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I. OVERVIEW
Generally, every person born or naturalized in the U.S. and subject to its jurisdiction
is a citizen. All other individuals are aliens. Aliens are classified as either
nonresident aliens or resident aliens. 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. The general rule is that
30 percent must be withheld on all fixed and determinable payments of U.S. source
income to nonresident aliens unless the income is excluded under a specific
provision in the Internal Revenue Code. Income includes wages or salary payments
made to employees, payments made to independent contractors for services rendered,
and fellowship/scholarships payments made to students, scholars, and trainees.
Payments to aliens are handled through the Payroll System or the Voucher Audit
System, depending upon the residency status of the individual (resident or nonresident),
the worker's classification (an employee or independent contractor), and the
source of the payment (foreign or U.S.). These factors also affect the applicability
of federal reporting and taxation. This manual covers procedures applicable
to processing payments through the Voucher Audit System and through the Payroll
System.
Care should be taken to ensure that the proper amount of withholding 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
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. Under Executive Order 12989, as of January 1, 1996
there is the possibility of debarment from receiving government research grants
for illegal payments to nonresidents.
All compensation paid to nonresident aliens for services performed in the U.S.
is subject to these requirements and procedures. Agencies that employ or contracts
with nonresident aliens are required to designate a withholding agent who will
be responsible for maintaining an understanding of the Internal Revenue Code
and Treasury Regulations related to nonresident aliens. A person should also
be designated to maintain a knowledge of the Immigration Act of 1990, amendments
to the Act and regulations promulgated pursuant to the Act.
II. VERIFICATION OF WORK AUTHORIZATION
A. Employees
Federal law prohibits employers from knowingly hiring or continuing to employ,
any foreign national not authorized to work in the U.S. Immigration law requires
an employer to verify the employment authorization of every individual hired.
To verify the employment authorization, effective November 6, 1986, the employer
and employee must complete a Form I-9. This form must be completed for full-time,
part-time and temporary employees.
Form I-9 has two parts that must be completed. The first part is to be completed
by the employee at the time of hire and reviewed by the employer to ensure it
is completed correctly. The second part is to be completed by the employer after
he/she has reviewed and verified the employee's identity and work authorization
documents.
Please note that birth certificates have been removed from valid employment
authorization documents. Employment eligibility only is established by the following
documents:
- Social Security number card, except a card marked "not valid for employment
purposes"
- Native American tribal document
- U.S. citizen identification card (Form I-197)
- Identification card for use by resident citizen in the U.S. (Form I-179)
Employment eligibility and identity both are established by these documents:
- U.S. passport
- Certificate of U.S. citizenship (INS Form N-560 or Form N-561)
- Certificate of naturalization (INS Form N-550 or N-570)
- Unexpired foreign passport that contains an unexpired I-551 stamp or
that has attached to it a Form I-94 bearing the same name as the employment
authorization stamp
- Alien registration receipt card (Form I-551), also known as a "green
card." Forms I-551 issued between 1977 and 1989 are valid indefinitely;
ones issued since August 1989 are valid for 10 years;
- Temporary resident card (Form I-688) or employment authorization card
(Form I-688A or I-688B)
- Unexpired reentry permit (INS Form I-327), or
- Unexpired refugee travel document (Form I- 571)
- Unexpired employment authorization document (Form I-766) issued by INS
to nonimmigrant workers temporarily authorized to work in the U.S. (Form
I-766 is currently being phased in by INS).
If an employee is unable to present the required document or documents within
three business days of the date employment begins, the employee must produce
a receipt showing that he or she has applied for the document. In addition,
the employee must present the actual document to you within ninety days of the
hire.
The Form I-94 is for F-1 nonimmigrant students. An I-20 Student ID must accompany
the I-94 endorsed with employment authorization by the Designated School Official
for off campus employment or curriculum practical training. INS will issue Form
I-688B (Employment Authorization Document) to all students (F-1 and M-1) authorized
for post-completion practical training periods.
Nonimmigrant exchange visitors (J-1) must have an I-94 accompanied by an unexpired
IAP-66, specifying the sponsor and issued by the United States Information Agency
(USIA). J-1 students working outside the program indicated on the IAP-66 also
need a letter from their responsible school officer.
