Presented by: Mike Sattin and Steven Truong Payroll Services April - PowerPoint PPT Presentation

Taxation of Non-Residents Presented by: Mike Sattin and Steven Truong Payroll Services April 25, 2012

Today’s Agenda  Basic Withholding Concepts  Six Q’s of NRA Withholding  Tax Withholding Obligations  Maintenance 2 Payroll Services 4/27/2012

Basic Withholding Concepts Code of Federal Regulations Title 26 - Tax Withholding Obligations Internal Revenue Codes Specific to Nonresidents  § 1441. Withholding § 1441. Withholding of tax on nonresident aliens   § 1442. Withholding of tax on foreign corp.  § 1443. Foreign tax-exempt organizations § 1444. Withholding on Virgin Islands source income   § 1461. Withholding Tax on Foreign Persons with U.S. Source Income 3 Payroll Services 4/27/2012

Basic Withholding Concepts Tax Withholding Obligations California Law California Code – Revenue & Taxable Code  § 18661-18667 General Rules  § 17951-17955 Non-resident specific rules For employees who are nonresidents of California and work out of California, we need to apply the relevant state laws in which the employee works. Contact: Jeremy Henmi 310-794-0834 4 Payroll Services 4/27/2012

Basic Withholding Concepts The Withholding Agent  Anyone who has control, receipt, custody, disposal, or payment of income to a foreign person  Responsibilities include:  Liable for any required withholdings  Required to withhold at the time the payment is being made or determined  Required to remit taxes to IRS at a particular schedule  Required to file tax returns and issue tax statement for payments to non-residents for tax purposes 5 Payroll Services 4/27/2012

Basic Withholding Concepts The Withholding Agent At UCLA, the withholding agents for nonresident aliens are……. Type of Tax Contact Phone Number 592B – CA income tax Shirley 310-794-0197 for non-employees Sams  Federal income tax Aurora 310-794-8728 Orozco  Employment tax 6 Payroll Services 4/27/2012

Taxes Withheld by PPS / AP / BAR (3 paying systems)  Income tax  Federal  California  Other State  Employment tax  Social Security & Medicare 7 Payroll Services 4/27/2012

SIX Q’S OF NRA WITHHOLDING What do we need to know about NRA tax? 1. Who is subject to withholding? 2. Which payment is subject to withholding? 3. When are payments subject to withholding? 4. Who is required to withhold? 5. How much tax should we withhold? 6. 8 Payroll Services 4/27/2012

Six Q’s of NRA Withholding 1. Why worry about taxing NRA’s?  There exists in the U.S. Two distinct tax systems under IRC - each having it’s own withholding and reporting rules that payers are liable for.  There is a system for U.S. Persons and one for Foreign Person.  NRA withholding applies only to payments made to a “ foreign person ”. 9 Payroll Services 4/27/2012

Six Q’s of NRA Withholding 2. Who is Subject to NRA Withholding? A FOREIGN PERSON  A “foreign person” includes:  A nonresident alien for tax purpose  A foreign corporation, foreign partnership, foreign, estate, foreign trust  And any other person who is not a US person. For the remainder of the class, a foreign person will be referred to as a NRA 10 Payroll Services 4/27/2012

Six Q’s of NRA Withholding (2. Who is Subject to NRA Withhold? Cont.) Who is a U.S. Person?  A citizen or resident of the United States  A partnership or corporation created or organized in the United States  Any estate or trust other than a foreign estate or foreign trust  Any other person that is not a foreign person 11 Payroll Services 4/27/2012

Six Q’s of NRA Withholding 3. What is subject to NRA Withholding? Any payment is subject to NRA withholding if it is from sources within the United States, and it is either:  Fixed or determinable annual or periodical (FDAP) income (Service Payments, Fellowship/Scholarship, Payroll, etc.)  Income from the disposition or sale of personal property 12 Payroll Services 4/27/2012

Six Q’s of NRA Withholding What is not subject to NRA tax? All payments are considered taxable income with the exception of: Foreign Sourced Income – Not reported/Not taxed I. Excluded under IRS Code – Not reported/Not taxed II. Excluded under Tax Treaty – Not Taxed III. 13 Payroll Services 4/27/2012

Six Q’s of NRA Withholding I. Foreign Sourced Income Exemption (Not reported/Not taxed) Sourcing Payment is important!  A U.S. Person is subject to U.S. tax on Wo Worl rldwide wide income .  A NRA for tax purposes is subject to U.S. tax on U.S. sou U. ourc rced ed income  A NRA for tax purposes is not subject to U.S. tax on for oreig ign n sou ourced ed income 14 Payroll Services 4/27/2012

