Payroll in Practice: 1.29.2024

Question: An employer has hired a nonresident alien who is authorized to work in the United States. What does the employer need to know about withholding income tax for nonresident aliens?

Answer: Nonresident alien employees are generally subject to the same withholding rates as US employees for performance of dependent personal services in the United States. Compensation for dependent personal services includes wages, salaries, fees, bonuses, commissions, compensatory scholarships, fellowship income and other similar amounts paid to an employee, However, nonresident aliens are subject to special instructions when preparing Form W-4, Employee’s Withholding Certificate.

To assist nonresident aliens in preparing Form W-4, the IRS released Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens. Employers should provide Notice 1392 along with Form W-4 at the time of hire to ensure the form is filled out properly.

Form W-4 is broken down into a series of steps. The employee’s name and address are entered in Step 1(a) and the employee’s Social Security Number is entered in Step 1(b). The employee must have an SSN or be eligible to work in the US and have applied for one. An individual taxpayer identification number may not be used for employment and should not be entered in lieu of an SSN. In Step 1(c) a nonresident alien must check the “Single or Married filing separately” box regardless of actual marital status. Nonresident aliens may not file joint returns.

Nonresident aliens should not complete Step 2 unless the employee has more than one job at the same time. Because nonresident aliens may not file joint returns, a spouse’s job(s) are not considered for this step.

A nonresident alien should not use the IRS Tax Withholding Estimator mentioned in Step 2(a) because it will not give a correct result for a nonresident alien. The employee may either fill out the Multiple Jobs Worksheet from page 3 of Form W-4 for Step 2(b) or, if there are only two jobs, check the box in Step 2(c).

If the worksheet is used for Step 2(b), it should be filled out for only one job, and the employee is to write “nonresident alien” or “NRA” in the space below Step 4(c) for only that job.

If the employee checks the box for Step 2(c), the employee should check the box on both Forms W-4. However, the employee is to write “nonresident alien” or “NRA” in the space below Step4 (c) for the highest paying job only.

If the employee is providing Forms W-4 to more than one employer, the employee should complete Steps 3 through 4(b) for only one of the forms. Filling in these steps on the Form W-4 for the highest paying job will result in the most accurate withholding.

Only nonresident aliens from Canada, Mexico, South Korea, and students and business apprentices from India, may claim credits for dependent in Step 3. Nonresident aliens may be eligible to enter amounts for certain other tax credits in Step 3. IRS Publication 519, U.S. Tax Guide for Aliens, contains more information about exceptions to the generally rules, tax credits, other deductions, and treaty provisions.

Step 4 is optional, but employees may use Step 4(a) to increase withholding to cover taxes on nonemployment income such as investment or retirement income. Step 4 (b) can be used to reduce withholding by entering allowable itemized deductions and other adjustments to income. Step 4(c) is used to request an additional amount of withholding per pay period. It is important to recognize that the amount on Step 4(c) is for one pay period, but all other amounts on Form W-4 are annual amounts.

In the space below Step 4(c), if it has not already been entered from Step 2, the employee should enter “nonresident alien” or “NRA.” A nonresident alien may not claim exemption from withholding on Form W-4 but may be entirely or partially exempt from withholding under an income tax treaty. A treaty exemption is not claimed on Form W-4. It is claimed on Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Form 8233 should be provided to each withholding agent making payments to the employee.

A nonresident alien may not claim a standard deduction. Standard deductions are built into the tax tables in Publication 15-T, Federal Income Tax Withholding Methods. The employer must make an adjustment that increases the amount of gross pay used in the withholding calculation to offset the amount of standard deduction included in the tax tables. The adjustment amounts are found in Table 2 on page 6 of Publication 15-T.

An individual who is a lawful permanent resident of the US with a green card or who meets the substantial-presence test is treated as a US resident for tax purposes. Under the substantial-presence test, an individual is treated as a resident for tax purposes for the current calendar year if the person was physically present in the US for at least 31 days during the current year and for 183 days during the three-year period that includes the current year and the two immediately preceding years. The 183-day test counts all of the days the person was present in the current year, one-third of the days present in the first preceding year and one-sixth of the days present in the second preceding year.

Special dual-status rules may apply in the year of arrival in or departure from the US. The dual status rules are discussed in Publication 519.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

Do you have a question for Payroll in Practice? Send it to phaggerty@prodigy.net.