There are civil penalties for violation of the prohibitions on hiring unauthorized
aliens. First offense -- between $250 and $2000 for each unauthorized alien;
Second offense -- between $2,000 and $5,000 for each unauthorized alien; three
or more offenses -- between $3,000 and $10,000 for each unauthorized alien.
There are also criminal penalties for "patterns or practice" violations -- up
to $3,000 for each unauthorized alien and/or imprisonment of up to six months.
Paperwork violations, that is failure to complete properly or maintain I-9 forms
range from $100 to $1,000 for each individual with respect to whom such violation
occurred.
The following section is from the U.S. Immigration and Naturalization Service
Web Site, USCIS.gov Home Page
U.S. INS INFORMATION
Frequently Asked Questions
What are employer and employee responsibilities under the law?
The Immigration and Nationality Act of 1990 that amended the Immigration Reform
and Control Act (IRCA) includes six conditions that affect the responsibilities
of an employer and two conditions that affect the responsibilities of an employee.
The six conditions which impact an employer are:
- Employers cannot request more or different documents than are required
under the new anti-discrimination provision.
- Employers cannot knowingly use, attempt to use, possess, obtain, accept,
or receive any forged, counterfeit, altered or falsely made documents which
come under the new fraud conditions.
- Employers cannot backdate or otherwise falsely make Form I-9 appear
as if they are or have met the Immigration Reform and Control Act (IRCA).
- Employers must have new employees complete section 1 of the employment
verification Form I-9 at the time of the hire by filling in the correct
information, signing and dating the form.
- Employers are responsible for reviewing and ensuring that the employees
fully and properly complete section 1 of the employment verification Form
I-9.
- Employers must examine the original documents(s) (the only exception
is a certified copy of a birth certificate) presented by the employee and
then fully complete section 2 of the employment verification Form I-9. Employers
must keep the employment verification Form I-9 for three years after the
date employment begins or one year after the person's employment is terminated,
whichever is later.
The two conditions which affect an employee are:
- Employees must present original documents to establish their identity
and employment eligibility within three business days of the date employment
begins. However, employees must present the documents at the time of hire
if they are hired for less than three business days.
- Employees must indicate, by checking an appropriate box in section 1
of the employment verification Form I-9, that they are already eligible
to be employed in the U.S. and present Form I-9 and acceptable documents
within three business days of employment. If employees are unable to produce
the required documents within three business days, they must produce a receipt
showing that they have applied for the document and present the original
document within 90 days of hire. However, employees hired for less than
three business days must produce the actual document at the time that employment
begins.
For more information concerning employee or employer responsibilities, you can
request an M-274 booklet, entitled "Handbook for Employers,"which should be
available at your local INS office in limited supply or ordered in bulk from:
The Superintendent of Documents
US Government Printing Office
Washington, D.C. 20402
B. Independent Contractors
The Form I-9 is not required to be completed for individuals who are independent
contractors. However, agencies/universities cannot contract for the labor of
an alien if you know the alien is not authorized to work in the U.S. The INS
has a more strict definition of independent contractors than that held by the
IRS. That is, an independent contractor for federal tax purposes may be considered
an employee for employment eligibility verification purposes. For additional
information refer to INS Bulletin 96-08. This bulletin may be ordered by calling
(800) 357-2099.
U.S. citizens and resident aliens must complete The State of Florida, Office
of Comptroller, Taxpayer Identification Number Request, Form DBF BP-53.
Nonresident aliens should complete an IRS Form W-8 and a Foreign National
Information Form. The Foreign National Information Form is reprinted
with permission from Windstar Technologies, Inc.
These forms will assist in determining the tax residency status of the independent
contractor and provide their taxpayer identification number (TIN). The IRS requires
all independent contractors receiving compensation to furnish their correct
TIN. For additional information on taxpayer identification numbers refer to
Section X.. TAXPAYER IDENTIFICATION NUMBERS, Sec. 3406 of the Internal
Revenue Code and Treasury Regulation Sec. 301.6109-1.
