Withholding From Compensation The following discussion generally applies only to nonresidentaliens. Tax is withheld from resident aliens in the same manner asU.S. citizens. Wages and other compensation paid to a nonresident alien forservices performed as an employee are usually subject to graduatedwithholding at the same rates as resident aliens and U.S. citizens.Therefore, your compensation, unless it is specifically excluded fromthe term "wages" by law, or is exempt from tax by treaty, issubject to graduated withholding. Withholding on Wages If you are an employee and you receive wages subject to graduatedwithholding, you will be required to fill out a Form W-4.Nonresident aliens should use the following instructions instead ofthe instructions on the Form W-4. Because of the restrictions on a nonresident alien's filing status,the limited number of personal exemptions a nonresident alien isallowed, and the fact that a nonresident alien cannot claim thestandard deduction, you should fill out Form W-4 following theseinstructions. Check only "Single" marital status on line 3(regardless of your actual marital status). Claim only one allowance on line 5, unless you are aresident of Canada, Mexico, Japan, or South Korea, or a U.S. national. Request that your employer withhold an additional amount of$7.60 per week on line 6. If your wages are paid based on a 2-week payperiod, the additional amount will be $15.30. For other payrollperiods, ask your employer for the amount to enter. Do not claim "Exempt" withholding status online 7. A U.S. national is an individualwho, although not a U.S. citizen, owes his or her allegiance to theUnited States. U.S. nationals include American Samoans, and NorthernMariana Islanders who chose to become U.S. nationals instead of U.S.citizens. See Reduced Withholding on Scholarships and Fellowship Grants,later, for how to fill out Form W-4 if you receive a U.S.source scholarship or fellowship grant. Students and business apprentices from India.If you are eligible for the benefits of Article 21(2) of the UnitedStates-India Income Tax Treaty, you may claim additional withholdingallowances for the standard deduction and your spouse. You may alsoclaim an additional withholding allowance for each of your dependentsnot admitted to the United States on "F-2," "J-2,"or "M-2" visas if they meet the same rules that apply toU.S. citizens. You do not have to request additional withholding online 6. Withholding on Pensions If you receive a pension as a result of personal services performedin the United States, the pension income is treated as effectivelyconnected with a U.S. trade or business. This income will be subjectto graduated withholding under the pension with- holding rules thatapply to U.S. citizens and resident aliens. Denmark HotelsYou must fill out a Form W-4P using the following guidelines.On line 2, check only "Single" marital status, and claim only onewithholding allowance unless you are a resident of Canada, Mexico,Japan, or South Korea, or a U.S. national. A nonresident alien who receives periodic pension payments ornonperiodic pension distributions outside of the United States canchoose to not have tax withheld under the graduated withholding rules.However, if you make this choice, the 30% (or lower treaty rate)withholding tax will apply. Withholding on Tip Income Tips you receive during the year for services performed in theUnited States are subject to U.S. income tax. Include them in taxableincome. In addition, tips received while working for one employer,amounting to $20 or more in a month, are subject to graduatedwithholding. Independent Contractors If there is no employee-employer relationship between you and theperson for whom you perform services, your compensation is subject tothe 30% (or lower treaty) rate of withholding. However, if you areengaged in a trade or business in the United States during the taxyear, your compensation for personal services as an independentcontractor (independent personal services) may be entirely or partlyexempt from withholding if you reach an agreement with the InternalRevenue Service on the amount of withholding required. Also, the finalpayment to you during the tax year for independent personal servicesmay be entirely or partly exempt from withholding if you are engagedin a trade or business in the United States during the year and youfile the forms and provide the information required by the IRS. Withholding Agreement An agreement that you reach with the IRS regarding withholding fromyour compensation for independent personal services is effective forpayments covered by the agreement after it is agreed to by allparties. You must agree to timely file an income tax return for thecurrent tax year. Central withholding agreements.If you are a nonresident alien entertainer or athlete performing orparticipating in athletic events in the United States, you may be ableto enter into a withholding agreement with the IRS for reducedwithholding provided certain requirements are met. Under nocircumstances will such a withholding agreement reduce taxes withheldto less than the anticipated amount of income tax liability. Nonresident alien entertainers or athletes requesting a centralwithholding agreement must submit the following