|Volume 7, Number 2 | March/April 2010|
IN THIS ISSUE
by Paula N. Singer, Esq.
The IRS has begun to enforce the long-standing (but largely ignored) withholding and reporting obligations of organizations making payments to foreign entities and to foreign nationals who are nonresident aliens for federal tax purposes (collectively called “foreign persons”).
While domestic entities, U.S. citizens, and resident aliens (collectively called “U.S. persons”) are subject to income tax on their worldwide income, foreign entities and nonresident aliens are subject to tax only on their U.S.-source income. As a result, the withholding and reporting rules for payments to foreign persons are different from the rules for payments to U.S. persons.
Payers may document the U.S. or foreign status of their payees with a Form W-9 as a certificate of U.S. status or a Form W-8BEN as a certificate of foreign status. A U.S. taxpayer identification number (TIN) is required on Form W-9 to avoid 28 percent backup withholding, but no TIN is required on the Form W-8BEN used solely as a certificate of foreign status.
Thirty Percent Withholding
Payers must timely deposit withheld amounts using the deposit schedule provided in IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. Payers required to deposit wages electronically must also deposit these other withheld taxes (called “1042 deposits”) electronically. Payers who fail to withhold and timely deposit the taxes are liable for the underwithheld taxes, plus penalties and interest.
Source of Income
Since foreign persons are not subject to U.S. tax on foreign-source income, it is important to document foreign-source income in contracts and invoices. A payment including unallocated U.S. and foreign-source income is subject to 30 percent withholding on the total payment. The beneficial owner of the income may allocate the income on a U.S. tax return (Form 1040NR for an individual or trust, Form 1120-F for a foreign corporation) to obtain a refund of the taxes withheld on the foreign-source portion of the payment.
Other exemptions from withholding are available under a Code or income tax treaty provision provided the beneficial owner of the income meets the conditions for the exemption. The beneficial owner is the one subject to tax under U.S. tax rules. The payer may allow the exemption from withholding only if the payer has a valid signed and dated withholding certificate (Form W-8BEN, W-8ECI, W-8EXP, W-9, or 8233) from the beneficial owner of the income prior to the payment being made. The form varies with the type of income, payee, and/or exemption being claimed. Withholding and reporting must be in the name of the beneficial owner of the income even if payment is made to a third party such as an agent.
Generally, for a withholding certificate to be valid for an exemption from withholding, it must include the beneficial owner’s U.S. taxpayer identification number (TIN). (A U.S. TIN is not required simply to make a payment subject to NRA withholding.) There is an exception for income on publicly traded investments and related loans. An individual beneficial owner must provide a Social Security number (SSN) or individual taxpayer identification number (ITIN). Other beneficial owners must provide an employer identification number (EIN).
A payer who knows (or has reason to know) that the beneficial owner is a foreign person, must withhold 30 percent. For purposes of these rules, personnel making the payments are deemed to know what anyone else in the organization knows about the payee.
Form 1042-S Reporting
If withholding was at the statutory rate, no U.S. TIN is required on Form 1042-S. Forms 1042-S reporting a payment exempt from withholding (except for treaty-exempt income on publicly traded investments) must generally have a U.S. TIN unless an exception is provided in the form’s instructions. Otherwise, the payer will be obligated to pay the underwithheld taxes plus penalties and interest and may be subject to a $50 penalty for failure to include a TIN on the form.
Payers filing 250 or more Forms 1042-S must submit them electronically through the IRS Filing Information Returns Electronically (FIRE) system. Payers issuing Form(s) 1042-S must also submit a Form 1042 tax return even if they did not withhold taxes from the payments. Failure to report timely and accurately can result in penalties and interest.
Paula Singer, Esq., Co-founder and Chair of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer LLP, Newton, MA, has over 25 years of experience providing advice and compliance services to individuals and their employers, and payers on cross-border matters.
Watch for Volume 7, Number 3, for a discussion on Withholding Certificates for Claiming Exemption from Withholding.
Q: Do I have to withhold on travel expenses reimbursed to a nonresident alien?
