Nonresident Alien Federal Tax Withholding Procedures FAQs

• How do I determine if an employee is a nonresident alien?
• Should departments include resident aliens on the listing submitted to SCO?
• Who can I talk to if I cannot understand the guidelines issued by the IRS?
• What if an employee designated as a nonresident alien becomes a citizen or resident alien?
• What federal marital status should nonresident alien employees claim in their EAR or SPAR forms?
• What will happen if an employee does not claim the above federal marital status?
• Why does an employee’s additional federal tax deduction amount different each month?
• Why do some employees have no deductions taken at all?
• Why is it that the State Controller’s Office does not identify these employees?
• How do I notify SCO of employee changes to the NRA process?
• How do I notify SCO if an NRA employee included in the NRA process has had a change to his/her SSN or if the SSN originally provided was incorrect?
• Where can I find information to help determine residency status and definition/test of permanent resident and nonresident aliens?
• Are employees who have permanent resident cards considered noncitizens?
• If they are considered as noncitizens, do we need to add them to our Nonresident alien report?
• Departments are unclear on which employees should be reported as nonresident alien employees. Are departments required to check employees I- 9 and report those who checked “noncitizen box" on the I-9 form?
• What do you mean by tax treaty, and what is the effect of these treaties to wages paid to NRAs?
• If an employee claims exemption from withholding due a tax treaty to which the United States is a party, which part of the EAR form should be checked?
• How do you report tax treaty exempt wages for nonresident alien employees?
• How do we know which countries does the U.S. currently have a tax treaty?
• How do we get the federal withholding from employee’s monthly pay warrant returned going back to prior years?
• How are we supposed to know if an NRA employee needs to be reported to SCO and what is the method for reporting them?
• What types of employees are subject to additional withholding?
• Are wages paid to nonresident alien employees reported on Form W-2 or 1042-S?
• Are payments that are exempt from federal tax laws due to tax treaties (IRS Form W8, Certificate of Foreign Status), also exempt from California tax and withholding?
• An employee is a nonresident alien, and some of his earnings are exempt from Federal taxation due to an Income Tax Treaty between the US and his home country. Why did he receive a W‐2?
• Does a nonresident alien with a tax treaty exemption receive a Form W-2 at the end of the year?

Per Internal Revenue Service (IRS), a person who is not a U.S. citizen is considered a nonresident alien unless they meet either the Green Card Test or the Substantial Presence Test. Information on who is considered a nonresident alien is included in IRS Publication 519, U.S. Tax Guide for Aliens, IRS Topic No. 851, Resident and Nonresident Aliens, and IRS Notice 2005-76, Withholding on Wages of Nonresident Alien Employees Performing Services within the United States.

No.  Only nonresident aliens who are subject to the rules under IRS Notice 2005-76 should be included on the listing.  Visit the above links to determine the difference between nonresident aliens and resident aliens.

If you need assistance interpreting the IRS guidelines and determining which employees are considered nonresident aliens, we suggest you contact your legal office for guidance.

If an employee has notified you that he/she has become a citizen or resident alien and provided you with the supporting documentation, you should complete the following steps:

1. If the employee has completed a STD. 686 Employee Action Request (EAR) (Rev.10/2022) or STD. 457 Student Payroll Action Request (SPAR) (Rev.11/2022) with a check in the Nonresident Alien/Noncitizen box (E01/G01), have the employee complete a new EAR or SPAR form without indicating the Nonresident Alien (E01).
2. Remove the employee from SCO’s nonresident alien process using the attached form.  Complete his/her name, social security number and enter “delete” in the type of change field.
3. Update the employee’s employment history record.  For civil service departments:  Refer to the PAM Manual Section 2.71 Item 545, Oath/Non-Citizen for more information on citizenship changes.

For CSU campuses:  Refer to the PIMS Manual Item 825, Noncitizen Status Code for information on how to document citizenship status changes.

Per IRS Publication 15-E, Circular E, Employer’s Tax Guide,  nonresident aliens who are subject to the new IRS Procedures must claim Single for their federal marital status regardless of their actual filing status, cannot claim an exception from withholdings and  the dependents field should be blank.

If the nonresident alien employee is a resident of Canada, Mexico, or South Korea, or a student from India, he or she may claim under certain circumstances (see Pub 519), the child tax credit or credit for other dependents.

An employee must adhere to the rules specified per IRS Notice 2005-76 and IRS Publication 15-E.  If an employee is currently claiming something different from above, a new EAR of SPAR form must be submitted.  Please do not accept an EAR or SPAR from a nonresident alien with an incorrect federal marital status.  Departments/campuses may not correct the federal marital status without an EAR or SPAR document completed by the employee.

The federal tax calculation process reads the previous month’s federal taxable gross, performs a series of recalculations and determines how much an employee owes per the IRS procedure.  The calculated federal tax amount is then compared to the amount of federal taxes the employee has already had withheld for the pay period.  A one-time federal deduction (code 099) amount for each month may be withheld to a difference in the federal taxable gross or a difference for taxes originally withheld.

