Publication 519 |
2000 Tax Year |
Withholding From Compensation
The following discussion generally applies only to nonresident
aliens. Tax is withheld from resident aliens in the same manner as
U.S. citizens.
Wages and other compensation paid to a nonresident alien for
services performed as an employee are usually subject to graduated
withholding at the same rates as resident aliens and U.S. citizens.
Therefore, your compensation, unless it is specifically excluded from
the term "wages" by law, or is exempt from tax by treaty, is
subject to graduated withholding.
Withholding on Wages
If you are an employee and you receive wages subject to graduated
withholding, you will be required to fill out a Form W-4.
Nonresident aliens should use the following instructions instead of
the instructions on the Form W-4.
Because of the restrictions on a nonresident alien's filing status,
the limited number of personal exemptions a nonresident alien is
allowed, and because a nonresident alien cannot claim the standard
deduction, you should fill out Form W-4 following these
instructions.
- Check only "Single" marital status on line 3
(regardless of your actual marital status).
- Claim only one allowance on line 5, unless you are a
resident of Canada, Mexico, Japan, or South Korea, or a U.S. national.
- Request that your employer withhold an additional amount of
$7.60 per week on line 6. If your wages are paid based on a 2-week pay
period, the additional amount will be $15.30. For other payroll
periods, ask your employer for the amount to enter.
- Do not claim "Exempt" withholding status on
line 7.
A U.S. national
is an individual
who, although not a U.S. citizen, owes his or her allegiance to the
United States. U.S. nationals include American Samoans, and Northern
Mariana Islanders who chose to become U.S. nationals instead of U.S.
citizens.
See Reduced Withholding on Scholarships and Fellowship Grants,
later, for how to fill out Form W-4 if you receive a U.S.
source scholarship or fellowship grant.
Students and business apprentices from India.
If you are eligible for the benefits of Article 21(2) of the United
States-India Income Tax Treaty, you may claim additional
withholding allowances for the standard deduction and your spouse. You
may also claim an additional withholding allowance for each of your
dependents not admitted to the United States on "F-2,"
"J-2," or "M-2" visas if they meet the same
rules that apply to U.S. citizens. You do not have to request
additional withholding on line 6.
Withholding on Pensions
If you receive a pension after 2000 as a result of personal
services performed in the United States, the pension income is subject
to the 30% (or lower treaty) rate of withholding. You may, however,
have tax withheld at graduated rates on the portion of the pension
that arises from the performance of services in the United States
after December 31, 1986. You must fill out Form W-8ECI and give
it to the withholding agent or payer before the income is paid or
credited to you.
Withholding on Tip Income
Tips you receive during the year for services performed in the
United States are subject to U.S. income tax. Include them in taxable
income. In addition, tips received while working for one employer,
amounting to $20 or more in a month, are subject to graduated
withholding.
Independent Contractors
If there is no employee-employer relationship between you and the
person for whom you perform services, your compensation is subject to
the 30% (or lower treaty) rate of withholding. However, if you are
engaged in a trade or business in the United States during the tax
year, your compensation for personal services as an independent
contractor (independent personal services) may be entirely or partly
exempt from withholding if you reach an agreement with the Internal
Revenue Service on the amount of withholding required. Also, the final
payment to you during the tax year for independent personal services
may be entirely or partly exempt from withholding if you are engaged
in a trade or business in the United States during the year and you
file the forms and provide the information required by the IRS.
Withholding Agreement
An agreement that you reach with the IRS regarding withholding from
your compensation for independent personal services is effective for
payments covered by the agreement after it is agreed to by all
parties. You must agree to timely file an income tax return for the
current tax year.
Central withholding agreements.
If you are a nonresident alien entertainer or athlete performing or
participating in athletic events in the United States, you may be able
to enter into a withholding agreement with the IRS for reduced
withholding provided certain requirements are met. Under no
circumstances will such a withholding agreement reduce taxes withheld
to less than the anticipated amount of income tax liability.
Nonresident alien entertainers or athletes requesting a central
withholding agreement must submit the following information.
- A list of the names and addresses of the nonresident aliens
to be covered by the agreement.