III. VISAS
The type of visa that an employee or independent contractor holds determines
the types of payment remuneration that an individual may receive. Certain visas
are not eligible to receive any type of payments.
A. Immigration Visas
The U.S. Department of State is responsible for the issuance of U.S. passports
and immigrant visas to the United States. Immigrant visas usually are obtained
where a relative of the prospective immigrant or a U.S. employer wishing to
provide work for the alien files a petition with the Immigration and Naturalization
Service. Individuals entering the United States with an immigrant visa are issued
a photo-identification card, commonly known as the "green card."Green cards
containing the notation "I-151"in the lower left-hand back corner are being
replaced with an I-551 card containing the bearer's photo, fingerprint, and
signature. As of March 20, 1996 the old I-151 green card no longer constitutes
valid proof of immigrant status. Lawful permanent resident aliens may obtain
an application for a new I-551 card by calling 1-800-755-0777.
Foreign nationals holding green cards -- those foreign nationals admitted under
immigrant visas -- are classified as resident aliens for U.S. taxation purposes.
However, it is not necessarily true that foreign nationals admitted under nonimmigrant
visas are nonresident aliens for tax purposes. Nonimmigrants will be considered
resident aliens if they satisfy the "substantial presence test"(See
Determination of Tax Status).
B. Non-Immigration Visas
Non-immigration visas are issued to foreign nationals seeking to enter the United
States for a specific purpose that can be accomplished during a temporary period.
The various types of non-immigrant visas are denoted by letters and are sometimes
referred to as "temporary visas"since they generally are issued for finite periods,
although some are renewable. A non-immigrant visa authorizes foreign nationals
to proceed to the United States, where if admitted, they are issued a Form I-94
indicating the length of the period they are authorized to remain in the United
States.
C. Non-Immigration Visa Types
A-1, A-2, and A-3 visaholders are foreign government officials. They
are aliens coming temporarily to the United States who has been accredited by
a foreign government to function as an ambassador, public minister, career diplomatic
or consular officer, other accredited official, or an attendant, servant or
personal employee of an accredited official, and all above aliens' spouses and
unmarried minor (or dependent) children.
A-1 and A-2 visaholders are only authorized to work for the foreign government
which accredited them. A-1 and A-2 immediate family members may obtain
work authorization in the form of a fully executed Form I-566, endorsed by the
Department of State. A-3 visas are only authorized to work for the A-1
or A-2 visaholders who hired them. Immediate family members are not authorized
to work.
B visas are issued to nonresident aliens who are visiting the United
States temporarily for business or for pleasure. B visa holders may not receive
compensation for services in the U.S. The B classification is divided into two
types, visitors for business (B-1) and visitors for pleasure (B-2). B-1 visa
holders are only eligible to receive reimbursement for travel expenses and per
diem. B-2 visa holders are not eligible to receive reimbursements for any expenses.
In some instances, a combination B-1/B-2 visa is issued. These visa holders
may not accept employment or perform services for which they are paid from a
U.S. source. They are only eligible to receive an expense allowance or reimbursement
for expense incidental to their temporary stay. The language of the Foreign
Affairs Manual suggests that if an agency or university pays an honorarium to
a nonresident alien B visaholder it must not exceed reasonable incidental expenses.
N3.4 of Section 41.31 of the Foreign Affairs Manual explains "incidental expenses":
- "In determining whether an honorarium or other fee paid an alien constitutes
remuneration of 'incidential expenses' (i.e., room and board, cost of travel,
pocket money), the consular officer shall consider the standard of living
to which the applicant is accustomed and the relative cost of living expenses
in the United States."
F-1 students are permitted to engage in on-campus employment for not
more than 20 hours per week. On-campus employment may be performed either on
the school's premises or at an off-campus location that is educationally affiliated
with the school. Students may be employed full-time on campus when school is
not in session. This type of employment is authorized by the school and no particular
written endorsement or permission is required. F-2 visa holders are dependents
of students and are not authorized to work.
H-1 visas are issued to professionals who have completed a degree program
at an accredited college or university or have accumulated equivalent experience.
