Category: Compensation & Employee Benefits; International
Subject: Withholding
Title: Foreign Workers
IRC Sections: 3402(a)(1), 3401(a), 3121(b), 3306(c)
Filename: 1062.html
Date Produced: 9/97

Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com

Facts

Taxpayer is a California corporation owned 40% each by two Chinese individuals and 20% by a U.S. citizen. The Chinese individuals are not citizens or residents of the U.S. One of the Chinese owners performed services in China for the corporation for which he is paid a small salary.

Issue

What are the Taxpayer's obligations with respect to federal income and employment tax withholdings?

Answer

The Taxpayer has no withholding obligations with respect to the Chinese worker.

Discussion: Income Tax Withholding

In general, Section 3402(a)(1) requires "every employer" who makes payment of "wages" to deduct and withhold tax at source . The term "wages" is defined in Section 3401(a) as "all remuneration . . . for services performed by an employee for his employer," subject to a number of specifically enumerated exceptions.

Section 3401(a)(6) provides that remuneration for services performed by a nonresident alien individual shall be exempt from the definition of "wages" to the extent designated by regulations. Regs. Section 31.3401(a)(6)-1 provides that wages paid to nonresident aliens for services performed outside the United States are exempt from graduated withholding. The rule does not apply to residents of Puerto Rico.

Thus, assuming that the services performed by the Chinese individual were performed outside the U.S., his salary is not subject to U.S. income tax withholding.Discussion: FICA Withholding
For purposes of imposing FICA withholding on wages from employment, Section 3121(b) provides (in pertinent part) that the term "employment" means any service, of whatever nature, performed (A) by an employee for the person employing him, irrespective of the citizenship or residence of either, (i) within the United States, or (ii) on or in connection with an American vessel or American aircraft under a contract of service which is entered into within the United States or during the performance of which and while the employee is employed on the vessel or aircraft it touches at a port in the United States, if the employee is employed on and in connection with such vessel or aircraft when outside the United States, or (B) outside the United States by a citizen of the United States [a citizen or resident of the United States (effective for remuneration paid after December 31, 1983)] as an employee for an American employer (as defined in subsection (h)), or (C) if it is service, regardless of where or by whom performed, which is designated as employment or recognized as equivalent to employment under an agreement entered into under section 233 of the Social Security Act; [Emphasis supplied.]

In other words, with respect to nonresident aliens, only wages for services performed within the U.S. are subject to FICA withholding requirements.

Discussion: FUTA Withholding

For FUTA purposes, Section 3306(c) contains a provision substantially equivalent to Section 3121(b) set forth above. Accordingly, again the answer is the Taxpayer has no FUTA withholding obligation with respect to a nonresident alien unless the services are performed within the U.S.