Hiring People Who Live in the U.S. But Are Not U.S. Citizens

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Hello, I'm Jim.

And I'm Brandon.

Welcome to "Hiring People who live in the U.S., but aren't U.S. Citizens".

Have you ever been surprised by an employee who didn't have the usual identification?

For example, a foreign address or a special stamp in their foreign passport when you ask them for their Form W-4, Employee's Withholding Allowance Certificate.

It's easy to be caught off guard when a foreign person offers unfamiliar identification or documents.

In recent years, the world has become a smaller place.

It is not uncommon for U.S. Citizens to travel, study and work outside the U.S.

It's also not uncommon for citizens of other countries to come to the United for travel, study, and to work.

It's probably not a surprise that hiring people who are legally in the U.S. but not U.S. Citizens can require treating them differently for federal income tax purposes.

At the end of this lesson, you will be able to:

Verify the employee's identity and status with proper documentation;

Withhold federal taxes at the proper withholding or treaty rate;

Properly deposit or pay the tax withheld;

And file accurate and timely withholding tax returns and provide copies to the individual.

Today we're going to talk about hiring employees and independent contractors who are from a foreign country and legally live in the U.S.

Now, if they live and work in a foreign country, except for Canada, Mexico and South Korea, then please see Publication 519, U.S. Tax Guide for Aliens, and Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

We'll explain later about what to do if they live in Canada, Mexico or South Korea.

Okay.

We have some great information to share with you today.

So, let's get started.

Whenever you hire someone to work for you, the first step is to determine their tax status.

For this lesson we are assuming you are hiring individuals.

For individuals, there are three possibilities:

U.S. Citizen;

U.S. Resident Alien;

Or, Nonresident Alien.

Remember, it is against federal law to hire illegal aliens.

Okay, now let's talk about Tax Identification Numbers.

A U.S. Citizen's tax identification number is their Social Security Number or SSN.

Instead of having a Social Security Number, a foreign individual may have an Individual Taxpayer Identification Number (or ITIN).

ITINs look a lot like a Social Security Number.

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.

Foreign individuals may have an ITIN if they need an I.D. for U.S. tax purposes, but an ITIN is not a "work permit".

So now you're probably wondering if the ITIN isn't a work permit, how can you find out if someone is eligible to work in the U.S.?

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

You can find out if it is okay for someone to work in the United States by using the e-Verify system on the U.S. Citizenship and Immigration Service's website.

e-Verify compares information from an employee's Form I-9, Employment Eligibility Verification, to data from U.S. Department of Homeland Security and Social Security Administration records to confirm their employment eligibility.

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

However, just like everyone else, illegal aliens who work in the United States are subject to U.S. taxes.

Payments you make to them are subject to the same rules as payments you make to aliens who are legal.

If you decide to hire someone who is not a U.S. Citizen, but is a legal alien, your first step is to find out if they are a Resident or a Nonresident Alien.

Okay.

So what's a Resident alien and what's a Nonresident alien?

And how can you tell the difference?

That's a very good question.

One way is very easy.

A resident alien is someone who has a "green card" or who has passed the substantial presence test.

So what is a "green card" and what's it for?

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.

There are two substantial presence tests to determine if a person is a lawful permanent resident.

There's a process for finding this information.

First, go to IRS.gov and enter "green card test" in the search box.

Then, click on Green Card Test and Substantial Presence Test.

That will take you to the page with all the details.

So don't worry about remembering everything.

Be aware that these substantial presence tests exist and must be applied if the person doesn't have a green card or an I-551 stamp.

Okay, here we go.

Someone without a green card can still claim resident alien status if they pass the 31-day and 183-day substantial presence tests.

The 31-day test requires the person to have been in the United States for 31 days during the current year.

The 183-day test is a numerical formula for counting days of presence in the United States over a 3-year period.

In other words, they meet the 183-day test if the sum of the following is at least 183 days.

Number of days in the United States for the current year; 1/3 the number of days in the United States for the preceding year; 1/6 the number of days in the second preceding year.

