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Federal income tax (FIT) withholding requirements for nonresident alien employees

non-resident

alien

NRA

Go onlineAbout nonresident alien withholding

Federal income tax (FIT) on wages paid to certain NRA employees have been overwithheld for services performed in the United States. Consequently, the IRS has revised the withholding requirements for nonresident alien employees, effective on wages paid on or after January 1, 2006. The intent is to set up the FIT withholding so that is actually approximates the income tax liability of the NRA employee.

With these new requirements, employers must set up NRA employees and process NRA employee wages for the sole purpose of calculating the federal income tax withheld each payroll period.

Note: The amount added to the wages is not income or wages to the employee. It does not affect income, FUTA, Social Security, or Medicare tax liabilities for the employer or the employee, and is not to be reported as income or wages.

To ensure that you comply with these new IRS requirements, you must:

  1. Go onlineDetermine if any of your employees qualify and make sure the nonresident alien employee fills out a Form W-4.

    Nonresident aliens (NRAs) are defined in IRS Publication 515 (1/2006), Withholding of Tax on Nonresident Aliens and Foreign Entities. To determine whether or not your employees qualify as NRAs, visit the Forms and Publications page on the Go onlineIRS Web site and search for Publication 515 (1/2006). Alternatively, you can contact your professional tax advisor for more information.

  2. Set up the employee as a nonresident alien in QuickBooks.

    When you select Withhold as Nonresident Alien in the Nonresident Alien Withholding field in the payroll setup interview, QuickBooks automatically calculates and tracks the federal income tax withholding amounts on each paycheck you create for the employee. The federal income tax calculation is based on the procedure provided by the IRS. What if the employee's nonresident alien status changes?

    If the employee's nonresident alien status changes—for example, from a nonresident to a resident alien—you must change the employee's federal tax setup in the payroll setup interview. If you attempt to change the employee's filing status outside the payroll setup interview, QuickBooks will not recognize the change and will continue to calculate and withhold at the rate applied to a nonresident alien employee.

    When you change an employee's federal tax setup because he or she is no longer considered a nonresident alien, be sure to change the Nonresident Alien Withholding setting, reset the correct filing status, and verify the withholding allowance in the payroll setup interview. For example, if the employee is married and submitted a new Form W-4 claiming Married as a filing status, be sure to reset the filing status from Single (the nonresident alien filing status) to Married.

For more information about the FIT withholding requirements for nonresident alien employees, Go onlinecontact the IRS or your professional tax advisor.

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