If you’re an employer and you are considering hiring aliens (or have already done so), there are certain parameters you will need to be in compliance with in regards to the reporting and withholding of federal taxes. The first thing you will need to do is identify all aliens on the company’s payroll (an alien is considered any non-U.S. citizen). You’ll want to divide these employees into Resident Aliens and Nonresident Aliens, which is determined by Internal Revenue Code Section 7701(b) or by a tax treaty.
For resident aliens, withhold tax the same as you would for U.S. citizens. For nonresident aliens, withholding tax requires a few more steps. The withholding rules are described in IRS Publication 15 (Circular E) and Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. You can find the specifics here, but I will do my best to simplify and summarize below:
Form W-4 for Nonresident Aliens
When filling out Form W-4, nonresident aliens cannot write “exempt” on line 7, nor can they claim only “single” filing status on line 3, regardless of whether or not he or she is married. But for a few exceptions, a nonresident alien cannot claim more than one personal exemption on Form W-4. (Details on how many exemptions can be claimed can be found here.) If a nonresident alien refuses to file a proper Form W-4, IRS regulations state that they will have federal income taxes withheld at the rates pertaining to single status, zero exemptions. (Details here.)
Additional Withholding Details
Any wages paid on or after January 1, 2016, require you to apply a special procedure in calculating the amount of federal income tax withholding on the wages of nonresident alien employees. See Chapter 9 of IRS Publication 15 Circular E here. Occasionally, nonresident aliens are eligible for exemptions from federal income tax withholding on wages because of tax treaties. In this case, have these individuals file Form 8233 with your payroll office to claim such exemptions.
Income Tax Reporting
Your payroll office is responsible for reporting wages paid to any nonresident aliens who are exempt under a tax treaty on Form 1042 and Form 1042-S. Additional wages paid to a nonresident alien over and above the exempt amount will then be reported on Form W-2 per usual. In certain situations when all of a nonresident alien’s wages are exempt from federal income tax, your payroll office will still be required to file a Form W-2 in order to report state and local wage amounts and income taxes withheld on said alien’s wages.