No additional deductions have been taken because enough federal tax was withheld in the original payment to meet the criteria of the IRS procedures.

Nonresident aliens subject to IRS procedures cannot be identified by the State Controller’s Office since the information required to determine if an employee is a nonresident alien is held by the appointing agency.  Agencies/campuses must verify an employee has nonresident alien status and verify the employee’s country of origin to determine if the IRS procedures apply.

To remove or add an employee from the NRA process, please complete the attached Nonresident alien change form including the employee’s social security number, name, in addition, whether the employee is to be added or deleted from the process.  Please have these changes submitted to SCO no later than the 10th of each month to ensure the change is reflected for the current monthly warrant.  This form can be submitted through ConnectHR upload feature.  In the dropdown menu, select Tax Support Unit – Noncitizen Add or Delete.

    If the employee’s SSN has changed or needs to be corrected please take the following steps:

1. Submit a 105 transaction to SCO for processing along with a copy of the Social Security card.

2. Submit the attached form, indicate employee’s name, the old or incorrect SSN, and indicate that the record should be deleted.  On another line of the form include the employee’s name, correct SSN and indicate that this record should be added.  Submit this form to SCO Tax Support Unit per the instructions above. 

Visit the links below:

http://apps.irs.gov/app/vita/content/globalmedia/determining_residency_status_decision_tree_4012.pdf

http://www.irs.gov/Individuals/International-Taxpayers/Determining-Alien-Tax-Status

http://www.irs.gov/taxtopics/tc851.html

IRS Publications 513, 515, 519 (Chapter 1 pp, 3-14; Chapter 4 p. 17-18), and 901 should be consulted.

Yes, they are considered as noncitizens but they are taxed in the same manner as US residents on their worldwide income and not as nonresident aliens. Lawful permanent residents (LPRs), also known as “green card” holders, are non-citizens who are lawfully authorized to live permanently within the United States. LPRs may accept an offer of employment without special restrictions, own property, receive financial assistance at public colleges and universities, and join the Armed Forces.   Lawful Permanent Residents |  Homeland Security (dhs.gov)

An individual who obtains a green card is treated as a lawful permanent resident and is considered a US tax resident for U.S. income tax purposes.            

For assistance in determining whether a person is a U.S. tax resident or nonresident, please refer to Determining Alien Tax Status.

No. Permanent Resident Card holders are treated as US Residents/Resident Aliens and taxed the same way as US Citizens. For withholding tax purposes, treat RESIDENT ALIENS the same as U.S. Citizens. Resident aliens are not subject to special withholding rules that apply to non-residents as described in IRS Publication 15 (Circular E) and Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

Yes. Departments should check employees' I-9 (Employment Eligibility Verification) form and report those who checked "noncitizen box" on the same form. Use form I-9 to verify the identity and employment authorization of individuals hired for employment in the United States employers must properly complete form I-9 for each individual they hire for employment in the United States. This includes citizens and noncitizens. Both employees and employers (or authorized representatives of the employer) must complete the form.

The term "noncitizen" includes aliens and nationals who are not citizens. United States noncitizen nationals are persons who owe permanent allegiance to the United States, which include those born in American Samoa, including Swains Island. Citizen of the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) are not noncitizen nationals; however, they are eligible to work in the United States. https://www.uscis.gov/i-9-central/form-i-9-resources/handbook-for-employers-m-274/130-some-questions-you-may-have-about-form-i-9

Tax treaties are agreements made by two countries to resolve issue of double taxation.  The United States has income tax treaties with 160 foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries may be eligible to be taxed at a reduced rate or exempt from U.S. income taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income.  Publication 901, U.S. Tax Treaties, will indicate whether a tax treaty between the United States and a particular country offers a reduced rate of, or possibly a complete exemption from, U.S. income tax for residents of that particular country. Refer to the Tax Treaty Tables page for a summary of many types of income that may be exempt or subject to a reduced rate of tax. Tax Treaties | Internal Revenue Service (irs.gov)

If a tax treaty between the United States and residents of a foreign country provides an exemption from, or a reduced rate of, withholding for certain items of income, employee should notify the payor of the income (the withholding agent) of his/her foreign status to claim the benefits of the treaty. If the employee is not a student, trainee, teacher, or researcher, but  perform services as an employee and his/her pay is exempt from U.S. income tax under a tax treaty, he/she may be able to eliminate or reduce the amount of tax withheld from his/her wages. Employee should provide his/her employer with a properly completed Form 8233 for the tax year. The Form 8233 must report your Taxpayer Identification Number (TIN), generally your U.S. Social Security Number or

If you are treated as a resident of a foreign country under a tax treaty, and not treated as a resident of the United States under the treaty (i.e., not a dual resident), you are treated as a nonresident alien in figuring your U.S. income tax. Tax Treaties | Internal Revenue Service (irs.gov)

EAR FORM PROCESSING, PAM, Section 6.9 EAR ITEM DEFINITIONS PAM: Section 6 - EAR Processing (ca.gov)

To claim exemption from withholding due to Non-taxable Wages, the employee must ONLY COMPLETE Part V - NONTAXABLE WAGES OF Section E - Withholding Changes.   Parts I, II, III and IV must be left blank.

