exempt from withholding | TaxConnections (2024)

Wages paid to U.S. citizens and residents by a U.S. person are generally subject to federal withholding, subject to certain exceptions. Wages paid to non-resident aliens are generally subject to reporting requirements and payments for services performed in the United States are generally subject to withholding, unless an exemption applies — for example, the common tax-treaty exemption forteachers, students, and researchers.

Tax withholding obligations may be impacted bytax residency, as well as incomesourcing rules. And taxpayers seeking to apply a treaty exemption are generally required to file aForm 8233.

Section 3402 Withholding—“Wages” Paid to “Employees”

As a general rule, under the Internal Revenue Code, employers must withhold federal income tax as well as social security tax from the wages they pay toemployees. In addition, employers generally must pay social security and unemployment taxes on behalf of their employees.These taxes are known collectively as ‘employment taxes.

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The first of January 2018 was the effective date of expansion of the Dutch dividend tax withholding regime. It was also the date of duty notification being imposed regarding the application of the taxation exemption in respect of dividends paid out to non-Dutch based recipients. This blog discusses said newly introduced duty of notification by elaborating on the following themes: “Dividend withholding tax specification”, “Dividend withholding tax exemption conditions”, “Abuse of dividend withholding tax exemption” and “Artificial construction in connection with dividend withholding tax”.

The first of January 2018 was the effective date of expansion of the Dutch dividend tax withholding regime. It was also the date of duty notification being imposed regarding the application of the taxation exemption in respect of dividends paid out to non-Dutch based recipients. This blog discusses said newly introduced duty of notification by elaborating on the following themes: “Dividend withholding tax specification”, “Dividend withholding tax exemption conditions”, “Abuse of dividend withholding tax exemption” and “Artificial construction in connection with dividend withholding tax”.

The current DDWT exemption for EU and EEA shareholders has per 1 January 2018 been extended to third countries where the non – resident shareholder is an entity that has an interest of at least 5 percent in the Dutch company or resides (for tax treaty purposes) in a jurisdiction that has concluded a tax treaty, including a dividend article, with the Netherlands. The dividend article does not necessary has to minimize the dividend withholding tax to 0%.The extended DDWT exemption may also apply to distributions to a hybrid entity (an entity which is considered transparent in one country and non-transparent in the other).

Hybrid Entity

There are two possible situations:

A hybrid entity is non – transparent for Dutch tax purposes but is transparent under its local tax legislation;
A hybrid entity is transparent for Dutch tax purposes but is non – transparent under its local tax legislation.
We will discuss the application of the DDWT exemption in both situations below.

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The term “NRA withholding” is not a reference to deductions from a person’s paycheck to support the National Rifle Association. Instead, it is a general term that refers to federal tax withholdings on payments of U.S.-sourced income to foreign persons under Sections 1441 to 1443 of the Internal Revenue Code. Foreign persons should be mindful of their tax filing and payment obligations under this regime.

NRA Withholding, Generally

As a general matter, a foreign person is subject to U.S. federal taxes on its U.S.-sourced income. A foreign person’s U.S. income (with certain exceptions) is subject to a U.S. tax rate of 30 percent.[1] The applicable federal tax is generally withheld (i.e., the NRA withholding) from the total payment submitted to the foreign person. Taxpayers should consider the following relevant areas associated with NRA withholdings:

Who Is Subject to NRA Withholding?

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Most United States tax treaties provide an exemption for certain categories of employees, including teachers, students, and researchers.[1]

Nonresident alienteachers, students, and trainees who are entitled to treaty exemptions from U.S. tax on part or all of their salary for working in the United States are generally required to file Form 8233 in order to claim the exemption.[2]

A teacher or trainee is an individual, other than a student, who is temporarily in the United States under a “J” or “Q” visa and substantially complies with the requirements of that visa. A person is considered to have substantially complied with the visa requirements if they have not engaged in activities that are prohibited by U.S. immigration laws and could result in the loss of their visa status.

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Tax Treaties and Exempt Income

Most United States tax treaties provide an exemption for certain categories of employees, including teachers, students, and researchers.[1]

Nonresident alienteachers, students, and trainees who are entitled to treaty exemptions from U.S. tax on part or all of their salary for working in the United States are generally required to file Form 8233 in order to claim the exemption.[2]

A teacher or trainee is an individual, other than a student, who is temporarily in the United States under a “J” or “Q” visa and substantially complies with the requirements of that visa. A person is considered to have substantially complied with the visa requirements if they have not engaged in activities that are prohibited by U.S. immigration laws and could result in the loss of their visa status.

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The U.S. Department of the Treasury and the Internal Revenue Service issued final regulations updating the federal income tax withholding rules for certain periodic retirement and annuity payments made after Dec. 31, 2020.

Prior to the Tax Cuts and Jobs Act (TCJA), if no withholding certificate was in effect for a taxpayer’s periodic payments, the amount to be withheld from the payments was determined by treating the taxpayer as a married individual claiming three withholding exemptions.

The TCJA amended this rule to provide that the rate of withholding on periodic payments when no withholding certificate is in effect (the default rate of withholding) would instead be determined under rules prescribed by the Secretary of the Treasury.

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Must You Pay Social Security and Medicare Tax?

Nonresident aliens who are F-1, J-1, M-1 or Q-1 visa holders are not subject to social security and Medicare taxes (FICA) on services are performed to carry out the purpose for which they are admitted to the United States [IRC sec. 3121(b)(19)]. This generally includes on-campus work for which authorization is granted on Form I-94, Arrival and Departure Record, or Form I-20, Certificate of Eligibility for Nonimmigrant Student Status.

A nonresident alien admitted to the US as a student is not permitted to work off campus for a wage or to engage in business unless given approval by the U.S. Citizenship and Immigration Services (CIS). This should be noted on the student’s copy of Immigration Form I-20, or Form I-688B, Employment Authorization Document.

Off-campus work due to severe economic necessity or for optional practical training is considered by the IRS to qualify for the exemption. The IRS does not consider other off-campus work performed by a nonresident alien student to be performed to carry out the purpose of a student visa.
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The U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations updating the federal income tax withholding rules to reflect changes made by the Tax Cuts and Jobs Act (TCJA) and other legislation.

In general, the proposed regulations, available now in the Federal Register, are designed to accommodate the redesigned Form W-4, Employee’s Withholding Certificate, to be used starting in 2020, and the related tables and computational procedures in Publication 15-T, Federal Income Tax Withholding Methods. The proposed regulations and related guidance do not require employees to furnish a new Form W-4 solely because of the redesign of the Form W-4.

Employees who have a Form W-4 on file with their employer from years prior to 2020 generally will continue to have their withholding determined based on that form.
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