||2008 Tax Year
Paying Tax Through Withholding or Estimated Tax
This chapter discusses how to pay your U.S. income tax as you earn or receive income during the year. In general, the federal
income tax is a pay
as you go tax. There are two ways to pay as you go.
Withholding. If you are an employee, your employer probably withholds income tax from your pay. Tax may also be withheld from
certain other income—including pensions, bonuses, commissions, and gambling winnings. In each case, the amount withheld is
paid to the U.S.
Treasury in your name.
Estimated tax. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated
tax. People who are in business for themselves generally will have to pay their tax this way. You may have to pay estimated
tax if you receive income
such as dividends, interest, rent, and royalties. Estimated tax is used to pay not only income tax, but self-employment tax
and alternative minimum
tax as well.
Topics - This chapter discusses:
How to notify your employer of your alien status,
Income subject to withholding of income tax,
Exemptions from withholding,
Social security and Medicare taxes, and
Estimated tax rules.
Useful Items - You may want to see:
Form (and Instructions)
Employee's Withholding Allowance Certificate
Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding
Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the
Request for Taxpayer Identification Number and Certification
U.S. Estimated Tax for Nonresident Alien Individuals
Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien
Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests
See chapter 12 for information about getting these publications and forms.
Notification of Alien Status
You must let your employer know whether you are a resident or a nonresident alien so your employer can withhold the correct
amount of tax from your
If you are a resident alien under the rules discussed in chapter 1, you must file Form W-9 or a similar statement with your
employer. If you are a
nonresident alien under those rules, you must furnish to your employer Form 8233 or Form W-8BEN, establishing that you are
a foreign person, or Form
W-4, establishing that your compensation is subject to graduated withholding at the same rates as resident aliens or U.S.
If you are a resident alien and you receive income other than wages (such as dividends and royalties) from sources within
the United States, file
Form W-9 or similar statement with the withholding agent (generally, the payer of the income) so the agent will not withhold
tax on the income at the
30% (or lower treaty) rate. If you receive this type of income as a nonresident alien, file Form W-8BEN with the withholding
agent so that the agent
will withhold tax at the 30% (or lower treaty) rate. However, if the income is effectively connected with a U.S. trade or
business, file Form W-8ECI
Withholding From Compensation
The following discussion generally applies only to nonresident aliens. Tax is withheld from resident aliens in the same manner
as U.S. citizens.
Wages and other compensation paid to a nonresident alien for services performed as an employee are usually subject to graduated
withholding at the
same rates as resident aliens and U.S. citizens. Therefore, your compensation, unless it is specifically excluded from the
term “wages” by law,
or is exempt from tax by treaty, is subject to graduated withholding.
If you are an employee and you receive wages subject to graduated withholding, you will be required to fill out a Form W-4.
Also fill out Form W-4
for a scholarship or fellowship grant to the extent it represents payment for past, present, or future services and for which
you are not claiming a
tax treaty withholding exemption on Form 8233 (discussed later under Income Entitled to Tax Treaty Benefits). These are services you are
required to perform as an employee and as a condition of receiving the scholarship or fellowship (or tuition reduction).
Nonresident aliens should fill out Form W-4 using the following instructions instead of the instructions on the Form W-4.
This is because of the
restrictions on a nonresident alien's filing status, the limited number of personal exemptions a nonresident alien is allowed,
and because a
nonresident alien cannot claim the standard deduction.
Check only “Single” marital status on line 3 (regardless of your actual marital status).
Claim only one allowance on line 5, unless you are a resident of Canada, Mexico, or the Republic of Korea (South Korea), or
Write “Nonresident Alien” or “NRA” on the dotted line on line 6. You can request additional withholding on line 6 at your
Do not claim “Exempt” withholding status on line 7.
A U.S. national
is an individual who, although not a U.S. citizen, owes his or her allegiance to the United States.
U.S. nationals include American Samoans, and Northern Mariana Islanders who chose to become U.S. nationals instead of U.S.
