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 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 Date of Original Port of Entry under Current Immigration Status December 15 th 2006 China 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___________________ Institution MSU, Mankato Title of position(s) held: Visiting professor, cultural exchange Department(s) China Studies 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 2001 2000 Immigration Status F-1 F-1 Total Number of Days in the US during Year under Immigration Status 178 153 Purpose of Visit Graduate studies at NYC 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 15 th , 2006 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___________________ Institution Department(s) MSU, Mankato China Studies 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 178 Purpose of Visit 2001 2000 F-1 F-1 153 Graduate Student program 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 7 th 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 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 Date of Original Port of Entry under Current Immigration Status December 15 th 2006 China 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___________________ Institution MSU, Mankato Title of position(s) held: Visiting professor, cultural exchange Department(s) China Studies 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 2001 2000 Immigration Status F-1 F-1 Total Number of Days in the US during Year under Immigration Status 178 153 Purpose of Visit Graduate studies at NYC 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

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:

1.

31 days during the • All the days present in the current year, plus 2.

current year, and 183 days during the 3 • 1/3 of the days present in the first year before year period that the current year, plus includes the current year and the 2 years • 1/6 of the days present immediately preceding, in the second year calculated as follows: before the current year.

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

Statutory Withholding Rules

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”

W-4 Witholding Allowance

Mei Lee

Nonresident Alien

12/16/2006

  

Exceptions to Statutory Withholding Rules

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. 

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 Attachment

People’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.e

du/Tax_Services/index.html

  Ann Page, 651-632-5007 [email protected]

Steve Gednalske, 651-632-5016, [email protected]