Federal Statutory Withholding Rules for Nonresident Alien Employees

On November 14th, 2005 in the Internal Revenue Bulletin 2005-46, the Internal Revenue Service published Notice 2005-76 (.pdf) changing the Federal Statutory Withholding Rules for nonresident alien employees.

In addition to changing the statutory withholding requirements, the IRS also published Notice 2005-77 (.pdf) which provides an exception to the 1040-NR filing requirements for nonresident alien individuals.

A link to Notice 2005-77 will be made available to students on the Tax Services website.

Collecting Form W-4, Employee's Certificate of Withholding for Wages to be Paid in 2006
For wages to be paid in 2006 to nonresident alien employees (employees with a tax residency year greater than 2006), campuses should gather two W-4 forms one for Federal withholding and one for State withholding. The State W-4 must be filled out as Single, Zero withholding allowances.

The Federal W-4 must be completed as follows:
(1) Not claim exemption from withholding;
(2) Request withholding as if they are single, regardless of the actual marital status;
(3) Claim only one allowance (see exceptions below); and
(4) 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.

With respect to the third requirement, nonresident aliens who are residents of:
Canada, Mexico, Northern Mariana Islands, or American Samoa may claim additional withholding allowances for their spouse and dependents.
South Korea may claim additional allowances for spouse and dependents present with them in the U.S.
India and are in the U.S. as students or business apprentices may claim an additional allowance for a spouse present in the U.S. and personal withholding allowances for any dependents present in the U.S. who are also resident aliens of the U.S.

A nonresident alien employee may choose to claim less than one withholding allowance. The additional $15.30 in withholding per bi-weekly pay is no longer required. However, like all employees, nonresident aliens may request additional withholding at their option.

Employer Calculation of Withholding on Wages of Nonresident Alien Employees
In addition to changing how a nonresident alien employee completes their Federal W-4, the IRS has also changed how the employer must calculate nonresident alien Federal withholding. The following change will be programmed into the ISRS Student Payroll Module and will be applied to wages paid on or after 1/20/2006. Because the programming will not be in place until the second pay day of 2006, employees with a W-4 record with the effective date of 12/14/2005 should be made aware of the possibility of federal income tax being under withheld on wages paid 1/6/2006.

Beginning with wages paid on or after January 1, 2006, employers are required to calculate federal income tax withholding under section 3402 of the Code on wages of nonresident alien employees (except for students and business apprentices from India) using a new procedure.

Under this procedure, for each bi-weekly pay period, the employer will add $102.00 to the wages of the nonresident alien employee solely for purposes of calculating the federal income tax withholding. The income tax to be withheld is determined by applying the tax tables to the sum of the wages paid for the payroll period plus the additional amount. Adding this amount will offset the assumed standard deduction that is incorporated into the tables without requiring income tax to be withheld from wages that will fall below the personal exemption when annualized. Students/apprentices from India are excepted pursuant to treaty.

Please note that the added amount is not income or wages to the employee, does not affect income, Minnesota withholding, Federal Insurance Contributions Act (FICA) or Federal Unemployment Tax Act (FUTA) tax liability for the employer or the employee, and will not be reported as income or wages.

A PowerPoint presentation describing the new Statutory Withholding Rules will be available soon in the Nonresident Alien section of the Tax Services website.