There is no notation regarding employment on the INS I-94 card for H-1 visa
holders because this type of visa denotes that employment is authorized. Normally,
an H-1 visa holder performs services as an employee. The employer and the duties
will be specified. Work is only authorized for the sponsoring employer.
J-1 visas are issued to exchange visitors including students, scholars
and trainees. A J-1 beneficiary may only work for the sponsoring employer. A
J-2 spouse may be employed if authorized by the INS. An economic necessity
must be demonstrated to receive this authorization.
K-1 visaholders are nonimmigrant aliens coming to the United States to
conclude a valid marriage with a U.S. citizen within ninety days after entry.
Work is authorized.
Q visas are issued to participants in international cultural exchange
programs for the duration of the program, but no longer than fifteen months.
The purposes of these exchange programs are to provide practical training, employment
and the sharing of the history, culture and traditions of the country of the
alien's nationality.
D. United States-Canada Free Trade Agreement
Public Law 100-449 (Act of 9/28/88) established a special, reciprocal trading
relationship between the United States and Canada. It provided two new classes
of nonimmigrant admission for temporary visitors to the United States-Canadian
citizen business persons and their spouses and unmarried minor children. Entry
is facilitated for visitors seeking classification as visitors for business,
treaty traders or investors, intracompany transferees, or other business people
engaging in activities at a professional level. Such visitors are not required
to obtain nonimmigrant visas, prior petitions, labor certifications, or prior
approval but must satisfy the inspecting officer they are seeking entry to engage
in activities at a professional level and that they are so qualified. The United
States-Canada Free-Trade Agreement was superseded by the North American Free
Trade Agreement (NAFTA) as of 1/1/94. (See North American Free-Trade Agreement.)
E. North American Free-Trade Agreement (NAFTA)
Public Law 103-182 (Act of 12/8/93), superseded the United States-Canada Free-Trade
Agreement as of 1/1/94. NAFTA continues the special, reciprocal trading relationship
between the United States and Canada (see United States-Canada Free-Trade Agreement),
and establishes a similar relationship with Mexico.
The NAFTA permits Canadians to enter the U.S. as visitors for business or pleasure
without first obtaining a visa. Mexican applicants must still obtain a visa
or use a Border Crossing Card. If the individual is a business visitor engaging
in legitimate business activities of a commercial or professional nature, they
are comparable to the business visitor (B-1). The business activities must be
necessary incidents to international trade/commerce. In general, business visitors
may enter the U.S. to (1) engage in commercial transactions, (2) participate
in litigation, (3) participate in scientific, educational, professional or business
conferences, (4) conduct independent research, or (5) be trained.
NAFTA also has special provisions for certain professionals. The professional
visa status under NAFTA is a Trade NAFTA status or a "TN"status. To qualify
for a TN visa, a Mexican or Canadian national must hold an occupation listed
in the NAFTA annex of professionals, and must be entering to pursue that occupation
for a U.S. employer. There are no special labor applications regarding prevailing
wage or formal petition documents for Canadians, who may obtain a TN at the
border. For Mexicans, the TN visa requires INS preapproval, like an H-1B. TN
visa status is valid for one year and is indefinitely renewable.
TN visaholders must be coming to the U.S. to provide prearranged professional
services. These services may be through an employee-employer relationship or
through a signed contract between a self-employed professional and an agency/university
or the professional's foreign employer and the agency/university.
F. Visa Waiver Countries
Individuals may enter the U.S. for up to 90 days without a visa if they are
nationals from the following counties: Andorra, Argentina, Australia, Austria,
Belgium, Brunei, Denmark, Finland, France, Germany, Iceland, Italy, Republic
of Ireland, Japan, Liechtenstein, Luxembourg, Monaco, Netherlands, New Zealand,
Norway, Pakistan, Philippines, Poland, Portugal, San Marino, Spain, Sweden,
Switzerland, and the United Kingdom. Business visitor status (B-1) may be used
for business visitors engaging in legitimate business activities of a commercial
or professional nature.
