Proper Tax Treatment of Foreign Hires Presented by Tax Services September 2006.
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Transcript of Proper Tax Treatment of Foreign Hires Presented by Tax Services September 2006.
Proper Tax Treatment of Foreign Hires
Presented by Tax Services
September 2006
Overview
Tax Residency: What’s it all about?
Identifying Foreign Hires Tax Residency Information Form
& Documentation Taxing Nonresident Alien
Employees
Tax Residency
What is it? Why we care
Tax Residency
Under U.S. tax laws, all non-U.S. citizens are considered to be either:
Permanent resident aliens Resident aliens for tax
purposes, or Nonresident aliens.
Taxation & Residency
Permanent resident aliens and resident aliens for tax purposes are taxed the same as U.S. citizens
Resident aliens generally are taxed on their worldwide income, the same as US Citizens
Nonresident aliens are taxed under special laws
Nonresident aliens are taxed only on their income from sources within the US & on certain income connected with the conduct of trade or business in the US.
Tax Residency - Why We Care
Knowing an individuals tax residency status prior to payment is essential to accurately report the individual’s tax liability and to be in compliance with IRS tax laws.
Tax Residency - Why We Care
If we incorrectly report a nonresident alien’s tax withholding liability, we may be held responsible for the tax not withheld, in addition to any penalties for failure to withhold, plus the interest from the time the tax was not withheld.
Identifying Nonresident Aliens
State Employees
Identifying NRA Employees: I-9
I-9 : “An alien authorized to work until…” must fill out MNSCU TRIF form
Tax Residency Information Form
Employee’s who indicate on their I-9 that they are “an alien authorized to work until…” must fill out the Payroll Tax Residency Information form.
The data collected on this form will help determine an employee’s tax residency status
Tax Residency Information Form
Section A: Personal Information Current Immigration Status Date Current Status Began
Section B: Prior Visit Information Visits to the U.S. before Date Current
Status began Section C: Employee Certification
Tax Residency Information FormPAYROLL TAX RESIDENCY INFORMATION FORM
To be filled out by employees who indicate on their I-9 “other alien authorized to work until xx/xx/xx”. Notice: The following information is requested to determine and document your resident or nonresident status for tax purposes, tax withholdings, and any tax treaty benefits you may be eligible to receive. This is NOT an Internal Revenue Service (IRS) nor is it a United States Citizenship and Immigration Services (USCIS) form. You are not legally required to fill out this questionnaire, but if you do not do so, the institution will be unable to determine your eligibility for tax treaty benefits and will withhold federal and state taxes. This information will be used by the institution’s finance/HR personnel to determine your tax liability and may be available to other government officials as authorized by law.
B: PRIOR VISITS – List all prior visits to the United States, include the year of the visit, the immigration status under which the individual entered the U.S., the number of days spent in the U.S. during the visit and the reason for the visit.
A: PERSONAL INFORMATION To be completed by employee
Name Lee Mei ______________________________________________________________ Last First or Personal Middle
Social Security # or ITIN 477-85-5551
Current Immigration Status
J-1 scholar
Country of Citizenship China
Date of Original Port of Entry under Current Immigration Status December 15th 2006
Institution MSU, Mankato
Department(s) China Studies
Change of Immigration Status If individual has had a change of status since entering the U.S., enter the date that status changed and the original status below (Individual must also complete Section B: Prior Visits). Contact Tax Services to determine Tax Residency.
Change of Status Date____________ Previous Status___________________
Title of position(s) held: Visiting professor, cultural exchange
Year Immigration
Status
Total Number of Days in the US during Year under Immigration
Status
Purpose of Visit
2001 F-1 178 Graduate studies at NYC 2000 F-1 153 Graduate studies at NYC
Tax Residency Information Form
PAYROLL TAX RESIDENCY INFORMATION FORM To be filled out by employees who indicate on their I-9 “other alien authorized to work until xx/xx/xx”.
Notice: The following information is requested to determine and document your resident or nonresident status for tax purposes, tax withholdings, and any tax treaty benefits you may be eligible to receive. This is NOT an Internal Revenue Service (IRS) nor is it a United States Citizenship and Immigration Services (USCIS) form. You are not legally required to fill out this questionnaire, but if you do not do so, the institution will be unable to determine your eligibility for tax treaty benefits and will withhold federal and state taxes. This information will be used by the institution’s finance/HR personnel to determine your tax liability and may be available to other government officials as authorized by law.