information. A list of the names and addresses of the nonresident aliensto be covered by the agreement. Copies of all contracts that the aliens or their agents andrepresentatives have entered into regarding the time period andperformances or events to be covered by the agreement including, butnot limited to, contracts with: Employers, agents, and promoters, Exhibition halls, Persons providing lodging, transportation, and advertising,and Accompanying personnel, such as band members or trainers. An itinerary of dates and locations of all events orperformances scheduled during the period to be covered by theagreement. A proposed budget containing itemized estimates of all grossincome and expenses for the period covered by the agreement, includingany documents to support these estimates. The name, address, and telephone number of the person theIRS should contact if additional information or documentation isneeded. The name, address, and employer identification number of theagent or agents who will be the central withholding agents for thealiens and who will enter into a contract with the IRS. A centralwithholding agent ordinarily receives contract payments, keeps booksof account for the aliens covered by the agreement, and pays expenses(including tax liabilities) for the aliens during the period coveredby the agreement. When the IRS approves the estimated budget and the designatedcentral withholding agents, the Associate Chief Counsel(International) will prepare a withholding agreement. The agreementmust be signed by each withholding agent, each nonresident aliencovered by the agreement, and the Assistant Commissioner(International). Generally, each withholding agent must agree to withhold income taxfrom payments made to the nonresident alien, to pay over the withheldtax to the IRS on the dates and in the amounts specified in theagreement, and to have the IRS apply the payments of withheld tax tothe withholding agent's Form 1042 account. Each withholding agent willbe required to file Form 1042 and Form 1042-S for each tax yearin which income is paid to a nonresident alien covered by thewithholding agreement. The IRS will credit the withheld tax payments,posted to the withholding agent's Form 1042 account, in accordancewith the Form 1042-S. Each nonresident alien covered by thewithholding agreement must agree to file Form 1040NR or Form1040NR-EZ. Envelope: A request for a central withholding agreement should be sent to thefollowing address at least 90 days before the agreement is to takeeffect. Internal Revenue Service Chief, Special Procedures Section OP:IN:D:C:SS:TS Room 4417 950 L'Enfant Plaza South, S.W. Washington, DC 20024 Final payment exemption.Your final payment of compensation during the tax year forindependent personal services may be entirely or partly exempt fromwithholding. This exemption is available only once during your taxyear and applies to a maximum of $5,000 of compensation. To obtainthis exemption, you or your agent must give the following statementsand information to the Assistant Commissioner (International). A statement by each withholding agent from whom you havereceived gross income effectively connected with a trade or businessin the United States during the tax year, showing the amount of incomepaid and the tax withheld. Each statement must be signed by thewithholding agent and verified by a declaration that it is made underpenalties of perjury. A statement by the withholding agent from whom you expect toreceive the final payment of compensation, showing the amount of thepayment and the amount of tax that would be withheld if a finalpayment exemption were not granted. This statement must also be signedby the withholding agent and verified by a declaration that it is madeunder penalties of perjury. A statement by you that you do not intend to receive anyother income effectively connected with a trade or business in theUnited States during the current tax year. The amount of tax that has been withheld or paid under anyother provision of the Internal Revenue Code or regulations for anyincome effectively connected with your trade or business in the UnitedStates during the current tax year. The amount of your outstanding tax liabilities, if any,including interest and penalties, from the current tax year or priortax periods. Any provision of an income tax treaty under which a partialor complete exemption from withholding may be claimed, the country ofyour residence, and a statement of sufficient facts to justify anexemption under the treaty. A statement signed by you, and verified by a declarationthat it is made under penalties of perjury, that all the informationgiven is true and that to your knowledge no relevant information hasbeen omitted. If satisfied with the information, the IRS will determine theamount of your tentative income tax for the tax year on gross incomeeffectively connected with your trade or business in the UnitedStates. Ordinary and necessary business expenses can be taken intoaccount if proven to the satisfaction of the Assistant Commissioner(International). The IRS will send you a letter, directed to the withholding agent,showing the amount of the final payment of compensation that is exemptfrom withholding and the amount that can be paid