IV. DETERMINATION OF TAX STATUS
If a review of the applicable documents indicates that the alien is authorized
to work in the U.S., the agency must then determine if the person is a resident
alien or a nonresident alien for tax purposes. Foreign nationals authorized
to work in the United States are classified as either residents or nonresidents
for U.S. taxation purposes. The distinctions between these two classifications
are important since resident aliens, like U.S. citizens, are taxed on their
worldwide income, while nonresident aliens are taxed merely on their U.S. source
income. The individual will be considered a nonresident unless it can be established
that he or she is a resident alien as evidenced by the following:
- Possession of an alien registration card, Form I-551, issued by the
Immigration and Naturalization Service ("green card" which are actually
pink); or
- Possession of documents to show that he or she meets the "substantial
presence test", which means that the alien must be present in the U.S. on
at least:
- 1. 31 days during the current calendar year, and
- 2. 183 days during the three-year period that includes the current
year and the two years immediately before that, counting:
- a) All the days present in the current year,
- b) One-third of the days present in the year preceding the current
year, and
- c) One-sixth of the days present in the second year preceding
the current year.
Example. Individual was physically present in the United States for 120
days in each of the years 1994, 1995, and 1996. To determine if they meet the
substantial presence test for 1996, count the full 120 days of presence in 1996,
40 days in 1995 (1/3 of 120), and 20 days of 1994 (1/6 of 120). Since the total
for the 3-year period is 180 days, they are not considered a resident alien
under the substantial presence test for 1996.
In theory, the substantial presence test must be applied each year. However,
it is possible for the employer to estimate the future date on which he/she
expects the individual to satisfy the test. This estimate of the individual's
"residency change date" is based upon the employer's knowledge of or ability
to identify any future changes in the components of the substantial presence
test.
For purposes of calculating the days that an individual is physically present
in the U.S. for purposes of the substantial presence test, those days that the
individual qualifies as an "exempt individual"are not counted. J or Q teacher
or trainee visaholders are considered exempt if they were not exempt as a teacher,
trainee, or student for any two of the last six calendar years. Additionally,
if in any year during the six-year period the individual qualified as an F,
J, M, or Q student visaholder, that year must also be taken into account.
F, J, M, or Q student visaholders are not considered exempt individuals if they
have benefited from that status for any part of more than five calendar years.
IRS Publication 519, U.S. Tax Guide for Aliens, identifies other exceptions
for days present in the U.S. that are not counted toward meeting the "substantial
presence test."
A "calendar" year is used for purposes of both the two-year and five-year limitation
rules - the period from January 1 - December 31. A "calendar"year is not twelve
consecutive months. Thus, if an individual is exempt for any part of a calendar
year, that year will count as a full calendar year when determining exempt individual
years.
Example. An F-1 student visaholder subject to the five-year rule who
arrives in the U.S. on December 15, 1992, will cease being an exempt individual
on January 1, 1997. The visaholder's first "calendar"year will be 1992, even
though he/she was only in the U.S. for 17 days of the year, and his/her second
calendar year will be 1993. On January 1, 1997, the visaholder must begin to
count the days of presence in the U.S. for purposes of the substantial presence
test; if he/she leaves the U.S. before the test is met, he/she is not considered
a U.S. resident. If, however, the visaholder stays in the U.S. for at least
183 days in 1997, he/she will meet the substantial presence test and be treated
as a U.S. resident retroactively to January 1, 1997, and therefore, retroactively
subject to FICA.
If the individual represents that he or she meets the "substantial presence
test" or the agency has reason to believe that the individual meets the test,
the agency should tax the individual as a resident alien.
The IRS has a query on the World Wide Web called "Tax Trails"that can be used
to determine the status of an individual. Tax Trails is an interactive session
which poses questions that you can answer by selecting Yes or No. Your choice
then activates a hypertext link to the next appropriate question until an answer
is possible. The address is:
http://www.irs.ustreas.gov/plain/ind_info/tax_trails/index.html
Also refer to Internal Revenue Code Sec. 7701(b)(3)
and Treasury Regulations 301.7701(b)-1(c).
V. RESIDENT ALIENS
A resident alien's income is generally subject to tax in the same manner as
a U.S. citizen; that is, a resident alien is taxed on and must report income
from all sources, including sources outside the United States.
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