1. Proper Tax Treatment of Foreign Hires
Presented by Tax Services
September 2006

2. Overview Tax Residency: What’s it all about? Identifying Foreign Hires
Tax Residency Information Form & Documentation
Taxing Nonresident Alien Employees

3. Tax Residency
What is it?
Why we care

4. Tax Residency
Under U.S. tax laws, all non-U.S. citizens are considered to be either:
Permanent resident aliens
Resident aliens for tax purposes, or
Nonresident aliens.

5. Taxation & Residency
Permanent resident aliens and resident aliens for tax purposes are taxed the same as U.S. citizens
Resident aliens generally are taxed on their worldwide income, the same as US Citizens
Nonresident aliens are taxed under special laws
Nonresident aliens are taxed only on their income from sources within the US & on certain income connected with the conduct of trade or business in the US.

6. Tax Residency - Why We Care
Knowing an individuals tax residency status prior to payment is essential to accurately report the individual’s tax liability and to be in compliance with IRS tax laws.

7. Tax Residency - Why We Care
If we incorrectly report a nonresident alien’s tax withholding liability, we may be held responsible for the tax not withheld, in addition to any penalties for failure to withhold, plus the interest from the time the tax was not withheld.

8. Identifying Nonresident Aliens
State Employees

9. Identifying NRA Employees: I-9
I-9 : “An alien authorized to work until…” must fill out MNSCU TRIF form

10. Tax Residency Information Form
Employee’s who indicate on their I-9 that they are “an alien authorized to work until…” must fill out the Payroll Tax Residency Information form.
The data collected on this form will help determine an employee’s tax residency status

11. Tax Residency Information Form
Section A: Personal Information
Current Immigration Status
Date Current Status Began
Section B: Prior Visit Information
Visits to the U.S. before Date Current Status began
Section C: Employee Certification

12. Tax Residency Information Form

13. Tax Residency Information Form

14. Tax Residency Information Form

15. Tax Residency Information Form

16. TRIF Documentation Verify immigration status
Copy immigration documentation
Passport
I-94, arrival/departure record, stamped
Immigration Status documentation
I-20, F-1 student on OPT
DS-2019, J-1 (student or scholar)
H-1B Approval Letter
Invitation and Employment Letters
Employment Authorization Cards (front and back)
Any other immigration documentation presented by the payee

17. I-20
Certificate of Eligibility for Nonimmigrant (F-1) Student

18. I-94: Arrival/Departure Record

19. DS-2019
Certificate of Eligibility for Exchange Visitor(J-1) Status

20. I-94: Arrival/Departure Record

21. Passport Information Identification Page Current visa information
Prior visits to US

22. Determining Tax Residency
The Substantial Presence Test

23. Tax Residency Information Form

24. Tax Residency Tests
There are two tests used to determine whether a non U.S. citizen should be treated as a U.S. resident for tax purposes:
The “Green Card” test, and the
Substantial Presence Test

25. The “Green Card” Test
The individual is a lawful permanent resident alien if he/she:
Has been granted lawful permanent resident status in the U.S., and
Has been issued or will receive an alien registration card by U.S. Citizenship & Immigration Services (USCIS).
Tax
as U.S.
Citizen

26. The Substantial Presence Test
Mathematical calculation of days present in the U.S. used to determine tax residency.
An alien individual will be considered a U.S. resident for tax purposes if they meet the SPT for the calendar year.

27. Substantial Presence Test Data
Current Immigration Status
Primary Purpose of U.S. Visit
Date of Arrival for Purposes of Current Visit
Information about Prior Visits including the above facts

28. Substantial Presence Test
An alien individual will be treated as a resident alien for tax purposes if they are physically present in the United States on at least:
All the days present in the current year, plus
1/3 of the days present in the first year before the current year, plus
1/6 of the days present in the second year before the current year.
31 days during the current year, and
183 days during the 3 year period that includes the current year and the 2 years immediately preceding, calculated as follows:

29. Substantial Presence Test & Taxation
If SPT is met, Tax as a Resident
If SPT is not met, Tax as a Nonresident

30. Substantial Presence Test Example A
Lorena was physically present in the U.S. for:
138 days in 2004,
129 days in 2005, and
120 days in 2006,
Q: Does Lorena meet the substantial presence test for 2006?

31. SPT Example A
Q: Does Lorena meet the substantial presence test for 2006?
In the U.S. for over 31 days in the current year
Apply the 183 day test as follows:
2006: 120 days
2005: (129 x1/3) = 43 days
2004: (138 x 1/6) = 23 days
Total days present in U.S. = = 186 days

32. SPT Example A
Ans: Yes, Lorena is considered a resident alien for tax purposes because:
She has been present in the U.S. for over 31 days in current calendar year, and
Her total number of days in the U.S. for the three-year period as calculated by the substantial presence test was over 183 days.