A: PERSONAL INFORMATION To be completed by employee
Name
Lee Mei ________________________________________________________________ Last First or Personal Middle
Social Security # or ITIN
477-85-5551
Current Immigration Status
J-1 Scholar
Country of Citizenship
China Date of Original Port of Entry under Current Immigration Status
December 15th, 2006
Institution
MSU, Mankato
Department(s)
China Studies
Change of Immigration Status If individual has had a change of status since entering the U.S., enter the date that status changed and the original status below (Individual must also complete Section B: Prior Visits). Contact Tax Services to determine Tax Residency.
Change of Status Date____________ Previous Status___________________
Title of position(s) held:
Teacher
Tax Residency Information Form
B: PRIOR VISITS – List all prior visits to the United States, include the year of the visit, the immigration status under which the individual entered the U.S., the number of days spent in the U.S. during the visit and the reason for the visit.
Year Immigration
Status
Total Number of Days in the US during Year under Immigration
Status
Purpose of Visit
2001 F-1 178 Graduate Student program 2000 F-1 153 Graduate Student program
Tax Residency Information Form
C: CERTIFICATION I hereby certify that all of the information on this form is true and correct. I understand that if my immigration status changes from that which I have indicated on this form, I must prepare and submit a new Tax Residency Information Form to the Human Resource office at my institution.
Date _12/16/2006________________ Signature ___Mei Lee_____________________________________________________________
To be completed by the withholding agent with assistance from Tax Services D: RESIDENCY STARTING DATE Residency Start Year_____2009___if immigration status does not change, begin taxing employee as a Resident Alien on Jan. 1, 2009 __ Date in the future when individual will have met the Substantial Presence Test and becomes a Resident Alien for Tax Purposes. This date must be recalculated if any of the information on this form changes. When the employee reaches the Residency Start date, they must be treated as resident aliens for tax purposes.
E: CAMPUS CONTACT INFORMATION
Date ____12/18/2006________ Signature ____Ann Page_____________________ Phone Number (651_____)_632-5007________Name (Print please)___Ann Page, Tax Services________________________________
Tax Services Contact Information: Ann Page at 651-632-5007, [email protected], or Steve Gednalske at 651-632-5016, [email protected]. Send a copy of this form to Tax Services, 30 7th Street East, Suite 350, St. Paul, MN 55101 or Fax to 651-649-5762.
TRIF Documentation Verify immigration status Copy immigration documentation
Passport I-94, arrival/departure record, stamped Immigration Status documentation
I-20, F-1 student on OPT DS-2019, J-1 (student or scholar) H-1B Approval Letter Invitation and Employment Letters
Employment Authorization Cards (front and back)
Any other immigration documentation presented by the payee
I-20
Certificate of Eligibility for Nonimmigrant (F-1) Student
I-94: Arrival/Departure Record
DS-2019
Certificate of Eligibility for Exchange Visitor(J-1) Status
I-94: Arrival/Departure Record
Passport Information
Identification Page Current visa
information Prior visits to US
Determining Tax Residency
The Substantial Presence Test
Tax Residency Information FormPAYROLL TAX RESIDENCY INFORMATION FORM
To be filled out by employees who indicate on their I-9 “other alien authorized to work until xx/xx/xx”. Notice: The following information is requested to determine and document your resident or nonresident status for tax purposes, tax withholdings, and any tax treaty benefits you may be eligible to receive. This is NOT an Internal Revenue Service (IRS) nor is it a United States Citizenship and Immigration Services (USCIS) form. You are not legally required to fill out this questionnaire, but if you do not do so, the institution will be unable to determine your eligibility for tax treaty benefits and will withhold federal and state taxes. This information will be used by the institution’s finance/HR personnel to determine your tax liability and may be available to other government officials as authorized by law.
B: PRIOR VISITS – List all prior visits to the United States, include the year of the visit, the immigration status under which the individual entered the U.S., the number of days spent in the U.S. during the visit and the reason for the visit.
A: PERSONAL INFORMATION To be completed by employee
Name Lee Mei ______________________________________________________________ Last First or Personal Middle
Social Security # or ITIN 477-85-5551
Current Immigration Status
J-1 scholar
Country of Citizenship China
Date of Original Port of Entry under Current Immigration Status December 15th 2006
Institution MSU, Mankato
Department(s) China Studies
Change of Immigration Status If individual has had a change of status since entering the U.S., enter the date that status changed and the original status below (Individual must also complete Section B: Prior Visits). Contact Tax Services to determine Tax Residency.