- Copies of all contracts that the aliens or their agents and
representatives have entered into regarding the time period and
performances or events to be covered by the agreement including, but
not limited to, contracts with:
- Employers, agents, and promoters,
- Exhibition halls,
- Persons providing lodging, transportation, and advertising,
and
- Accompanying personnel, such as band members or trainers.
- An itinerary of dates and locations of all events or
performances scheduled during the period to be covered by the
agreement.
- A proposed budget containing itemized estimates of all gross
income and expenses for the period covered by the agreement, including
any documents to support these estimates.
- The name, address, and telephone number of the person the
IRS should contact if additional information or documentation is
needed.
- The name, address, and employer identification number of the
agent or agents who will be the central withholding agents for the
aliens and who will enter into a contract with the IRS. A central
withholding agent ordinarily receives contract payments, keeps books
of account for the aliens covered by the agreement, and pays expenses
(including tax liabilities) for the aliens during the period covered
by the agreement.
When the IRS approves the estimated budget and the designated
central withholding agents, the Associate Chief Counsel
(International) will prepare a withholding agreement. The agreement
must be signed by each withholding agent, each nonresident alien
covered by the agreement, and the Commissioner of the Internal Revenue
Service.
Generally, each withholding agent must agree to withhold income tax
from payments made to the nonresident alien, to pay over the withheld
tax to the IRS on the dates and in the amounts specified in the
agreement, and to have the IRS apply the payments of withheld tax to
the withholding agent's Form 1042 account. Each withholding agent will
be required to file Form 1042 and Form 1042-S for each tax year
in which income is paid to a nonresident alien covered by the
withholding agreement. The IRS will credit the withheld tax payments,
posted to the withholding agent's Form 1042 account, in accordance
with the Form 1042-S. Each nonresident alien covered by the
withholding agreement must agree to file Form 1040NR or Form
1040NR-EZ.
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A request for a central withholding agreement should be sent to the
following address at least 90 days before the agreement is to take
effect.
Internal Revenue Service
Compliance Area Director, Area 15
950 L'Enfant Plaza South, S.W. S:C:15
Washington, DC 20024
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Final payment exemption.
Your final payment of compensation during the tax year for
independent personal services may be entirely or partly exempt from
withholding. This exemption is available only once during your tax
year and applies to a maximum of $5,000 of compensation. To obtain
this exemption, you or your agent must give the following statements
and information to the Commissioner.
- A statement by each withholding agent from whom you have
received gross income effectively connected with a trade or business
in the United States during the tax year, showing the amount of income
paid and the tax withheld. Each statement must be signed by the
withholding agent and verified by a declaration that it is made under
penalties of perjury.
- A statement by the withholding agent from whom you expect to
receive the final payment of compensation, showing the amount of the
payment and the amount of tax that would be withheld if a final
payment exemption were not granted. This statement must also be signed
by the withholding agent and verified by a declaration that it is made
under penalties of perjury.
- A statement by you that you do not intend to receive any
other income effectively connected with a trade or business in the
United States during the current tax year.
- The amount of tax that has been withheld or paid under any
other provision of the Internal Revenue Code or regulations for any
income effectively connected with your trade or business in the United
States during the current tax year.
- The amount of your outstanding tax liabilities, if any,
including interest and penalties, from the current tax year or prior
tax periods.
- Any provision of an income tax treaty under which a partial
or complete exemption from withholding may be claimed, the country of
your residence, and a statement of sufficient facts to justify an
exemption under the treaty.
- A statement signed by you, and verified by a declaration
that it is made under penalties of perjury, that all the information
given is true and that to your knowledge no relevant information has
been omitted.
If satisfied with the information, the IRS will determine the
amount of your tentative income tax for the tax year on gross income
effectively connected with your trade or business in the United
States. Ordinary and necessary business expenses can be taken into
account if proven to the satisfaction of the Commissioner.
The Commissioner will send you a letter, directed to the
withholding agent, showing the amount of the final payment of
compensation that is exempt from withholding and the amount that can
be paid to you because of the exemption. You must give two copies of
the letter to the withholding agent and must also attach a copy of the
letter to your income tax return for the tax year for which the
exemption is effective.
Allowance for
Personal Exemption
Withholding on payments for independent personal services is
generally based on the amount of your compensation payment minus the
value of one exemption ($2,900 for 2001).
