Resident, nonresident alien status tax wise – Part 2

(Part 2)

IN part 1: We defined 1) who are resident aliens, nonresident aliens or both, 2) who are exempt individuals, and 3) closer connection exception.

In part 2: We defined 1) how resident alien and nonresident alien are taxed, 2) when is income considered U.S. sourced, 3) withholding requirement and employee issues.

Taxation and withholding rates of nonresident aliens or NRAs:

• TIP: Secure Form W-4 employee’s withholding allowance certificate from a NRA employee and withhold until Form 8233 to claim tax treaty exemption from withholding has been approved by the IRS.

• Employers must advise NRA to follow IRS Notice 1392 supplemental Form W-4 instructions line by line item prior to completing the Form.

• A Single status with zero exemption will be withheld from a NRA for failure to file Form W-4 or for filing an invalid Form W-4.

• NRAs are subject to graduated withholding unless exemption applies from withholding.

• NRAs are required to file U.S. tax return Form 1040NR or Form 1040NR-EZ unless exemption applies.

• Wages paid to NRAs that are exempt under a tax treaty must be reported by employers on Form 1042 annual withholding tax return for U.S. Source income of foreign persons and Form 1042-S foreign person’s U.S. source income subject to withholding.

• Totalization agreement exemption: The totalization agreement is to address between social security administration and other foreign countries when dual social security taxation occurs for NRA working within the U.S., and these taxes are required to be paid on the same wages to both U.S. and NRAs residence country. A NRA should provide to employer a certificate of coverage from the resident country and the U.S. employer must keep copy of certificate for IRS if FICA taxes are questioned why not being withheld. For more information refer to 2017 IRS publication 15-A,, publication 519.

• IRS employer reporting obligation: The same reporting applies for resident alien and NRA. Wages are reported on Form 941/944 and Form W-2 except for wages for NRA exempt under the tax treaty, payments are reported on Form 1042 and Form 1042-S.

• State reporting: Form W-2 must include wages and income taxes withheld from NRA including exempt wages under a tax treaty. State and foreign government do not have tax treaties.

• Liability from incorrect withholding: Both the U.S. payer and foreign person are responsible for the failure to proper withholding and will be assessed for related tax liability plus penalty and interest.

• BEWARE: US employer is expected to report and withhold taxes on wages from illegal aliens should an employer hire an undocumented alien.

To be continued in the next issue.

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Disclaimer: Any accounting, business or tax advice contained in this communication is neither intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

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Al-os & Associates  Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies.    

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