In a detailed notice, the IRS provides

• new rules for determining the amount of income tax that employers must withhold from wages paid for services performed by nonresident alien employees within the United States
  
  
• new rules for use by nonresident alien employees in completing Form W-4 Employee's Withholding Allowance Certificate.

The rules for employers and employees are effective with respect to wages paid on or after January 1, 2006.

Some nonresident alien employees have experienced over-withholding of income tax and the new rules are designed to provide for withholding that more closely approximates the income tax.

Procedure for employees

When completing Form W-4 to provide information with respect to withholding on wages to be paid on or after January 1, 2006, nonresident alien employees are required to:

1. request withholding as if they are single, regardless of their actual marital status
   
   
2. claim only one allowance (although residents of Canada, Mexico or South Korea may claim more than one allowance)
   
   
3. request an additional amount to be withheld, if they wish to do so, and
   
   
4. not claim exemption from withholding.

To help the employer apply the correct withholding procedure, the employee should also write "nonresident alien" or "NRA" above the dotted line after the words "Additional amount, if any, you want withheld from each paycheck" and before the box on line 6 of Form W-4.

Employers maintaining electronic Form W-4 systems should make an appropriate modification in their systems that would allow employees to identify themselves as nonresident aliens. Also, employers using permissible substitute forms should make an appropriate modification to their forms.

Procedure for employers

Employers hiring new nonresident alien employees who will receive remuneration for services performed in the United States for the first time on or after January 1, 2006 should instruct the new employees to complete Form W-4 as indicated above. An employer who already has one or more nonresident alien employees with Forms W-4 on file requesting additional withholding should advise such employees to file new Forms W-4 at an appropriate time so that the new Forms W-4 will be effective for wages paid on or after January 1, 2006.

The procedure to be followed by employers for calculating the withholding amount, beginning with wages paid on or after January 1, 2006, is as follows. (The procedure does not apply for students and business apprentices from India.)

• add an amount (see below) to the wages of the nonresident alien employee solely for purposes of calculating the income tax withholding for each payroll period - the specific amount depends on the payroll period (weekly, monthly, etc.), and
  
  
• if the employer uses the percentage method, subtract an amount for withholding allowances for the payroll period and apply the percentage method withholding tables to the remainder, or
  
  
• if the employer uses the wage bracket method, apply the wage bracket tables to the sum of the gross wages and the additional amount.

The added amount is not income or wages to the employee, does not affect income, Federal Insurance Contributions Act (FICA) or Federal Unemployment Tax Act (FUTA) tax liability for the employer or the employee, and is not to be reported as income or wages on form W-2.

The amounts to be added for 2006 are

These values are the highest wage amount to which a zero withholding rate applies as shown in the Table for the Percentage Method of Withholding for a person who is "Single or Head of Household" for each payroll period, as published periodically in Publication 15.

The new procedures do not apply in determining the amount of withholding on supplemental wages if the supplemental wages are subject to mandatory flat rate withholding (currently 35 percent) or the employer is applying an optional flat rate of income tax withholding (currently 25 percent) on such supplemental wages.

The new procedures also do not apply to students or business apprentices from India who are in the US principally for the purpose of their education or training. This exception only applies for such periods of time as may be reasonable or customarily required to complete the education or training undertaken.

More detailed information, including a number of worked examples, is available at the link below.

...back to 3 November 2005

Further information:
Withholding on Wages of Nonresident Alien Employees Performing Services within the United States

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