Are all of your employees either U.S. citizens or U.S. lawful permanent residents?
Form I-9, Work Authorization Verification, indicates a choice of four categories for employees:
- U.S. citizen
- U.S. national
- U.S. lawful permanent resident
- A nonimmigrant authorized to work through [a specified date]
If no, do you capture immigration status history and U.S. presence in your processing systems about your alien employees?
In order to determine an alien employee’s tax status (resident alien or nonresident alien) the employer needs current immigration status, immigration history the extensiveness of which depends on the immigration statuses in the current and prior year, and U.S. presence over a three-calendar year period.
Does your system analyze the immigration history and U.S. presence of your alien employees annually to determine whether the employee is a resident alien or a nonresident alien?
To determine which tax withholding rules apply (the rules for U.S. citizens/resident aliens or the rules for nonresident aliens) requires an analysis of the employee’s substantial presence in the U.S. This analysis must be performed at the beginning of each year and when immigration status changes, because of the possibility of change in tax status.
If you employ aliens who are, or have been, in J-1 status at sometime in the current three calendar years, do you capture the alien’s immigration history prior to the three calendar years in order to determine the aliens’ correct tax status?
A J-1 non-student, such as an intern or trainee, does not count U.S. days for purposes of determining tax residency for two out of the current seven years. If the alien was in the U.S. in F or J status prior to the seven-year period, the analysis must take those years into account in order to determine which calendar years do not count out of the seven.
If you employ aliens who have been F-1 students, do you collect the immigration status history as a F or J status alien back to 1985?
Under the rules for determining tax residency for F and J students, the alien does not count days for substantial presence purposes for five calendar years in F, J, M or Q status.
Does your payroll system prepare Forms W-4 for employees who are nonresident aliens using the special Form W-4 rules?
The withholding is higher for a nonresident alien, so it is important to be able to make this determination. The special Form W-4 rules and the “phantom gross-up” required to eliminate the effect of the standard deduction in the wage withholding tables are explained in IRS Publication 15, Circular E, Employer’s Tax Guide.
If you employ J-1 non-students or J-1 or F-1 students under practical training, do you exempt those who are nonresident aliens from Social Security and Medicare taxes?
Only nonresident aliens in these categories are exempt from Social Security and Medicare taxes. Resident aliens in these categories are subject to Social Security and Medicare taxes.
If an outside advisor, such as a major accounting firm, deals with tax matters for your alien employees, do they deal with the J-1 interns and F-1 and J-1 students under practical training?
Most tax programs for employees relocating internationally do not include tax assistance for these aliens because they are not highly paid. When left to their own devices, many submit incorrect tax returns even if they use a paid preparer.
If you allow exemption from tax under an income tax treaty for trainees, do you collect the proper paperwork from the alien?
The payer must collect a completed Form 8233, which includes a certifying statement under the appropriate tax treaty and treaty article. A copy of Form 8233 must be sent timely to the IRS as described by the form’s instructions in order for the form to be valid.
If you allow exemption from tax under an income tax treaty, do you report the treaty exempt income on a Form 1042-S (and 1042) instead of the W-2 (and 941)?
Treaty exempt income must be reported to the IRS and the recipient on a Form 1042-S information return and on a Form 1042 tax return. (There is only one Form 1042 allowed per employee identification number.)
Do you use the same common law rules for determining when alien workers are employees or independent contractors?
The same rules for determining independent contractor status vs. employee status apply to alien workers as apply to U.S. citizens. Frequently, employers treat aliens without work authorization as independent contractors because they are unable to obtain Social Security Numbers. Employers who misclassify workers as independent contractors can be subject to substantial taxes, penalties and interest by IRS. Worse, such employers can be subject to penalties by the immigration service for knowingly employing unauthorized alien workers.