Important Tax Update for Work/Travel Employers/Student Participants
This information is the most up-to-date and replaces the information on page 18 of the Employer Handbook. The IRS will not punish employers solely for failing to make these changes prior to January 1, 2007, as they probably realize many employers may be confused or have not heard about the changes.
The following are sections of the Internal Revenue Bulletin announcing
the changes in withholding rules for Work & Travel program
participants.
The entire bulletin can be found at:
http://www.irs.gov/irb/2005-46_IRB/ar10.html#d0e889
Employers/students should fill out the W-4 following the instructions listed below. They will no longer request an additional withholding of $7.60 per week. This was leading to over-withholding for our students. Under the new rules the employer will add an amount to the students wages solely for calculating the proper withholding. This amount will not be added to wages reported on the W-2. The employer will then determine withholding by applying the tables to the students wages plus this amount. This added amount has already been determined and is listed in a table below. Included below are excerpts from the bulletin with instructions and explanations regarding these rule changes.
"III. WITHHOLDING RULES THAT WILL BE EFFECTIVE FOR WAGES PAID TO NONRESIDENT ALIEN EMPLOYEES ON OR AFTER JANUARY 1, 2006
A. Nonresident Alien Employees Completing Form W-4
When completing Form W-4 to provide information with respect to withholding on wages to be paid on or after January 1, 2006, nonresident alien employees are required to:
(1) Not claim exemption from withholding;
(2) Request withholding as if they are single, regardless of the actual marital status;
(3) Claim only one allowance; and (4) Write “Nonresident Alien” or “NRA” above the dotted line on line 6 of Form W-4.
With respect to the third requirement, if the nonresident alien is a resident of Canada, Mexico, or South Korea, he or she may claim more than one allowance.
When completing a Form W-4 that will apply to wages paid on or after January 1, 2006, nonresident alien employees will no longer be required to request an additional withholding amount. However, like all other employees, nonresident aliens may request additional withholding at their option.
B. Employer Calculation of Withholding on Wages of Nonresident Alien Employees
Beginning with wages paid on or after January 1, 2006, employers are required to calculate income tax withholding under section 3402 of the Code on wages of nonresident alien employees (except for students and business apprentices from India) using a new procedure. Under this procedure the employer will add an amount to the wages of the nonresident alien employee solely for purposes of calculating the income tax withholding for each payroll period; the specific amount depends on the payroll period. Employers will determine the income tax to be withheld by applying the tables to the sum of the wages paid for the payroll period plus the additional amount. Adding this amount will offset the assumed standard deduction that is incorporated into the tables without requiring income tax to be withheld from wages that will fall below the personal exemption when annualized. The added amount is not income or wages to the employee, does not affect income, Federal Insurance Contributions Act (FICA) or Federal Unemployment Tax Act (FUTA) tax liability for the employer or the employee, and is not to be reported as income or wages.
The amounts added under this procedure as set forth in the chart below are added purely for purposes of calculating the amount of the income tax withholding on the wages of the nonresident alien employee. These chart amounts should not be included in any box on the Form W-2, Wage and Tax Statement.
The amount required to be added to the wages of a nonresident alien employee for purposes of calculating income tax withholding is the highest wage amount to which a zero withholding rate applies as shown in the Table for the Percentage Method of Withholding for a single person (including a head of household) for each payroll period. The tables are published periodically in Publication 15.
For 2006, the amount required to be added to the wages of a nonresident alien employee for purposes of calculating income tax withholding, for each length of payroll period is as follows:
| Payroll period | Add additional |
| Weekly | $ 51 |
| Biweekly | $ 102 |
| Semimonthly | $ 110 |
| Monthly | $ 221 |
| Quarterly | $ 663 |
| Semiannually | $ 1,325 |
| Annually | $ 2,650 |
| Daily or Miscellaneous (each day of the payroll period) | $ 10.20 |
"IV. EFFECTIVE DATE
This notice is effective with respect to wages paid to nonresident alien employees on or after January 1, 2006. However, with respect to wages paid prior to January 1, 2007, the Internal Revenue Service will not assert an employer's liability for underpayments of income tax withholding and related interest and penalties resulting solely from the failure to apply the new withholding procedure in this notice to payments of wages made to nonresident alien employees, provided the employer has made a good faith effort to implement the withholding requirements in this notice as soon as possible. The transitional relief in the previous sentence does not affect the liability of employees for federal income tax."
Explanation in bulletin for changes:
"The income tax withholding tables in Publication 15 (Circular E), Employer’s Tax Guide (January 2005 revision), for use with the percentage method of withholding and the wage bracket method of withholding assume that an employee will be entitled to a standard deduction in determining the employee’s federal income tax liability. Under the withholding tables, an employer does not withhold any amount of income tax until the employee has received an amount (for example, $2,650 for an annual payroll period) that will be subject to tax after taking into account the standard deduction and the employee’s claimed withholding allowance(s). However, because a nonresident alien individual is not permitted to claim the standard deduction, nonresident alien employees have been given special instructions for completing their withholding exemption certificates in an effort to offset the assumed standard deduction built into the withholding tables. These instructions were intended to prevent under-withholding."
"The current withholding rules result in over-withholding on wages of nonresident alien employees who have small amounts of remuneration from services within the United States because the additional amount that the nonresident alien employee must request for withholding purposes is withholding liability that will apply from the first dollar of wages. Thus, even if the amount of the nonresident alien employee's total annual wages for services performed in the United States is less than the personal exemption amount, the current withholding rules require income tax to be withheld. A nonresident alien in this situation must file a return and request a refund to get back the amount withheld."