To determine the income for independent personal services performed
in the United States to which the 30% (or lower treaty) rate will
apply, you are allowed one personal exemption if you are not
a U.S. national and are not a resident of Canada,
Mexico, Japan, or South Korea. For purposes of 30% withholding, the
exemption is prorated at $7.95 a day in 2001 for the period that labor
or personal services are performed in the United States. To claim an
exemption from withholding on the personal exemption amount, fill out
the applicable parts of Form 8233 and give it to the withholding
agent.
Example.
Eric Schmidt, who is a resident of Germany, worked under a contract
with a U.S. firm (not as an employee) in the United States for 100
days during 2001 before returning to his country. He earned $6,000 for
the services performed (not considered wages) in the United States.
Eric is married and has three dependent children. His wife is not
employed and has no income subject to U.S. tax. The amount of the
personal exemption to be allowed against the income for his personal
services performed within the United States in 2001 is $795 (100 days
x $7.95), and withholding at 30% is applied against the balance.
Thus, $1,561.50 in tax is withheld from Eric's earnings (30% of $5,205
($6,000 - $795)).
U.S. nationals or residents of Canada, Mexico, Japan, or
South Korea.
If you are a nonresident alien who is a resident of Canada, Mexico,
Japan, or South Korea, or who is a national of the United States, you
are subject to the same 30% withholding on your compensation for
independent personal services performed in the United States. However,
if you are a U.S. national or a resident of Canada or Mexico, you are
allowed the same personal exemptions as U.S. citizens. For the 30% (or
lower treaty rate) withholding, you can take $7.95 per day for each
allowable exemption in 2001. If you are a resident of Japan or Korea,
you are allowed personal exemptions for yourself and for your spouse
and children who live with you in the United States at any time during
the tax year. However, the additional exemptions for your spouse and
children must be further prorated as explained in chapter 5
under
Exemptions.
Students and business apprentices from India.
If you are eligible for the benefits of Article 21(2) of the United
States-India Income Tax Treaty, you are allowed an exemption for
your spouse only if your spouse has no gross income. You are also
allowed an exemption for each dependent not admitted to the United
States on "F-2," "J-2," or "M-2"
visas if they meet the same rules that apply to U.S. citizens. For the
30% (or lower treaty rate) withholding on compensation for independent
personal services performed in the United States, you are allowed
$7.95 per day for each allowable exemption in 2001.
Residents of Canada or Mexico Engaged in
Transportation-Related Employment
Certain residents of Canada or Mexico who enter or leave the United
States at frequent intervals are not subject to withholding on their
wages. These persons either:
- Perform duties in transportation service between the United
States and Canada or Mexico, or
- Perform duties connected to the construction, maintenance,
or operation of a waterway, viaduct, dam, or bridge crossed by, or
crossing, the boundary between the United States and Canada or the
boundary between the United States and Mexico.
This employment is subject to withholding of social security and
Medicare taxes unless the services are performed for a railroad.
To qualify for the exemption from withholding during a tax year, a
Canadian or Mexican resident must give the employer a statement in
duplicate with name, address, and identification number, certifying
that the resident:
- Is not a U.S. citizen or resident,
- Is a resident of Canada or Mexico, whichever applies, and
- Expects to perform duties previously described during the
tax year in question.
The statement can be in any form, but it must be dated and signed
by the employee and must include a written declaration that it is made
under the penalties of perjury.
Certain Residents
of Puerto Rico
If you are a nonresident alien employee who is a resident of Puerto
Rico, wages for services performed in Puerto Rico are generally not
subject to withholding unless you are an employee of the United States
or any of its agencies in Puerto Rico.
Residents of the
U.S. Virgin Islands
Nonresident aliens who are bona fide residents of the Virgin
Islands are not subject to withholding of U.S. tax on income earned
while temporarily employed in the United States. This is because those
persons pay their income tax to the Virgin Islands. To avoid having
tax withheld on income earned in the United States, bona fide
residents of the Virgin Islands should write a letter, in duplicate,
to their employers, stating that they are bona fide residents of the
Virgin Islands and expect to pay tax on all income to the Virgin
Islands.
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