presence Test
you mentioned earlier?
Someone without a green card
can still claim resident alien status
if he or she passes the Substantial Presence Test
for the calendar year.
To meet this test, you must be physically present
in the United States on at least 31 days during the current year
and 1 hundred 83 days during the 3-year period
that includes the current year
and the 2 years immediately before that.
In other words, the person meets the 183-day test
if the sum of the following is at least 183 days:
1) the number of days in the United States
for the current year;
2) 1/3 the number of days in the United States
for the preceding year;
and 3) 1/6 the number of days in the second preceding year.
Do you have an example?
Substantial Presence Test example
Let's say you were physically present
in the United States on 120 days
in each of the years 2009, 2010, and 2011.
To determine if you meet
the substantial presence test for 2011,
count the full 120 days of presence in 2011,
40 days in 2010 (1/3 of 120),
and 20 days in 2009 (1/6 of 120).
Since the total for the 3-year period is 180 days,
you are not considered a resident
under the substantial presence test for 2011.
Days that don't count
Are there days that don't count in this calculation?
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.
If you want more information,
go to www.irs.gov
and type "Substantial Presence Test"
in the search box.
Need help?
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.
Resident alien - summary
In summary, then, if your potential employee
has a green card, an I-551 stamp,
or passes the substantial presence test,
there's nothing more to do.
You treat them like a U.S. citizen
for 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.
What about nonresident aliens?
Nonresident aliens
A nonresident alien
is someone who is not a U.S. citizen or a resident alien.
Residents of the U.S. Territories-
Puerto Rico, U.S. Virgin Territories,
American Samoa, Guam,
and the Commonwealth of the Northern Mariana Islands-
are nonresident aliens.
All nonresident aliens, however,
are not treated the same for tax purposes
and in this lesson we'll discuss the general rules
that apply to nonresident aliens and exceptions
that apply to certain nonresident aliens.
General rules
What are the general rules?
When you hire a nonresident alien
from any other country as an employee,
they must give you a Form W 4.
And, there are special rules for completing their Form W 4.
These employees may not write "exempt"
on their Form W 4;
they must request single withholding,
regardless of their actual marital status;
they may generally claim
only one personal withholding allowance;
and they must write "Nonresident Alien" or "NRA"
above the dotted line on line 6 of their Form W 4.
Calculating withholding
Are there special steps I need to take
to calculate how much income tax to withhold?
When nonresident aliens file their tax returns,
they may not use the standard deduction,
so some adjustments are necessary
before you can use the general withholding tables
Publication 15, (Circular E) Employer's Tax Guide
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.
Can you walk me through the steps?
Of course, Tuyet.
Withholding tables
For step one, go to IRS Publication 15, section 9,
Withholding from Employees' Wages.
It has a table of amounts to add
to your nonresident alien employee's wages
depending on whether you pay them weekly
or at some other frequency.
The purpose of this adjustment is to take into account
that they may not claim the standard deduction
when they file their income tax returns;
it is not an addition to wages.
Do not include it on the Form W 2
at the end of the year.
And step two?
For step two, use this adjusted amount
and the withholding allowances from Form W 4-
usually limited to one-
to calculate the income tax withholding
from the tables used for all employees.
Exceptions to general rules for withholding
You mentioned exceptions to these general rules
that apply to certain nonresident aliens.
What are the exceptions?
Nonresident aliens from Canada, Mexico, and South Korea
and nonresident alien students
and business apprentices from India
may claim more than one personal withholding allowance
when filling out Form W-4.
Specifically, nonresident aliens from Canada and Mexico
may claim personal withholding allowances
for their spouse and dependents
who meet certain tests.
Nonresident aliens from South Korea
may claim personal withholding allowances
for their spouse and children
if certain requirements are met.
Nonresident alien students and business apprentices
who are eligible for benefits under Article 21(1)
of the U.S.- India Income Tax Treaty
may claim personal withholding allowances
for their spouse and dependents.
You can find more information
in IRS Publication 519.
Withholding exceptions for tax treaties
Are there any other exceptions?
Yes.
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,
Form 8233
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.
Nonresident alien - summary
In summary . . .
remember that nonresident alien employees
who receive wages from you
must follow special rules
when completing Form W 4;
unlike other nonresident aliens,
nonresident aliens from Canada, Mexico, and South Korea
and nonresident students or business apprentices from India
may claim more than one personal withholding allowance
on Form W 4;
if a nonresident 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 employees' wages
before using the withholding tables
in IRS Publication 15, Section 9.
Employment taxes
Now, let's move on to Social Security,
Medicare, and FUTA, 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.
Totalization Agreement
There is, however,
one more way for a nonresident alien employee
to be exempt from Social Security and Medicare taxes.
It is called a Totalization Agreement.
These agreements are like tax treaties
but are 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
from their resident country
that collects its own social security-type taxes.
