Proper Tax Treatment of Foreign Hires

Presented by Tax Services

September 2006

Overview

Tax Residency: What’s it all about?

Identifying Foreign Hires Tax Residency Information Form

& Documentation Taxing Nonresident Alien

Employees

Tax Residency

What is it? Why we care

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.

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.

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.

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.

Identifying Nonresident Aliens

State Employees

Identifying NRA Employees: I-9

I-9 : “An alien authorized to work until…” must fill out MNSCU TRIF form

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

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

Tax Residency Information FormPAYROLL TAX RESIDENCY INFORMATION FORM

To be filled out by employees who indicate on their I-9 “other alien authorized to work until xx/xx/xx”. Notice: The following information is requested to determine and document your resident or nonresident status for tax purposes, tax withholdings, and any tax treaty benefits you may be eligible to receive. This is NOT an Internal Revenue Service (IRS) nor is it a United States Citizenship and Immigration Services (USCIS) form. You are not legally required to fill out this questionnaire, but if you do not do so, the institution will be unable to determine your eligibility for tax treaty benefits and will withhold federal and state taxes. This information will be used by the institution’s finance/HR personnel to determine your tax liability and may be available to other government officials as authorized by law.

B: PRIOR VISITS – List all prior visits to the United States, include the year of the visit, the immigration status under which the individual entered the U.S., the number of days spent in the U.S. during the visit and the reason for the visit.

A: PERSONAL INFORMATION To be completed by employee

Name Lee Mei ______________________________________________________________ Last First or Personal Middle

Social Security # or ITIN 477-85-5551

Current Immigration Status

J-1 scholar

Country of Citizenship China

Date of Original Port of Entry under Current Immigration Status December 15th 2006

Institution MSU, Mankato

Department(s) China Studies

Change of Immigration Status If individual has had a change of status since entering the U.S., enter the date that status changed and the original status below (Individual must also complete Section B: Prior Visits). Contact Tax Services to determine Tax Residency.

Change of Status Date____________ Previous Status___________________

Title of position(s) held: Visiting professor, cultural exchange

Year Immigration

Status

Total Number of Days in the US during Year under Immigration

Status

Purpose of Visit

2001 F-1 178 Graduate studies at NYC 2000 F-1 153 Graduate studies at NYC

Tax Residency Information Form

PAYROLL TAX RESIDENCY INFORMATION FORM To be filled out by employees who indicate on their I-9 “other alien authorized to work until xx/xx/xx”.

Notice: The following information is requested to determine and document your resident or nonresident status for tax purposes, tax withholdings, and any tax treaty benefits you may be eligible to receive. This is NOT an Internal Revenue Service (IRS) nor is it a United States Citizenship and Immigration Services (USCIS) form. You are not legally required to fill out this questionnaire, but if you do not do so, the institution will be unable to determine your eligibility for tax treaty benefits and will withhold federal and state taxes. This information will be used by the institution’s finance/HR personnel to determine your tax liability and may be available to other government officials as authorized by law.

A: PERSONAL INFORMATION To be completed by employee

Name

Lee Mei ________________________________________________________________ Last First or Personal Middle

Social Security # or ITIN

477-85-5551

Current Immigration Status

J-1 Scholar

Country of Citizenship

China Date of Original Port of Entry under Current Immigration Status

December 15th, 2006

Institution

MSU, Mankato

Department(s)

China Studies

Change of Immigration Status If individual has had a change of status since entering the U.S., enter the date that status changed and the original status below (Individual must also complete Section B: Prior Visits). Contact Tax Services to determine Tax Residency.

Change of Status Date____________ Previous Status___________________

Title of position(s) held:

Teacher

Tax Residency Information Form

B: PRIOR VISITS – List all prior visits to the United States, include the year of the visit, the immigration status under which the individual entered the U.S., the number of days spent in the U.S. during the visit and the reason for the visit.

Year Immigration

Status

Total Number of Days in the US during Year under Immigration

Status

Purpose of Visit

2001 F-1 178 Graduate Student program 2000 F-1 153 Graduate Student program

Tax Residency Information Form

C: CERTIFICATION I hereby certify that all of the information on this form is true and correct. I understand that if my immigration status changes from that which I have indicated on this form, I must prepare and submit a new Tax Residency Information Form to the Human Resource office at my institution.