to you because of theexemption. You must give two copies of the letter to the withholdingagent and must also attach a copy of the letter to your income taxreturn for the tax year for which the exemption is effective. Allowance forPersonal Exemption Withholding on payments for independent personal services isgenerally based on the amount of your compensation payment minus thevalue of one exemption ($2,800 for 2000). To determine the income for independent personal services performedin the United States to which the 30% (or lower treaty) rate willapply, one personal exemption is allowed a nonresident alien who isnot a U.S. national and is not a resident ofCanada, Mexico, Japan, or South Korea. For purposes of 30%withholding, the exemption is prorated at $7.65 a day in 2000 for theperiod that labor or personal services are performed in the UnitedStates. To claim an exemption from withholding on the personalexemption amount, fill out the applicable parts of Form 8233 and giveit to the withholding agent. Example.Eric Schmidt, who is a resident of Germany, worked under a contractwith a U.S. firm (not as an employee) in the United States for 100days during 2000 before returning to his country. He earned $6,000 forthe services performed (not considered wages) in the United States.Eric is married and has three dependent children. His wife is notemployed and has no income subject to U.S. tax. The amount of thepersonal exemption to be allowed against the income for his personalservices performed within the United States in 2000 is $765 (100 days $7.65), and withholding at 30% is applied against the balance.Thus, $1,570.50 in tax is withheld from Eric's earnings (30% of$5,235). U.S. nationals or residents of Canada, Mexico, Japan, orSouth Korea.If you are a nonresident alien who is a resident of Canada, Mexico,Japan, or South Korea, or who is a national of the United States, youare subject to the same 30% withholding on your compensation forindependent personal services performed in the United States. However,if you are a U.S. national or a resident of Canada or Mexico, you areallowed the same personal exemptions as U.S. citizens. For the 30% (orlower treaty rate) withholding, you can take $7.65 per day for eachallowable exemption in 2000. If you are a resident of Japan or Korea,you are allowed personal exemptions for yourself and for your spouseand children who live with you in the United States at any time duringthe tax year. However, the additional exemptions for your spouse andchildren must be further prorated as explained in chapter 5underExemptions. Students and business apprentices from India.If you are eligible for the benefits of Article 21(2) of the UnitedStates-India Income Tax Treaty, you are allowed an exemption for yourspouse. You are also allowed an exemption for each dependent notadmitted to the United States on "F-2," "J-2,"or "M-2" visas if they meet the same rules that apply toU.S. citizens. For the 30% (or lower treaty rate) withholding oncompensation for independent personal services performed in the UnitedStates, you are allowed $7.65 per day for each allowable exemption in2000. Residents of Canada or Mexico Engaged inTransportation-Related Employment Certain residents of Canada or Mexico who enter or leave the UnitedStates at frequent intervals are not subject to withholding on theirwages. These persons either: Perform duties in transportation service between the UnitedStates and Canada or Mexico, or Perform duties connected to the construction, maintenance,or operation of a waterway, viaduct, dam, or bridge crossed by, orcrossing, the boundary between the United States and Canada or theboundary between the United States and Mexico. Caution: This employment is subject to withholding of social security andMedicare taxes unless the services are performed for a railroad. To qualify for the exemption from withholding during a tax year, aCanadian or Mexican resident must give the employer a statement induplicate with name, address, and identification number, certifyingthat the resident: accommodation in AlbuferiaIs not a U.S. citizen or resident, Is a resident of Canada or Mexico, whichever applies, and Expects to perform duties previously described during thetax year in question. The statement can be in any form, but it must be dated and signedby the employee and must include a written declaration that it is madeunder the penalties of perjury. Certain Residentsof Puerto Rico If you are a nonresident alien employee who is a resident of PuertoRico, wages for services performed in Puerto Rico are generally notsubject to withholding unless you are an employee of the United Statesor any of its agencies in Puerto Rico. Residents of theU.S. Virgin Islands Nonresident aliens who are bona fide residents of the VirginIslands are not subject to withholding of U.S. tax on income earnedwhile temporarily employed in the United States. This is because thosepersons pay their income tax to the Virgin Islands. To avoid havingtax withheld on income earned in the United States, bona fideresidents of the Virgin Islands should write a letter, in duplicate,to their employers, stating that they are bona fide residents of theVirgin Islands and expect to pay tax on all income to the VirginIslands.