Change of Status Date____________ Previous Status___________________
Title of position(s) held: Visiting professor, cultural exchange
Year Immigration
Status
Total Number of Days in the US during Year under Immigration
Status
Purpose of Visit
2001 F-1 178 Graduate studies at NYC 2000 F-1 153 Graduate studies at NYC
Tax Residency Tests
There are two tests used to determine whether a non U.S. citizen should be treated as a U.S. resident for tax purposes: The “Green Card” test, and the Substantial Presence Test
The “Green Card” Test The individual is a lawful permanent
resident alien if he/she: Has been granted lawful permanent
resident status in the U.S., and Has been issued or will receive an alien
registration card by U.S. Citizenship & Immigration Services (USCIS).
Tax as U.S. Citizen
The Substantial Presence Test
Mathematical calculation of days present in the U.S. used to determine tax residency.
An alien individual will be considered a U.S. resident for tax purposes if they meet the SPT for the calendar year.
Substantial Presence Test Data
Current Immigration Status
Primary Purpose of U.S. Visit
Date of Arrival for Purposes of Current Visit
Information about Prior Visits including the above facts
Substantial Presence Test
1. 31 days during the current year, and
2. 183 days during the 3 year period that includes the current year and the 2 years immediately preceding, calculated as follows:
• All the days present in the current year, plus
• 1/3 of the days present in the first year before the current year, plus
• 1/6 of the days present in the second year before the current year.
An alien individual will be treated as a resident alien for tax purposes if they are physically present in the United States on at least:
Substantial Presence Test & Taxation
If SPT is met, Tax as a Resident
If SPT is not met, Tax as a Nonresident
Substantial Presence Test Example A
Lorena was physically present in the U.S. for:
138 days in 2004, 129 days in 2005,
and 120 days in 2006,
Q: Does Lorena meet the substantial presence test for 2006?
SPT Example A
Q: Does Lorena meet the substantial presence test for 2006?
In the U.S. for over 31 days in the current year Apply the 183 day test as follows:
2006: 120 days 2005: (129 x1/3) = 43 days 2004: (138 x 1/6) = 23 days Total days present in U.S. = 120 + 43 + 23 = 186
days
SPT Example A
Ans: Yes, Lorena is considered a resident alien for tax purposes because: She has been present in the U.S. for over
31 days in current calendar year, and Her total number of days in the U.S. for
the three-year period as calculated by the substantial presence test was over 183 days.
Days Not Counted
Exceptions to counting days towards substantial presence: Any days the individual regularly commutes to work
in the U.S. from a residence in Canada or Mexico Any days the individual is in the U.S. for less than
24 hours when in transit between two places outside of the U.S.
Any days the individual was unable to leave the U.S. due to a medical condition that developed while he was in the U.S., and
Any days the individual was present in the U.S. as an “exempt individual”.
Exempt Individuals
“Exempt individuals” are present in the U.S. for the primary purpose of being:
a teacher or trainee generally present under
a “J” or “Q” visa; includes all “J” non-student categories
a student generally present under
a “F”, “J”, “M” or “Q” visa
a “foreign government-related” individual
generally a foreign diplomat or consular officer present under an “A” or “G” visa
a professional athlete generally present under a
“P” visa
Exempt Individual: Rules
F, J, M or Q student visa holders will not qualify for “exempt individual” status if they have had that status for any part of more than five calendar years.
J or Q non-student visa holders will not qualify for “exempt individual” status if they were exempt as a teacher, trainee, non-student or student for any 2 of the last 6 calendar years.
SPT & Exempt Individual: Mei Lee
Mei Lee, a Chinese citizen, has never been to the United States before. She arrives in the U.S. under a J-1 visa on December 15, 2006 to work at Minnesota State University, Mankato.
As a J-1 scholar, Mei Lee is an exempt individual in calendar year 2006 & calendar year 2007.