Six Q’s of NRA Withholding II. IRS Code Income Exclusions A. Section 117 – Qualified Scholarship B. Section 125 – Cafeteria Plans C. Section 62 – Accountable Plan D. Section 861 (a)(3) – foreign employee E. Section 872 (b)(3) – foreign employee Section 893 – employee of foreign government F. 15 Payroll Services 4/27/2012

Six Q’s of NRA Withholding II.A. IRS Code Income Exclusion Section 117 Sec. 117 allows for exclusion from income if the payment is for a Qualified Scholarship: A qualified scholarship is any amount received by an individual as a scholarship or fellowship grant that is used for tuition and fees required for enrollment and required books, supplies, and equipment. 16 Payroll Services 4/27/2012

Six Q’s of NRA Withholding II.B. IRS Code Income Exclusion Section 125 Sec. 125 allows for exclusion from income if the payment is made under a cafeteria plan: This allows the employer contributions for health, dental, and vision benefits to be excluded from gross income! 17 Payroll Services 4/27/2012

II.C. IRS Code Income Exclusion Section 62  Accountable Plan  Can be excluded from income taxes if properly accounted for i.e. substantiate business within 60 days and delineate expenses  Travel Expense  Employee – Business expenses 18 Payroll Services 4/27/2012

Six Q’s of NRA Withholding III. Tax Treaty Exclusion IRC 1441 The general withholding rate of 30% will not apply if the payment is exempt under an income tax treaty between the individual’s country of residence and the U.S. Tax Treaty Articles US Treasury Foreign Country 19 Payroll Services 4/27/2012

Six Q’s of NRA Withholding 4. When are we required to withhold?  Withholding is required at the time you make a payment of an amount subject to withholding  A payment is made to a person whether or not that person realizes there is an actual transfer of cash or other similar aspect i.e. imputed income. 20 Payroll Services 4/27/2012

Six Q’s of NRA Withholding 5. Who is required to withhold? The Withholding Agent At UCLA, Payroll Services acts as the withholding agent for purposes of NRA tax reporting obligations to the IRS. Three central departments on campus have the responsibility to withhold the tax and report this information to Payroll Services . 21 Payroll Services 4/27/2012

Six Q’s of NRA Withholding UCLA Payment Process ACCOUNTS PAYABLE GRADUATE Process Non-Employee Payments PAYROLL DIVISION One Time 1. Process Wage Payments Payments Process to Employees Fellowship/Scholarship Lecture Fee 2. Charge Benefits for Post Awards Docs Honorariums 2. Withhold Taxes For Travel Office Includes student travel 3. Report Payments/taxes Travel Expenses Relocation Costs PPS Bruin Buy Withholds taxes BAR YEAR END Process YEAR END FORM 1099 and 592B CREATES FORMS YEAR END FORM W2 and1042S Informational Statement 1042S for BAR & PAC 22 Payroll Services 4/27/2012

Six Q’s of NRA Withholding 6. How much tax is withheld for a NRA? U.S. sourced income is usually taxed at a rate of 30%. 23 Payroll Services 4/27/2012

Six Q’s of NRA Withholding Exceptions to the 30% Rule  Wages paid to a NRA employee  Fellowship/Scholarship payments to a NRA  Tax Treaty Exemptions 24 Payroll Services 4/27/2012

Tax Withholding Obligations Tax Withholding on Specific Payments A. Wages B. Non-employment service payments C. Post Doc payments D. Fellowship/Scholarship E. Reimbursements Other payments: F. 1. Death Payments 2. Pension Payments 3. Awards 4. Relocation 25 Payroll Services 4/27/2012

Tax Withholding Obligations A. Wage Payments  NRA working out of U.S.  NRA working in U.S.  NRA working out of California 26 Payroll Services 4/27/2012

Tax Withholding Obligations UCLA employees may be subject to: Federal Income tax  At Graduated Tax Rates* FICA Tax  % of Gross Payment  OASDI  Medicare State Income Tax  At Graduated Tax Rates* * See current tax tables @ www.payroll.ucla.edu 27 Payroll Services 4/27/2012

Tax Withholding Obligations Allowable W-4 Exemptions for Residents for tax purposes Re Resid ident ents s ma may y choo hoose se an any y al allo lowances ances on n the he W-4! 4! Cau aution: ion: As s lo long ng as as the hey y me meet et the heir ir tax ax li liab ability lity at at year ye ar end nd All Others Residents Resident with Tax Treaty Federal Withholding Federal & State - None Based on DE 4 State per DE 4 W2 W2 and a 1042S 28 Payroll Services 4/27/2012