33. Days Not Counted
Exceptions to counting days towards substantial presence:
Any days the individual regularly commutes to work in the U.S. from a residence in Canada or Mexico
Any days the individual is in the U.S. for less than 24 hours when in transit between two places outside of the U.S.
Any days the individual was unable to leave the U.S. due to a medical condition that developed while he was in the U.S., and
Any days the individual was present in the U.S. as an “exempt individual”.

34. Exempt Individuals
“Exempt individuals” are present in the U.S. for the primary purpose of being:
a teacher or trainee
generally present under a “J” or “Q” visa; includes all “J” non-student categories
a student
generally present under a “F”, “J”, “M” or “Q” visa
a “foreign government-related” individual
generally a foreign diplomat or consular officer present under an “A” or “G” visa
a professional athlete
generally present under a “P” visa

35. Exempt Individual: Rules
F, J, M or Q student visa holders will not qualify for “exempt individual” status if they have had that status for any part of more than five calendar years.
J or Q non-student visa holders will not qualify for “exempt individual” status if they were exempt as a teacher, trainee, non-student or student for any 2 of the last 6 calendar years.

36. SPT & Exempt Individual: Mei Lee
Mei Lee, a Chinese citizen, has never been to the United States before. She arrives in the U.S. under a J-1 visa on December 15, 2006 to work at Minnesota State University, Mankato.
As a J-1 scholar, Mei Lee is an exempt individual in calendar year 2006 & calendar year 2007.
Mei is a nonresident alien for tax purposes.
J-1 NRA: Exempt for FICA/Medicare taxation
Eligible for J-1 Teaching/Researching Tax Treaty
W-4 - Statutory withholding

37. Taxing Nonresident Aliens
Statutory Withholding
FICA Exemption
Tax Treaty Benefits

38. Example: Taxing Mei Lee
NRA J-1 Scholar = Exempt from FICA/Medicare Taxation
U.S. – China Tax Treaty Benefit
Article 19 of US-China Tax Treaty
3 Years, No income limit
IRS Form 8233
Year End Reporting IRS Form 1042-S

39. Statutory Withholding Rules
Nonresident Aliens & W-4:
May not claim exemption from income tax withholding,
Request withholding as if they are single, regardless of their actual marital status,
Claim only one allowance, unless an exception exists, and
On line 6, write “Nonresident Alien” or “NRA”

40. W-4 Witholding Allowance
Nonresident Alien
Mei Lee
12/16/2006

41. Exceptions to Statutory Withholding Rules
Students from India
Article 21(2) of the United States-India Income Tax Treaty
An additional withholding allowance may be claimed for a spouse if the spouse has no U.S. source gross income and may not be claimed as a dependent by another taxpayer.
An additional withholding allowance for each dependent (usually a child) who has become a resident alien.
Canada and Mexico, American Samoa and Northern Mariana Islands
Entitled to claim additional withholding allowances for a nonworking spouse and for dependents, the same as a U.S. citizen.
South Korea
May claim additional withholding allowances for a nonworking spouse and dependents present with them in the U.S.

42. FICA Exception for F, J, M & Q Nonresident Aliens
IRC Section 3121(b)(19)
An individual may be exempt from FICA tax withholding if he or she meets all of the following criteria:
Is a nonresident alien for taxation purposes (i.e.: has not met the substantial presence test);
Is present in the U.S. under a F, J, M or Q visa;
Is performing services in accordance with the primary purpose of the visa’s issuance (i.e., the primary holder of the visa, the “-1”).
This exemption does not apply to F, J, M or Q visa holders who become resident aliens for tax purposes (i.e., individuals who have met the substantial presence test).

