What is nra withholding?

This directive establishes the proper methods of withholding tax for payments to foreign nationals or non-resident aliens (NRA), as these payments are subject to withholding tax requirements on their U.S. source income.  All payments made to foreign nationals or NRAs must be approved by Payroll Services, based on the directive Requirements for Payments to Foreign Nationals, Nonresident Aliens (NRAs).

The purpose of this directive is to comply with IRS regulations 1441, 1442, and 1443 that require federal NRA withholding taxes made to foreign persons.

Generally, the NRA withholding requirement is 30% unless the Internal Revenue Code stipulates a reduced rate or exemption based on U.S. tax treaty benefits. In addition, these regulations provide for the following:

The University of Florida extends tax treaty benefits to qualifying foreign nationals using the online Foreign National Information System (FNIS).  The treaty renewal process for the upcoming calendar year is initiated later during the fall semester.  For additional information, please refer to the UF Tax Treaty Renewal Guide.

All departments processing a payment to a foreign national, resident alien or nonresident alien.

Follow all information in the Requirements for Payments to Foreign Nationals, Nonresident Aliens (NRAs) prior to making any payment

Nonresident aliens may not claim “exempt” for the withholding status on IRS Form W-4

03/31/2023: reviewed content

IRS Publication 901, U.S. Tax Treaties

IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities

IRS Publication 519, U.S. Tax Guide for Aliens

U.S. Tax Treaties Website

UF HR Toolkit – Foreign Nationals

Payroll Services: (352) 392-1231

Generally, NRA withholding describes the withholding regime that requires 30% withholding on a payment of U.S. source income and the filing of Form 1042 and related Form 1042-S. Payments to all foreign persons, including nonresident alien individuals, foreign entities and governments, may be subject to NRA withholding.

As an employer in the US, before you begin the process of hiring nonresident alien (NRA) employees, you should know that there are a number or rules which must be followed in order to properly withhold tax from an NRA.

With that in mind, the Sprintax team have put together this guide which discusses some of the key factors that any employer should consider  when hiring nonresident alien employees!

In order for an individual to be deemed a resident alien for tax purposes they need to meet either the Substantial Presence Test or the Green Card Test for the calendar year.

If the nonresident is legally residing permanently in the US, they will be considered a lawful resident of the US. In order to secure this status, the US Citizenship and Immigration Services will need to issue them an alien registration card, Form I-551, also known as the Green Card.

This test identifies whether a foreign worker is a resident or nonresident alien for tax purposes.

If an individual doesn’t not pass this text they will be considered a nonresident for tax purposes.

The IRS defines a ‘withholding agent’ as any individual or organization that pays income to a foreign person which is subject to tax withholding.

This can include any entity such as individuals, corporations, trusts, associations, or anyone who is acting as agents or intermediaries.

Therefore, the majority of organizations in the US who employ nonresidents will be considered withholding agents.

Most nonresident aliens are subject to different tax withholding rules than resident alien employees.

For instance, nonresident aliens are taxed only on their US source income and their exact rate of tax withholding will depend on their personal circumstances.

For example, the nonresident may be entitled to avail of tax treaty benefits which enable them to pay tax at the reduced rate.

What’s more, it’s important to be aware that nonresidents typically do not qualify for the same tax credits that resident aliens do.

While there is no one rule for all nonresidents, as each case can differ, most US-sourced income earned by a nonresident is subject to a tax withholding rate at 30% (called “NRA withholding”).

However, as mentioned above, a reduced rate or even exemption may apply to some nonresident aliens, if an Internal Revenue Code Section provides for a lower rate, or if there is a tax treaty between the nonresident’s home country and the US.

Usually, a graduated rate of tax is already withheld from any payment made to the NRA.

There are three important pillars that can be used in order to properly determine the correct payment and tax withholding requirements of a nonresident worker.

Knowing the answers to these three questions can allow you will be able to properly determine how any individual should be treated from a tax and payroll perspective:

As previously mentioned, as an employer, you are classed as a withholding agent, and therefore should be withholding tax at a rate of up to 30% on the nonresident.

Chapter 3 of the Internal Revenue Code (IRC) pertains to the withholding of income taxes from wages paid to employees by employers.

Under Chapter 3 of the IRC, employers are required to withhold income taxes from their employees’ wages based on the information provided by the employee on Form W-4. What actually determines the amount is based on a variety of factors, such as the employee’s filing status, number of allowances claimed, and other factors that affect their tax liability.

Again, that depends!

In general, nonresident employees are exempt from paying Social Security and Medicare taxes for the first five years of their employment in the US.

However, there can be exceptions to this rule, such as for employees on certain visa categories or if they are residents of certain countries.

The employment that the nonresident alien is performing should be closely connected to the purpose for which the visa was granted.

Once the employee becomes a resident alien by IRS rules, they will need to start paying taxes.

As you are the withholding agent for the nonresident, you must generally request that the payee provide you with their SSN (Social Security Number) or ITIN (individual taxpayer identification number).

A SSN is required when the worker is expected to perform dependent personal services. In this case ITIN is not acceptable.

However, the ITIN is acceptable if the income is passive (dividends, rents, etc) or when the person is paid scholarship or grants.

Nonresidents are liable to play state tax, depending on the state they are living in.

That’s because only 41 of the US states tax workers at a state level, with some minor exceptions to the rule.

Essentially, factors deciding state income tax withholding for nonresidents differ by state, with different rules in each one.

Sprintax Calculus is a NRA tax software that has been specifically designed in order to ensure that organizations and their nonresident alien employees are compliant with IRS rules and laws come tax time.

Our easy-to-use software allows you to manage the tax profiles of your nonresident population easily in one place – in the process making life a lot easier for your payroll office staff.

With Sprintax Calculus, you can also  instantly generate key tax forms such as 1042-S, W-4, W-8BEN and more.

Why not register for a FREE demonstration of our software?

Simply complete the short form here to talk to one of our team members today!

Similarly, Sprintax Returns is the go-to federal tax e-filing and state tax return preparation site for nonresident aliens in the US.

When your nonresident employee sets up a Sprintax Returns account, they will ensure they are fully tax compliant with Internal Revenue Service (IRS) rules.

Better yet – nonresident aliens will receive their maximum legal US tax refund if they are due one.