A: No, if the travel expenses are related to services provided to your organization by the employee or independent contractor and your organization reimbursed the expenses under an accountable plan, because such amounts are excluded from income.
Yes, if the payments are related to study or research for which no services are required for the payment. These expenses (called “travel grants” or “travel funds”) are not excluded from income even if your organization reimbursed them under an accountable plan.
Hundreds of individuals have received comprehensive education on nonresident alien taxation, immigration practices, and the International Tax Navigator®. Join Windstar at the Spring NRA Tax Training, April 27th – 30th, and join this group of well-informed colleagues.
Attend two days of sessions to learn about NRA taxation, two days of sessions to brush up on your Tax Navigator skills, or join us for all four days. This training has dedicated tracks featuring substantive tax and immigration-based class sessions followed by hands-on Tax Navigator training.
The April 27th – 28th tax and immigration sessions will feature comprehensive information on nonresident alien taxation and include dedicated ECI and FDAP tracks on April 28th focusing on the following:
In addition, IRS senior tax specialist Karen Villa joins Windstar experts on April 27th for a presentation on “Withholding on Payments to NRA Athletes and Entertainers.”
The April 29th – 30th software based training will feature a Tax Navigator basics track for new and experienced users who want a refresher on the system, and a special topics track for more advanced users.
Special topics include:
The Doubletree Guest Suites Boston will host the training. The Doubletree Guest Suites is an all suite hotel located on the banks of the Charles River, just minutes from downtown Boston and its major attractions. Hotel features include:
In addition to the spring training, Windstar is also offering NRA Tax Trainings July 27th – 30th and December 7th – 10th. Agendas for each session will be available approximately ninety days prior to each training. E-mail email@example.com for dates and pricing.
Click here for a detailed schedule outline and register.
Paula Singer, Esq. has accepted an invitation to join the editorial advisory board of CCH’s Corporate Business Taxation Monthly. Paula has produced a number of articles for the publication.
Award-winning author Paula N. Singer, Esq.’s line of ten comprehensive tax guides help employers, tax preparers, and taxpayers understand the complex area of nonresident alien taxation.
U.S. Tax Guides for Foreign Persons and Those Who Pay Them® Series
U.S. Tax Returns
Click here to view full descriptions on each of the tax guides.
Free Webinar - Learn How to Automate and Streamline Your NRA Tax Processing with Windstar’s Tax Navigator
Learn how International Tax Navigator® can help improve your nonresident alien tax processing by viewing a free web demonstration on May 26th.
International Tax Navigator is a powerful software solution for nonresident alien tax compliance and income tax treaty analysis. Tax Navigator applies complex bodies of U.S. tax law and procedures, providing up-to-date analyses for withholding tax rates, and tax and treaty exemptions. Tax Navigator produces all required IRS withholding certificates, Form 1042 tax return, and 1042-S reporting forms.
With Tax Navigator users can:
The demonstration will educate you on the ease of use of Tax Navigator, the benefits of using this powerful software tool, and give you an overview on how to enter data into the system.
Don’t miss this opportunity to learn how to streamline and automate your NRA tax processing.
Click here to register.
Spring Nonresident Alien Tax Training
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American Payroll Association (APA) 28th Annual Congress
Don’t miss Windstar experts Paula N. Singer, Esq. and Linda Dodd-Major, Esq’s. sessions on immigration and tax compliance.
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NAFSA: Association of International Educators 2010 Annual Conference and Expo
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18th Annual New England Payroll Conference
©Copyright 2010 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication. While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.
Since 1995 educational
institutions, hospitals, research institutions, and corporations
have relied on Windstar Technologies, Inc. to deliver the expertise
to comply with the U.S. tax residency rules, tax rates, and special
tax exemption rules under the law and U.S. treaties. When government
agencies require information about foreign nationals in the workplace,
Windstar provides straightforward analysis and reporting. Comprehensive
software for analysis and reporting, expert knowledge, and unparalleled
customer service combine to make Windstar the first choice for nonresident
alien tax compliance.