See 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 that is not a payment for services.
Students and business apprentices from India.
If you are eligible for the benefits of Article 21(2) of the United States-India Income Tax Treaty, you may claim
an additional withholding
allowance for the standard deduction. You can claim an additional withholding allowance for your spouse only if your spouse
will have no gross income
for 2008 and cannot be claimed as a dependent on another U.S. taxpayer's 2008 return. You may also claim an additional withholding
allowance for each
of your dependents not admitted to the United States on “F-2,
” or “M-2
” visas if they meet the same rules that apply to U.S.
If you work as a household employee, your employer does not have to withhold income tax. However, you may agree to
voluntary income tax withholding
by filing a Form W-4 with your employer. The agreement goes into effect when your employer accepts the agreement by beginning
the withholding. You or
your employer may end the agreement by letting the other know in writing.
Wages Exempt From Withholding
Wages that are exempt from U.S. income tax under an income tax treaty are generally exempt from withholding. For information
on how to claim this
exemption from withholding, see Income Entitled to Tax Treaty Benefits, later.
Wages paid to aliens who are residents of Canada, Mexico, Puerto Rico, or the U.S. Virgin Islands may be exempt from withholding.
paragraphs explain these exemptions.
Residents of Canada or Mexico engaged in transportation-related employment.
Certain residents of Canada or Mexico who enter or leave the United States at frequent intervals are not subject to
withholding on their wages.
These persons either:
Perform duties in transportation service between the United States and Canada or Mexico, or
Perform duties connected to the construction, maintenance, or operation of a waterway, viaduct, dam, or bridge crossed by,
or crossing, the
boundary between the United States and Canada or the boundary between the United States and Mexico.
This employment is subject to withholding of social security and Medicare taxes unless the services are performed for a railroad.
To qualify for the exemption from withholding during a tax year, a Canadian or Mexican resident must give the employer
a statement in duplicate
with name, address, and identification number, certifying that the resident:
Is not a U.S. citizen or resident,
Is a resident of Canada or Mexico, whichever applies, and
Expects to perform duties previously described during the tax year in question.
The statement can be in any form, but it must be dated and signed by the employee and must include a written declaration
that it is made under the
penalties of perjury.
Residents of Puerto Rico.
If you are a nonresident alien employee who is a resident of Puerto Rico, wages for services performed in Puerto Rico
are generally not subject to
withholding unless you are an employee of the United States or any of its agencies in Puerto Rico.
Residents of the U.S. Virgin Islands.
Nonresident aliens who are bona fide residents of the U.S Virgin Islands are not subject to withholding of U.S. tax
on income earned while
temporarily employed in the United States. This is because those persons pay their income tax to the U.S. Virgin Islands.
To avoid having tax withheld
on income earned in the United States, bona fide residents of the U.S. Virgin Islands should write a letter, in duplicate,
to their employers, stating
that they are bona fide residents of the U.S. Virgin Islands and expect to pay tax on all income to the U.S. Virgin Islands.
If you receive a pension as a result of personal services performed in the United States, the pension income is subject to
the 30% (or lower
treaty) rate of withholding. You may, however, have tax withheld at graduated rates on the portion of the pension that arises
from the performance of
services in the United States after December 31, 1986. You must fill out Form W-8BEN and give it to the withholding agent
or payer before the income
is paid or credited to you.
Withholding on Tip Income
Tips you receive during the year for services performed in the United States are subject to U.S. income tax. Include them
in taxable income. In
addition, tips received while working for one employer, amounting to $20 or more in a month, are subject to graduated withholding.
If there is no employee-employer relationship between you and the person for whom you perform services, your compensation
is subject to the 30% (or
lower treaty) rate of withholding. However, if you are engaged in a trade or business in the United States during the tax
year, your compensation for
personal services as an independent contractor (independent personal services) may be entirely or partly exempt from withholding
if you reach an
agreement with the Internal Revenue Service on the amount of withholding required. An agreement that you reach with the IRS
regarding withholding from
your compensation for independent personal services is effective for payments covered by the agreement after it is agreed
to by all parties. You must
agree to timely file an income tax return for the current tax year.