43. Tax Treaties & Income Withholding
Agreement between two countries to reduce or eliminate double taxation.
US has income tax treaties with over 48 different countries
Each treaty is unique and may not contain the same provisions or exemptions as another tax treaty.
From time to time, treaties with additional countries are signed and existing treaties revised
IRS website has complete text of current tax treaties
Exemption from Income Tax Withholding based on Treaty Benefits
An income tax treaty is a bilateral legal agreement between two countries to reduce or eliminate double taxation. The United States maintains bilateral income tax treaties with over 48 different countries in an effort to reduce or eliminate double taxation. It is important to note that each individual treaty is unique and may not contain the same provisions or exemptions as another tax treaty. From time to time, treaties with additional countries are signed and existing treaties revised.
About half the tax treaties contain a limited exemption for dependent personal service income earned by employees while in the U. S. In general, tax treaty benefits will be applicable only to those MnSCU employees holding TN, F-1, J-1 or H-1B visas. There is typically an annual maximum dollar amount and/or a time limit of presence in the U.S. for which the exemption can be claimed.
Example A:
Under Article XV of the U.S.-Canada income tax treaty, income that residents of Canada receive for personal services performed as employees in the U.S. is exempt from U.S. tax if it is not more than $10,000 per year. If the employee earns more than $10,000 for the year, the entire amount is taxable. Thus the Canadian taxpayer who expects to earn more than $10,000 in the year should avoid claiming the treaty benefit.
Tax Treaties and Educators
Pay of professors and teachers may be exempt from U.S. income taxes for either 2 or 3 years if they are temporarily in the U.S. to teach or do research. The treaty exemption for teaching or research income is counted from the day of arrival in the U.S. Some countries have retroactive clauses stating that if the maximum years of presence are exceeded, the entire treaty benefit is lost. This could require the teacher to file amended returns and pay tax on past years income. Thus a taxpayer who expects to stay more than the limit of years of presence should avoid claiming the treaty benefit for any years.
Example B:
Deepak is from India. He is on a J-1 visa and is teaching physics at Minnesota State, Mankato. He has been hired on a 4 year contract. Under the U.S.-India tax treaty, Article 22, a professor or teacher who is a resident of India immediately before visiting the U.S. and is in the U.S. to teach at an accredited university or educational institution for a period of not longer than 2 years is exempt from U.S. income tax on income received for teaching. The U.S.-India tax treaty contains a retroactive clause that states if a professor or teacher remains in the U.S. for more than the specified two-year period, they may be subject to tax for the entire period of their presence in the U.S.
Since Deepak expects to stay beyond the maximum years of presence allowed by treaty, he should not claim the treaty benefit for any year.
Example C:
Assume the same facts as above, except that Deepak stays only one year and then returns to India. He is entitled to the treaty benefit, even though his original contract exceeded the limit on years of presence. Deepak would claim the treaty benefit with his 1040NR tax return.
For the complete text of current tax treaties, go to the IRS website. The direct link to the tax treaty page is:

44. Tax Treaties & Income Withholding
Typically, the employee must be a nonresident alien for tax purposes to claim treaty benefits
J-1 Scholar Tax Treaty Article/Clause
Teaching/Researching
Dependent Personal Services (Canadian)
Annual maximum dollar amount and/or a time limit of presence in the U.S.

45. Example: Taxing Mei Lee
NRA J-1 Scholar = Exempt from FICA/Medicare Taxation
U.S. – China Tax Treaty Benefit
Article 19 of US-China Tax Treaty
3 Years, No income limit
IRS Form 8233
Year End Reporting IRS Form 1042-S

46. Form 8233:
For Claiming Treaty Benefits

47. Completing Form 8233

48. Form 8233:
Page 2

49. 8233 Statement Attachment People’s Republic of China
I was a resident of the People’s Republic of China on the date of my arrival in the United States. I am not a U.S. citizen. I have not been lawfully accorded the privilege of residing permanently in the United States as an immigrant.
I have accepted an invitation by the U.S. government, or by a university or other recognized educational institution in the United States to come to the United States for the purpose of teaching or engaging in research at Minnesota State University, Mankato, which is an accredited educational institution or scientific research institution. I will receive compensation for my teaching, lecturing, or research activities.
The teaching, lecturing, or research compensation received during the entire tax year qualifies for exemption from withholding of federal income tax under the tax treaty between the United States and the People’s Republic of China. I have not previously claimed an income tax exemption under this treaty for income received as a teacher, lecturer, researcher, or student before the date of my arrival in the United States.
Any research I perform will be undertaken in the public interest and not primarily for the private benefit of a specific person or persons.
I arrived in the United States on 12/15/2006 [insert the date of your last arrival in the United States before beginning the teaching or research services for which the exemption is claimed]. The treaty exemption is available only for compensation received during a maximum aggregate period of three years.
Tax year treaty being claimed for _;
Under penalties of perjury, I declare that I have prepared this form and to the best of my knowledge and belief, it is true, correct, and complete.
Signature of nonresident alien individual_Mei Lee __________Date __12/16/2006_________

50. SEMA4 & Nonresident Aliens
SEMA4 Bulletin 7/13/2006
SEMA4 Tax Treaty Field
Informational only
Retirement & Foreign Hires
Contact Gary Janikowski,System Director, Personnel,

51. Questions?

52. Contact Information
Tax Services Website:
Ann Page,
Steve Gednalske, ,