Volume 7, Number 2 | March/April 2010  


NRA Withholding

April Nonresident Alien Tax Training

Paula N. Singer, Esq. to Join CCH Advisory Board

Spring Into Compliance with Windstar Publishing

Free International Tax Navigator Webinar

Upcoming Trade Shows and Appearances

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NRA Withholding

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
Under the Internal Revenue Code (the “Code”), gross U.S.-source income payments made to foreign persons are subject to 30 percent withholding (called “NRA withholding”) unless an exception applies. There is a lower 14 percent rate for certain scholarship and fellowship grants paid to or on behalf of candidates for a degree at an educational institution or by certain specified types of organizations provided the recipients are in F, J, M, or Q immigration status. NRA withholding is required even if the payment is not in the ordinary course of business, such as a resident alien making an alimony payment to a nonresident alien ex-spouse. There is no de minimis rule for amounts subject to NRA withholding. A $30 payment to a nonresident alien involved in a clinical trial would still be subject to NRA 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
The rules for sourcing income vary with the type of income paid. Pay for services is sourced where the services are performed, regardless of the location of the payer or currency of the payment. Pay for use of real or personal property (including intangibles) is sourced where the property is located or used regardless of where the beneficial owner is located.

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.

Withholding Exceptions
There are two important exceptions from NRA withholding: 1) payments excluded from income under the Code and 2) employee wages subject to wage withholding.

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 has no information about the payee must apply IRS presumptions, which always result in tax withholding and reporting. Under the presumption rules, payees are presumed to be 1099 reportable and subject to 28 percent backup withholding on their worldwide income.

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
The payer must report gross income and taxes withheld, if any, on income subject to NRA withholding rules to the recipient and the IRS on a Form 1042-S (not 1099!) information return. There is no exemption from reporting for payments made to corporations as there is for 1099 reporting. Even if the payment was exempt from tax under a Code or tax treaty provision, Form 1042-S is required.  

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.

Register Today for Windstar’s April Nonresident Alien Tax Training – There’s Still Time

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:

  • Effectively Connected Income (ECI) - payments to foreign employees, students and scholars
  • Fixed or Determinable, Annual or Periodic Income (FDAP) -  payments to non-employees and foreign entities

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:

  • Tax Navigator reporting functionality
  • Maintaining your software
  • Foreign National Information System (FNIS)

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:

  • Shuttle service to major tourist destinations in Boston and Cambridge and nearby train stations
  • Low cost transportation to and from Logan International Airport
  • High-def flat screen televisions in each room
  • Scullers Jazz Club

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 paul.carpinella@windstar.com for dates and pricing.

Click here for a detailed schedule outline and register.

Paula N. Singer, Esq. to Join CCH Advisory Board

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.

Spring Into Compliance with Windstar Publishing Tax Guides

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. 

Titles include:

U.S. Tax Guides for Foreign Persons and Those Who Pay Them® Series
U.S. Taxation of Foreign Students
U.S. Taxation of B-1 Business Visitors
U.S Taxation of H-1B Specialty Workers
J-1 Nonstudent Exchange Visitors Performing U.S. Services
L-1 Intracompany Transferees on U.S. Assignment
Tax Treaty Benefits for Foreign Nationals Performing U.S. Services
A Guide for Filing IRS Forms 1042 and 1042-S

Cross-Winds: What You Need to Know About Exchange Visitors

U.S. Tax Returns
International Aspects of Individual U.S. Tax Returns (Awarded an Axiom Business Book bronze medal)

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:

  • Determine accurate tax withholding rates easily based on immigration status and history on a case-by-case basis
  • Generate all required nonresident alien tax forms and IRS filings
  • Receive data via the web using Windstar’s Foreign National Information System
  • Create an audit trail for IRS audits of payments to foreign nationals

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.

Windstar Will Dock at the Following Events

Spring Nonresident Alien Tax Training
Doubletree Guest Suites
Boston, MA
April 27 – 30, 2010

 * * * * * * * * * * * * *

American Payroll Association (APA) 28th Annual Congress
Gaylord National Resort and Convention Center
National Harbor, MD
May 25 – 29, 2010

Don’t miss Windstar experts Paula N. Singer, Esq. and Linda Dodd-Major, Esq’s. sessions on immigration and tax compliance. 

  • Understanding Tax Treaty Benefits and Limitations
    May 27th from 4:00 p.m. to 5:30 p.m.

  • Visas – Working in the U.S.
    May 27th from 2:15 p.m. to 3:45 p.m.

  • Understanding Payments to Foreign Workers – Part 1
    May 28th  from 2:30 p.m. to 4:00 p.m.

  • Understanding Payments to Foreign Workers – Part 2
    May 29th from 8:00 a.m. to 9:30 a.m.

  * * * * * * * * * * * * *

NAFSA: Association of International Educators 2010 Annual Conference and Expo
Kansas City Convention Center
Kansas City, MO
May 30 – June 4, 2010

  * * * * * * * * * * * * *

18th Annual New England Payroll Conference
Radisson Hotel
Nashua, NH
June 9 – 10, 2010

Look in future issues of Crow’s Nest or visit http://www.windstar.com/public/events.html for the latest in event information.

©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.

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