New Rules for Income Tax Withholding on Wages Paid to Nonresident Aliens

The current withholding rules for nonresident alien employees result in overwithholding for employees who earn small amounts of wages within the U.S. The reason for this is that the current rules require the nonresident alien to request an additional amount of withholding when completing his or her Form W-4. Since nonresident aliens are not entitled to the standard deduction, this additional amount is to offset the standard deduction which is built into the federal withholding tables.

However, if the amount of the nonresident alien employee’s total annual wages for services performed in the U.S. is less than the personal exemption amount, income tax is still withheld. A nonresident alien in this situation must file a personal income tax return and request a refund to get back the amount withheld.

To correct this situation, the IRS has announced new rules for nonresident alien employees in completing their Form W-4 and new rules for employers in calculating the amount of income tax to be withheld for them. These rules do not apply to students and apprentices from India. Nonresident alien employees are required to complete a new Form W-4 for wages to be paid on or after January 1, 2006. They are required to:

• Not claim exemption from withholding;
• Request withholding as if they are single, regardless of their actual marital status;
• Claim only one allowance (except that, if the nonresident alien is a resident of Canada, Mexico, or South Korea, he or she may claim more than one allowance); and
• Write “Nonresident Alien” or “NRA” above the dotted line on Line 6 of Form W-4

Nonresident alien employees will no longer be required to request an additional amount, however they may request an additional amount at their option.

Beginning with wages paid on or after January 1, 2006, employers are required to calculate income tax withholding on wages of nonresident alien employees (except for students and business apprentices from India) using a new procedure. Under this procedure the employer will add an amount to the wages of the nonresident alien employee solely for the purpose of calculating the income tax withholding for each pay period. This added amount is not income or wages to the employee, does not affect federal income, FICA, or FUTA tax liability for the employer or the employee, and is not reported as income or wages. Adding this amount will offset the assumed standard deduction that is incorporated into the tax tables without requiring income tax to be withheld from wages that will fall below the personal exemption amount when annualized.

Speak to your Payroll Service Representative if you would like to indicate that an employee is a nonresident alien who has properly filled out a Form W-4 for 2006.