Recordkeeping requirements
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?
What does that mean?
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.
Withholding taxes on payments
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.
How does this work?
General rules for withholding for contractors
What are the rules?
First, 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 thousand dollars)
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.
Personal withholding exemptions
Second, those who are subject to the 30 percent rate
also use Form 8233
to claim their withholding exemptions.
You may reduce the amount of pay
subject to 30 percent withholding
by the personal exemption amount for the year.
Generally, nonresident alien independent contractors
may only claim one personal exemption allowance.
There are exceptions to this rule
for certain nonresident aliens.
Nonresident aliens from Canada, Mexico, South Korea,
and nonresident alien students
and business apprentices from India
may claim more than one personal withholding exemption.
Third, you must pro-rate each allowable exemption
according to the number of days during the tax year.
On their Form 8233,
the non-resident alien
enters the number of personal exemptions claimed
and the number of days they will perform services
in the United States during that tax year.
Your next step is to divide the personal exemption amount
for the year by 365-
366 if it's a leap year-
and multiply that
by the number of personal exemptions claimed.
If you (employer) are a nonresident alien, too
What if I'm a nonresident alien, too?
What do I do then?
There are special rules
if you yourself are a nonresident alien.
If you are a nonresident alien,
please call the IRS Business and Specialty Tax Line
at 1-800-829-4933
or ask your tax professional.
Nonresident alien independent contractors- review
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;
and nonresident alien independent contractors
use Form 8233- and not a Form W 4-
to claim their tax treaty benefits
and withholding exemptions.
Once you've completed calculating withholding,
then it's time to deposit or pay the tax withheld.
Wait-- one more question.
Nonresident alien - employee or independent contractor?
Do I determine if a nonresident alien
is an employee or an independent contractor
the same way I do a U.S. citizens who works for me?
Tuyet, you classify nonresident aliens
as either an independent contractor or an employee
using the same rules as you use for U.S. citizens
who work for you.
For more information, review the lesson
What You Need to Know about Federal Taxes
When Hiring Employees or Independent Contractors
or IRS Publication 15, Employer's Tax Guide.
Making tax deposits - rules are the same
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 lesson How to Make Tax Deposits
and File a Return to Report Your Payroll Taxes.
You can also go to
www.irs.gov/smallbiz
and click on "Filing/Paying Taxes"
in the left navigation bar.
Remember, IRS Publication 15
can also provide you with more information.
Filing employment tax returns - some rules are different
What about filing my employment tax returns?
When it comes to filing employment tax returns...
for your resident alien employees
and for the nonresident alien employees
who did not use Form 8233 to claim tax treaty benefits,
give them a Form W 2, Wage and Tax Statement,
and include them on your Form 941,
Employer's Quarterly Federal Tax Return,
and any other employment tax returns.
For nonresident alien employees who claimed tax treaty benefits
or nonresident alien independent contractors
who gave you a Form 8233
to claim a right to reduced withholding,
there are some different things to do.
What to do with Form 8233
What do I need to do with Form 8233?
You'll need to review it
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.
How do I know where to mail the form to?
See Form 8233 instructions for the mailing address.
And wait at least 10 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.
Additional filing requirements for Form 8233 filers
What are my other employment tax return filing requirements
for Form 8233 filers?
For your Form 8233 filers,
you will have new employment tax return filing requirements
with the IRS.
Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
They are Form 1042,
Annual Withholding Tax Return
for U.S. Source Income of Foreign Persons;
Foreign Person's U.S. Source Income Subject to Withholding
Form 1042-S,
Foreign Person's U.S. Source Income Subject to Withholding;
Annual Summary and Transmittal of Forms 1042-S
and Form 1042-T,
Annual Summary and Transmittal of Forms 1042-S.
And remember, this is for your nonresident alien employees
who claimed 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 Forms 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.
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.
Lesson Review
This lesson has had a lot of useful information.
Can I have a review?
Of course, Tuyet.
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:
1) Treat employees and independent contractors
who are resident aliens exactly the same way
as you treat U.S. citizens.
2) For nonresident alien employees
who are not claiming tax treaty benefits,
use Form W 4
on which they may claim only one withholding exemption
and figure their withholding
using the graduated withholding rates.
Recall, however,
that nonresident aliens from Canada,
Mexico, and South Korea
and nonresident alien students
and business apprentices from India
may claim more than one withholding exemption.
Remember, you may also need
to make an adjustment to their income
before going into the withholding tables-
that's to account for the fact
that they are not allowed to claim the standard deduction;
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
for the withholding and payments.
3) 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 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.
4) 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 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.
5) For nonresident alien independent contractors
who are claiming tax treaty benefits,
use Form 8233 instead of Form W 4
and withhold according to the tax treaty;
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.
And that's all the information we have for you
on hiring resident and non-resident aliens
as employees or independent contractors.
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 lesson.
Best wishes on your business.