Mei is a nonresident alien for tax purposes. J-1 NRA: Exempt for FICA/Medicare taxation Eligible for J-1 Teaching/Researching Tax Treaty W-4 - Statutory withholding
Taxing Nonresident Aliens
Statutory Withholding FICA Exemption Tax Treaty Benefits
Example: Taxing Mei Lee
NRA J-1 Scholar = Exempt from FICA/Medicare Taxation
U.S. – China Tax Treaty Benefit Article 19 of US-China Tax
Treaty 3 Years, No income limit IRS Form 8233 Year End Reporting IRS Form
1042-S
Nonresident Aliens & W-4:
May not claim exemption from income tax withholding,
Request withholding as if they are single, regardless of their actual marital status,
Claim only one allowance, unless an exception exists, and
On line 6, write “Nonresident Alien” or “NRA”
Statutory Withholding Rules
W-4 Witholding Allowance
Nonresident Alien
Mei Lee 12/16/2006
Students from India Article 21(2) of the United
States-India Income Tax Treaty An additional withholding
allowance may be claimed for a spouse if the spouse has no U.S. source gross income and may not be claimed as a dependent by another taxpayer.
An additional withholding allowance for each dependent (usually a child) who has become a resident alien.
Exceptions to Statutory Withholding Rules
Canada and Mexico, American Samoa and Northern
Mariana Islands Entitled to claim additional
withholding allowances for a nonworking spouse and for dependents, the same as a U.S. citizen.
South Korea May claim additional
withholding allowances for a nonworking spouse and dependents present with them in the U.S.
FICA Exception for F, J, M & Q Nonresident Aliens
IRC Section 3121(b)(19) An individual may be exempt from FICA tax
withholding if he or she meets all of the following criteria: Is a nonresident alien for taxation purposes (i.e.: has not
met the substantial presence test); Is present in the U.S. under a F, J, M or Q visa; Is performing services in accordance with the primary
purpose of the visa’s issuance (i.e., the primary holder of the visa, the “-1”).
This exemption does not apply to F, J, M or Q visa holders who become resident aliens for tax purposes (i.e., individuals who have met the substantial presence test).
Tax Treaties & Income Withholding Agreement between two countries to reduce or
eliminate double taxation. US has income tax treaties with over 48 different
countries Each treaty is unique and may not contain the
same provisions or exemptions as another tax treaty.
From time to time, treaties with additional countries are signed and existing treaties revised
IRS website has complete text of current tax treaties
Tax Treaties & Income Withholding
Typically, the employee must be a nonresident alien for tax purposes to claim treaty benefits
J-1 Scholar Tax Treaty Article/Clause Teaching/Researching Dependent Personal Services (Canadian)
Annual maximum dollar amount and/or a time limit of presence in the U.S.
Example: Taxing Mei Lee
NRA J-1 Scholar = Exempt from FICA/Medicare Taxation
U.S. – China Tax Treaty Benefit Article 19 of US-China Tax
Treaty 3 Years, No income limit IRS Form 8233 Year End Reporting IRS Form
1042-S
Form 8233:
For Claiming Treaty Benefits
Completing Form 8233
Form 8233:
Page 2
8233 Statement AttachmentPeople’s Republic of China
I was a resident of the People’s Republic of China on the date of my arrival in the United States. I am not a U.S. citizen. I have not been lawfully accorded the privilege of residing permanently in the United States as an immigrant.
I have accepted an invitation by the U.S. government, or by a university or other recognized educational institution in the United States to come to the United States for the purpose of teaching or engaging in research at Minnesota State University, Mankato, which is an accredited educational institution or scientific research institution. I will receive compensation for my teaching, lecturing, or research activities.
The teaching, lecturing, or research compensation received during the entire tax year qualifies for exemption from withholding of federal income tax under the tax treaty between the United States and the People’s Republic of China. I have not previously claimed an income tax exemption under this treaty for income received as a teacher, lecturer, researcher, or student before the date of my arrival in the United States.
Any research I perform will be undertaken in the public interest and not primarily for the private benefit of a specific person or persons.
I arrived in the United States on 12/15/2006 [insert the date of your last arrival in the United States before beginning the teaching or research services for which the exemption is claimed]. The treaty exemption is available only for compensation received during a maximum aggregate period of three years.
Tax year treaty being claimed for 2007_;
Under penalties of perjury, I declare that I have prepared this form and to the best of my knowledge and belief, it is true, correct, and complete.
Signature of nonresident alien individual_Mei Lee __________Date __12/16/2006_________
SEMA4 & Nonresident Aliens
SEMA4 Bulletin 7/13/2006 SEMA4 Tax Treaty Field
Informational only Retirement & Foreign Hires
Contact Gary Janikowski,System Director, Personnel, 651-297-5540
Questions?
Contact Information
Tax Services Website:
http://www.financialreporting.mnscu.edu/Tax_Services/index.html
Ann Page, 651-632-5007 [email protected]
Steve Gednalske, 651-632-5016, [email protected]