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

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

Publication 519 has a complete list of the exceptions.

If you need help, use the substantial presence test webpage or refer to Publication 519, U.S. Tax Guide for Aliens.

Remember to enter "green card test" in the IRS search box.

Wow, the tests sound complicated.

The web page may not be enough for me the first time.

I think I'll call the IRS for help if I'm not sure how to figure out if the person can pass the substantial presence tests.

Good point.

If you're still confused after checking the webpage, then 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 U.S. in the current year, the previous year, and the year preceding.

That will help the telephone assistor help you.

Bottom line with resident aliens...

If your potential employee has a green card, an I-551 stamp, or passes the substantial presence tests, there's nothing more to do.

You treat them like a U.S. Citizen for tax withholding purposes, Social Security and Medicare.

You also include them when you pay your Federal Unemployment Taxes or FUTA.

And now, let's talk about Nonresident Aliens.

A Nonresident Alien is someone who is not a U.S. Citizen or resident alien.

Residents of the U.S. Territories - Puerto Rico, U.S. Virgin Islands, American Samoa, Guam and the Commonwealth of the Northern Mariana Islands are nonresident aliens.

The withholding and reporting rules for them are a little different from the rules for U.S. Citizens and resident aliens.

See Publication 519, U.S. Tax Guide for Aliens for those special withholding and reporting rules.

Once you've verified the individual's identity and Nonresident Alien status with proper documentation, the next step is to withhold taxes at the proper withholding or tax treaty rate.

For two groups of nonresident alien employees, withholding from their wages is simple:

A nonresident alien married to a U.S. Citizen or resident alien;

And a nonresident alien from Canada, Mexico or South Korea.

These employees complete Form W-4, Employee's Withholding Allowance Certificate.

They follow the same rules for withholding exemptions as your U.S. employees and you withhold the same as you do for your employees who are U.S. Citizens or resident aliens.

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

The treaty may provide for lower tax rates or even exemption from withholding for residents working in the U.S.

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 a Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual.

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

Okay, that takes care of residents of Canada, Mexico and South Korea.

It also takes care of nonresident aliens who are residents of countries with which the United States has a tax treaty favorable to them for income tax withholding purposes.

Now for everyone else.

When you hire a nonresident alien from any other country as an employee, they must give you a Form W-4.

There are special rules for completing their Form W-4.

These nonresident alien employees:

May not write "exempt" on their Form W-4;

Must request single withholding regardless of actual marital status;

May generally claim only one personal withholding allowance;

And must write "Nonresident Alien" or "NRA" above the dotted line on line 6 of their Form W-4.

When they file their tax return, they may not use the standard deduction.

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

What kind of adjustments?

And how am I supposed to figure this out?

I usually just go to the tables in Publication 15 with what the employee put on their Form W-4.

Again, excellent questions.

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

Step 1.

Go to 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.

Step 2.

Use this adjusted amount and the withholding allowances from Form W-4 (usually limited to one) to figure out the income tax withholding from the tables used for all employees.

The only significantly different procedures for nonresident alien employees who receive wages from you are that they must:

Use Form 8233 to claim tax treaty benefits, instead of Form W-4.

Follow special rules for nonresident aliens who don't claim tax treaty benefits and are not residents of Canada, or South Korea when they complete their Form W-4;

And, make an adjustment to their wages before using the withholding tables in Publication 15, Section 9.

Now, let's move on to Social Security, Medicare and Federal Unemployment Taxes (or FUTA).

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

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

Wages not exempt by a tax treaty are usually subject to Social Security and Medicare.

There is, however, one more way for a nonresident alien employee to be exempt from Social Security and Medicare.

It's 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 when a foreign employee works within the United States and must pay these same kinds of taxes to their country of residence on the same wages.

The foreign 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.

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

Now that we've covered employees let's move on to Independent Personal Services.

Independent Personal Services?

What does that mean?

Let me explain.