Date _12/16/2006________________ Signature ___Mei Lee_____________________________________________________________

To be completed by the withholding agent with assistance from Tax Services D: RESIDENCY STARTING DATE Residency Start Year_____2009___if immigration status does not change, begin taxing employee as a Resident Alien on Jan. 1, 2009 __ Date in the future when individual will have met the Substantial Presence Test and becomes a Resident Alien for Tax Purposes. This date must be recalculated if any of the information on this form changes. When the employee reaches the Residency Start date, they must be treated as resident aliens for tax purposes.

E: CAMPUS CONTACT INFORMATION

Date ____12/18/2006________ Signature ____Ann Page_____________________ Phone Number (651_____)_632-5007________Name (Print please)___Ann Page, Tax Services________________________________

Tax Services Contact Information: Ann Page at 651-632-5007, ann.page@so.mnsu.edu, or Steve Gednalske at 651-632-5016, steve.gednalske@so.mnscu.edu. Send a copy of this form to Tax Services, 30 7th Street East, Suite 350, St. Paul, MN 55101 or Fax to 651-649-5762.

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

I-20

Certificate of Eligibility for Nonimmigrant (F-1) Student

I-94: Arrival/Departure Record

DS-2019

Certificate of Eligibility for Exchange Visitor(J-1) Status

I-94: Arrival/Departure Record

Passport Information

Identification Page Current visa

information Prior visits to US

Determining Tax Residency

The Substantial Presence Test

Tax Residency Information FormPAYROLL TAX RESIDENCY INFORMATION FORM

To be filled out by employees who indicate on their I-9 “other alien authorized to work until xx/xx/xx”. Notice: The following information is requested to determine and document your resident or nonresident status for tax purposes, tax withholdings, and any tax treaty benefits you may be eligible to receive. This is NOT an Internal Revenue Service (IRS) nor is it a United States Citizenship and Immigration Services (USCIS) form. You are not legally required to fill out this questionnaire, but if you do not do so, the institution will be unable to determine your eligibility for tax treaty benefits and will withhold federal and state taxes. This information will be used by the institution’s finance/HR personnel to determine your tax liability and may be available to other government officials as authorized by law.

B: PRIOR VISITS – List all prior visits to the United States, include the year of the visit, the immigration status under which the individual entered the U.S., the number of days spent in the U.S. during the visit and the reason for the visit.

A: PERSONAL INFORMATION To be completed by employee

Name Lee Mei ______________________________________________________________ Last First or Personal Middle

Social Security # or ITIN 477-85-5551

Current Immigration Status

J-1 scholar

Country of Citizenship China

Date of Original Port of Entry under Current Immigration Status December 15th 2006

Institution MSU, Mankato

Department(s) China Studies

Change of Immigration Status If individual has had a change of status since entering the U.S., enter the date that status changed and the original status below (Individual must also complete Section B: Prior Visits). Contact Tax Services to determine Tax Residency.

Change of Status Date____________ Previous Status___________________

Title of position(s) held: Visiting professor, cultural exchange

Year Immigration

Status

Total Number of Days in the US during Year under Immigration

Status

Purpose of Visit

2001 F-1 178 Graduate studies at NYC 2000 F-1 153 Graduate studies at NYC

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

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

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.

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

Substantial Presence Test

1. 31 days during the current year, and

2. 183 days during the 3 year period that includes the current year and the 2 years immediately preceding, calculated as follows:

• 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.

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:

Substantial Presence Test & Taxation

If SPT is met, Tax as a Resident

If SPT is not met, Tax as a Nonresident

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?

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. = 120 + 43 + 23 = 186

days

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.

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”.

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

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.

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

Taxing Nonresident Aliens

Statutory Withholding FICA Exemption Tax Treaty Benefits

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

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”

Statutory Withholding Rules

W-4 Witholding Allowance

Nonresident Alien

Mei Lee 12/16/2006

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.

Exceptions to Statutory Withholding Rules

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.

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).

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

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.

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

Form 8233:

For Claiming Treaty Benefits

Completing Form 8233

Form 8233:

Page 2

8233 Statement AttachmentPeople’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 2007_;

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_________

SEMA4 & Nonresident Aliens

SEMA4 Bulletin 7/13/2006 SEMA4 Tax Treaty Field

Informational only Retirement & Foreign Hires

Contact Gary Janikowski,System Director, Personnel, 651-297-5540

Questions?

Contact Information

Tax Services Website:

http://www.financialreporting.mnscu.edu/Tax_Services/index.html

Ann Page, 651-632-5007 Ann.Page@so.mnscu.edu

Steve Gednalske, 651-632-5016, Steve.Gednalske@so.mnscu.edu