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Date:October 23, 2006
Bulletin Number:665
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Subject

New Procedure for Calculating Federal Income Tax Withholding on Wages Paid to Nonresident Alien Employees

Purpose

To provide guidelines to agencies to remain compliant with the Internal Revenue Service’s requirement to use the new procedure to calculate income tax withholding on wages of nonresident alien employees.

Background

According to IRS Rules and Regulations wages paid after December 31, 2005, employers are required to calculate income tax withholding on wages of nonresident alien employees using a new tax calculation procedure.

Under the new procedure, employers are required to add an amount ($102.00 biweekly) to the nonresident alien employee’s biweekly wages solely for the purpose of calculating the amount of federal withholding tax to withhold.  The nonresident alien employee is no longer required to have an additional tax amount of $15.30 withheld.  This added biweekly amount will not be included in any box on the employee’s Form W-2 and does not increase the income tax liability of the employee.  In addition, this added amount does not increase the Social Security and Medicare tax liability of the employee.

In PayServ, if a nonresident alien employee is covered under a tax treaty, that employee to date has been set up in the Federal Tax Data page with a special withholding status of “nonresident alien” and given an additional withholding amount of $15.30.  Effective 11/15/06, these employees covered under a tax treaty will no longer need this additional amount of $15.30 specified on the Federal Tax Data page in order to have their taxes calculated correctly.

If a nonresident alien employee is not covered under a tax treaty, that employee has been set up in the Federal Tax Data page with a status of “None” and given the additional withholding amount of $15.30 as specified on their Form W-4. Effective 11/15/06, these employees will need the special withholding status of “nonresident alien,” will not need the additional withholding amount and will need their country of residence specified and “No Treaty” indicated in the Federal Tax Data page.  This will ensure the employee's tax calculation is correctly processed as a nonresident alien not covered under a tax treaty.

Affected Employees

This procedure applies only to nonresident alien employees who have wages subject to income tax withholding. 

Note:  Nonresident alien students and business apprentices from India are not subject to this procedure.

Effective Date(s)

OSC will implement the new tax withholding calculation effective paychecks dated November 15, 2006.

Form W-4 and Form 8233 Requirements

When completing Forms W-4, nonresident aliens are required to:

  • Not claim exemption from income tax withholding;
  • Request withholding as single marital status, regardless of their actual marital status;
  • Claim only one (1) allowance (if the nonresident alien is a resident of Canada, Mexico, or Korea, more than one (1) allowance may be claimed); and
  • Write “Nonresident Alien” or “NRA” above the dotted line on line 6 of Form
    W-4.

Note: Nonresident aliens are no longer required to request additional withholding in the box for line 6 on Form W-4.  This requirement has been replaced by the new requirement to base the withholding on the additional withholding amount specified above.  However, a nonresident alien employee may request additional withholding for other purposes.

Form 8233 In addition to the Form W-4, if a nonresident alien employee claims a tax treaty exemption from withholding, the employee must also submit Form 8233, Exemption from Withholding or Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, with respect to the income exempt under the treaty.  The Form W-4 will cover the correct withholding when the employee receives wages in excess of the tax treaty amount.

OSC Actions

OSC will create two new Control-D reports which identify employees in both tax classes: 

  • NHRP768 – Special Tax Withholding Status of NONE and ADDL AMT of $15.30.  These employees are not claiming income tax treaty exemption.
  • NHRP769 – Nonresident Alien Employees.  The status of these employees is Active, Leave or Paid Leave.

The tax data on these reports is obtained from the employee's Federal Tax Data page.

Note:  
Some employees identified on the NHRP768 report may not be  nonresident aliens.  Agencies may have nonresident alien employees who are not identified on the NHRP768 report because the additional $15.30 amount has been removed or never added.   For these employees, agencies must compare this report to the records maintained by the agency for nonresident alien employees.

Agency Actions
  • Notify all nonresident alien employees of the change in calculation for Federal withholding
  • Require all nonresident alien employees to complete a new Form W-4 as stated above

Employees identified on the NHRP769 report must have their Federal Tax Data information updated in PayServ by the following dates:

  • For paychecks dated November 15, 2006 (Administration), transactions must be entered into PayServ between October 27, 2006 and November 3, 2006.
  • For paychecks dated November 22, 2006 (Institution), transactions must be entered into PayServ between November 3, 2006 and November 10, 2006.

When a new Form W-4 is received for an employee in PayServ with a Special Tax Withholding status of nonresident alien in the Tax Treaty/NR data field, the agency must update the employee's Federal Tax Data page as follows:

Compensate  Employees > Maintain Payroll Data (US) > Use > Employee Tax Data > Federal Tax Data

  • Insert a new row
  • Delete the $15.30 amount from the FWT Additional Amount field
  • Save the page

Note:  PayServ automatically calculates the Federal and state withholding taxes based on the filing status on record when the nonresident alien employee receives compensation in excess of the tax treaty limit.

For nonresident alien employees - both those who have and have not reached their tax treaty limit - who have not submitted a new Form W-4, the new tax calculation method will be used and the additional amount of $15.30 will be withheld until a new Form W-4 is received and the employee's Federal Tax Data page is updated.  This could result in over-withholding in each paycheck that is over their tax treaty limit for these employees. 

Employees identified on the NHRP768 report must have their Federal Tax Data information updated in PayServ by the following dates:

  • For paychecks dated November 29, 2006 (Administration), transactions must be entered into PayServ between November 10, 2006 and November 17, 2006
  • For paychecks dated December 7, 2006 (Institution), transactions must be entered into PayServ between November 17, 2006 and November 24, 2006

When a new Form W-4 is received for employees in PayServ with Special Tax Withholding Status of NONE and ADDL AMT of $15.30, the agency must update the employee's Federal Tax Data page as follows:

Compensate  Employees > Maintain Payroll Data (US) > Use > Employee Tax Data > Federal Tax Data

  • Insert a new row
  • Special Tax Withholding Status: Click the radio button Non-Resident Alien; Tax Treaty/NR Data
  • Federal Withholding Status:
    Tax Marital Status: click the radio button Single,
    Withholding Allowances:  enter 1 unless the employee is a resident of Canada, Mexico or Korea and the number on Form W-4 is other than 1
  • FWT Additional Amount:  The amount box should be zero, unless the new Form W-4 shows an additional amount
  • Tax Treaty/NR Data:
    Date of Entry – required field
    Country – required field
    Eligible Income Code – leave blank
    Treaty ID –select  NO TREATY
  • Save the page

Note for nonresident alien students and business apprentices from India only:  A new field has been added to the Federal Tax Data page under Tax Treaty/NR Data (Exempt Withholding Rules).   This box must be checked in order to exclude these employees from the new tax calculation. 

All other nonresident alien employees from India are subject to the new withholding rules.

Questions

Questions regarding this bulletin may be directed to the Payroll Deductions mailbox.