Independent personal services is a tax treaty term and it refers to work performed by an independent nonresident alien 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 big difference here is that you might have to withhold taxes on payments to them even though they are not your employee.

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

Here's how it works.

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

Provide you with two copies of a letter from the IRS that state the amount of the final payment (up to $5000) is exempt from withholding;

Or, give you a Form 8233 to claim a tax treaty exemption from all or part of the required withholding.

Second, those who are subject to the 30% rate also use Form 8233 to claim their withholding exemptions.

You may reduce the amount of pay subject to 30% withholding by the personal exemption amount for the year.

Residents of Mexico, Canada or South Korea or U.S. nationals from American Samoa or the Northern Mariana Islands follow the same withholding allowance rules as U.S. Citizens or residents aliens.

All other nonresident alien independent contractors may only claim one personal exemption allowance.

Third, you must pro-rate each allowable exemption according to the number of days during the tax year.

On their Form 8233, the nonresident alien enters the number of personal exemptions claimed and the number of days they will perform services in the U.S. during this 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.

What if I'm a nonresident alien, too?

What do I do then?

There are also special rules if you are a nonresident alien.

If you are, 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% of the money you pay them for their personal services.

And, nonresident alien independent contractors use Form 8233 (not a Form W-4) to claim their withholding exemptions and tax treaty benefits.

Once you've completed figuring withholding, it's time to deposit or pay the tax withheld.

Do I determine if a nonresident alien is an employee or an independent contractor the same way as I do a U.S. Citizen who works for me?

Yes!

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.

Check out the Independent Contractor (Self-Employed) or Employee page on IRS.gov for details.

When it comes to making tax deposits or paying the tax, you do it the same way for everyone... there are no differences!

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 go to IRS.gov/smallbiz and click on filing and paying in the left navigation bar.

Okay, now it's time to talk about filing accurate and timely employment tax returns.

When it comes to filing 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 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 independent contractors who gave you a Form 8233 to claim a right to reduced withholding, there are some different things to do.

First, let's cover what you need to do with the Form 8233.

Review it, and if it is correct, certify in Part IV, Withholding Agent Acceptance and Certification.

This is what Part IV looks like.

You are responsible for withholding and you are considered the withholding agent.

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 the Form 8233 instructions for the mailing address.

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.

In a nutshell, 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.

Here's how it will work.

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 15th 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 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 don't take Form 1042-S.

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

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.

Well Brandon, I'd say we're pretty close to wrapping up this module.

You're right.

We've covered some very good information for small business owners.

Hiring people who aren't U.S. Citizens usually requires some additional procedures.

The penalties for not meeting your withholding requirements can be pretty stiff - just as they can be for not withholding or reporting properly when you pay U.S. Citizens.

This is a lot to remember.

How about a quick review?

Sure!

Here's a quick rundown on what you need to know about withholding and reporting when you pay people who reside in the U.S. but who are not U.S. Citizens to do work for your small business.

Treat employees and independent contractors who are resident aliens exactly the same as you treat U.S. Citizens.

For nonresident alien employees who are not claiming tax treaty benefits:

Use a Form W-4 on which they may claim only one withholding exemption and figure their withholding using the graduated withholding rates;

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 aren't allowed to claim the standard deduction;

Include them on the Form 941, Employer's Quarterly Federal Tax Return you file with the IRS;

And give them, the IRS, and any localities taxing them a Form W-2 for the payments and withholding.

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 finally, 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%;

Include them on the Form 1042 you file with the IRS;

Give them and the IRS a Form 1042-S;

And finally, give them and any localities taxing them a Form W-2.

For nonresident alien independent contractors 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 finally, give them and any localities taxing them a Form W-2.

And that's what we have for you on hiring resident and nonresident aliens as employees or independent contractors.

If you need help in the future, don't forget you can find all the forms and publications we talked about on IRS.gov.

There's also lots of information available from the U.S. Citizenship and Immigration Service's website at www.USCIS.gov.

Thanks for joining us today and good luck in the world of small business ownership.

So long everyone.