COMPTROLLER'S MEMORANDUM NO. 05 (1996-97)
SUBJECT: NONRESIDENT ALIEN EXPENDITURE OBJECT CODES
Section 1441 of the Internal Revenue Code provides a separate tax system with a different set of tax rules and regulations for individuals deemed to be nonresident aliens. Agencies making payments to nonresident aliens are subject to different tax withholding, reporting and liability requirements. Nonresident alien U.S. source income is subject to withholding unless the income is excluded under a specific provision in the Internal Revenue Code.
Travel reimbursment payments made to nonresident aliens are also subject to the IRS withholding and reporting requirements. Although the IRS routinely applies the accountable plan rules to U.S. citizen and U.S. resident alien independent contractors, the IRS has informally taken the position that an agency cannot use the accountable plan rules with respect to payments made to or on behalf of nonresident alien independent contractors.
In order to ensure that the requirements of the Internal Revenue Code are met, we have established new object codes for nonresident aliens. Agencies should review their procedures for assigning the codes to ensure expenditures are recorded correctly as transactions are processed. Effective January 1, 1997 agencies should use the following object codes as appropriate:
|1350||Nonresident Alien Independent Contractor - Taxable|
|1351||Nonresident Alien Independent Contractor - Exempt|
|1352||Nonresident Alien Independent Contractor - Foreign Source|
|2670||Travel Nonresident Alien Independent Contractor - Taxable|
|2671||Travel Nonresident Alien Independent Contractor - Exempt|
|2672||Travel Nonresident Alien Independent Contractor - Foreign Source|
If compensation income is earned with respect to services performed both within and without the U.S., Treasury Regulation § 1.861-4(b) requires the income to be prorated between the U.S. and foreign source on a time spent basis. Therefore, the income should also be appropriately allocated between object codes.
Care should be taken to ensure that the proper amount of income tax is withheld from payments made to nonresident aliens. Section 1461 of the Internal Revenue Code states that a withholding agent is liable for the income tax that must be withheld from payments made to or on behalf of a nonresident alien. Thus, if the agency fails to withhold the requisite tax and the nonresident alien payee fails to pay the tax due, the agency will be liable for the tax that was required to be withheld. There are also penalties associated with the failure to correctly report the income to the IRS, or failure to pay or deposit the tax when due. Agencies may also be liable for penalties and interest, unless it can be shown that the failure to pay or file was due to reasonable cause and not willful neglect.
The procedures for processing payments
to nonresident alien independent contractors is contained in Volume
V, Section 15 of the Bureau of State Payrolls, Payroll Preparation
Manual. If additional information is needed please call Phyllis
Goodman at 904/414-7823 or SUNCOM 994-7823.