Non-Taxable Wages - The employee must check the box and enter the following reason: Nonresident noncitizen - Employee's country must have a Tax Treaty that cites exemption from both Federal and State taxes. ARTICLE-NUMBER CITING TAX EXEMPTION AND COUNTRY MUST BE ENTERED.

Please see PPM (Payroll Procedures Manual) Sections I 050-056 for general information and SCO reporting process. PPM: Section I - General (ca.gov).

For more details on whether a tax treaty between the United States and a particular country offers a reduced rate of, or possibly a complete exemption from, U.S. income tax for residents of that particular country, refer to Publication 901, U.S. Tax Treaties. You can obtain the full text of these treaties at United States Income Tax Treaties - A to Z.

The employer cannot return the federal withholding after the close of the tax year.  The employer cannot collect federal or state income tax withheld in a prior year, so no correction can be made for income taxes withheld.

Please see response to FAQ nos. 1 and 2 if an employee needs to be reported to SCO. The Statewide Tax Support Program issues Personnel letters bi-annual verification of NRA employees per IRS rules. Validation of identified NRA employees occurs twice per year in January and July for agencies to verify their NRA employees to ensure accurate reporting. The instructions on the letter requires agencies to notify us (in January and July) of the list of NRA employees to be added or deleted or if there are no changes on the NRA listing on the View Direct Report. Agencies are encouraged to report changes to SCO on a flow basis throughout the year to ensure the most accurate withholding for the NRA employees.

Only nonresident alien employees who are identified in IRS Notice 2005-76  are subject to additional withholding.  These are employees who are not US citizens and do not meet/pass the Green Card test or Substantial Presence test.  The rules were designed to provide for withholding that more closely approximate the income tax liability of the nonresident alien.  This rule only applies to nonresident alien employees who have wages subject to income tax withholding (non-resident alien employees performing services within the United States). This notice does not apply or has no effect on nonresident alien individuals who have wages that are not subject to federal income tax withholding under section 3402 (nonresident alien employees who are entitled to a federal income tax exemption or an income tax treaty exemption).  Notice 2005-76 is effective with respect to wages paid to NRA employees after January 1, 2006. 

Employers are required to add an amount to the wages of a nonresident alien employee solely for calculating income tax withholding. The specific amounts depend on the payroll period. These amounts can be found in Withholding Adjustment for Nonresident Alien Employees in the Introduction of Pub. 15-T. This adjustment does not apply to students and business apprentices from India. Publication 515 (irs.gov)

Payments to nonresident employees are reported to employees and IRS on the following forms:

• Form W-2 (if no tax treaty applies)
• Form 1042-S, Foreign Person’s US Source Income Subject to Withholding (if tax treaty applies)
  • Withholding agents that are US government entities or US tax-exempt entities, including colleges and universities, and other U.S. tax-exempt entities under the Internal Revenue Code other than under section 501c that paid any amount subject to withholding to a foreign person must submit a 1042-S. The 1042-S is filed with the IRS and a completed copy is sent to the employee or business.
• On both forms ( if tax treaty applies to some, but not all wages)

No. California does not conform to federal law relating to income protected by U.S. tax treaties. California income is taxable and subject to withholding. Nonresident aliens are required to report income from California sources on Form 540NR, California Nonresident or Part‑Year Resident Income Tax Return.  FTB Publication 1017   | FTB.ca.gov

Generally, nonresident alien employees will receive an IRS Form 1042‐S to document earnings entirely covered by an approved tax treaty. However, it is common for nonresident alien employees to also receive a Form W‐2.  Examples include employees who have become residents for tax reporting purposes, where tax treaty income dollar limits or time limits have been exceeded, or under other special circumstances.

Nonresident aliens who both qualified for a treaty exemption and completed the necessary paperwork (Forms W-8 BEN or 8233), may receive a Form 1042-S and/ or a Form W-2 showing their treaty exempt earnings/other wages and taxes. The Form 1042-S is required before you can complete your income tax return. Form 1042-S is used to report amounts paid to foreign persons from US Sources that are reportable – withholding on certain payments to nonresident aliens, even if no payment is withheld from the payment.  For example, an amount subject to withholding on certain payments to nonresident aliens that are exempt from withholding under a treaty must be reported.   Form 1042-S is required to be delivered to the recipient by March 15. Form 1042-S, whether filed on paper or electronically, must be filed with the IRS by March 15.