Central withholding agreements.
If you are a nonresident alien entertainer or athlete performing or participating in athletic events in the United
States, you may be able to enter
into a withholding agreement with the IRS for reduced withholding provided certain requirements are met. Under no circumstances
will such a
withholding agreement reduce taxes withheld to less than the anticipated amount of income tax liability.
Nonresident alien entertainers or athletes requesting a central withholding agreement must submit the following information.
A list of the names and addresses of the nonresident aliens to be covered by the agreement.
Copies of all contracts that the aliens or their agents and representatives have entered into regarding the time period and
events to be covered by the agreement including, but not limited to, contracts with:
Employers, agents, and promoters,
Persons providing lodging, transportation, and advertising, and
Accompanying personnel, such as band members or trainers.
An itinerary of dates and locations of all events or performances scheduled during the period to be covered by the agreement.
A proposed budget containing itemized estimates of all gross income and expenses for the period covered by the agreement,
documents to support these estimates.
The name, address, and telephone number of the person the IRS should contact if additional information or documentation is
The name, address, and employer identification number of the agent or agents who will be the central withholding agents for
the aliens and
who will enter into a contract with the IRS. A central withholding agent ordinarily receives contract payments, keeps books
of account for the aliens
covered by the agreement, and pays expenses (including tax liabilities) for the aliens during the period covered by the agreement.
When the IRS approves the estimated budget and the designated central withholding agents, the Associate Chief Counsel
(International) will prepare
a withholding agreement. The agreement must be signed by each withholding agent, each nonresident alien covered by the agreement,
and the Commissioner
of the Internal Revenue Service or his delegate.
Generally, each withholding agent must agree to withhold income tax from payments made to the nonresident alien, to
pay over the withheld tax to
the U.S. Treasury on the dates and in the amounts specified in the agreement, and to have the IRS apply the payments of withheld
tax to the
withholding agent's Form 1042 account. Each withholding agent will be required to file Form 1042 and Form 1042-S for each
tax year in which income is
paid to a nonresident alien covered by the withholding agreement. The IRS will credit the withheld tax payments, posted to
the withholding agent's
Form 1042 account, in accordance with the Form 1042-S. Each nonresident alien covered by the withholding agreement must agree
to file Form 1040NR or,
if he or she qualifies, Form 1040NR-EZ.
A request for a central withholding agreement should be sent to the following address at least 90 days before the agreement
is to take effect.
Central Withholding Agreement Program
Internal Revenue Service
SE:S:C:CP:IIC MS 0175
1220 SW 3rd Ave.
Portland, OR 97204
Final payment exemption.
Your final payment of compensation during the tax year for independent personal services may be entirely or partly
exempt from withholding. This
exemption is available only once during your tax year and applies to a maximum of $5,000 of compensation. To obtain this exemption,
you or your agent
must give the following statements and information to the Commissioner or his delegate.
A statement by each withholding agent from whom you have received gross income effectively connected with a trade or business
in the United
States during the tax year, showing the amount of income paid and the tax withheld. Each statement must be signed by the withholding
verified by a declaration that it is made under penalties of perjury.
A statement by the withholding agent from whom you expect to receive the final payment of compensation, showing the amount
of the payment
and the amount of tax that would be withheld if a final payment exemption were not granted. This statement must also be signed
by the withholding
agent and verified by a declaration that it is made under penalties of perjury.
A statement by you that you do not intend to receive any other income effectively connected with a trade or business in the
during the current tax year.
The amount of tax that has been withheld or paid under any other provision of the Internal Revenue Code or regulations for
effectively connected with your trade or business in the United States during the current tax year.
The amount of your outstanding tax liabilities, if any, including interest and penalties, from the current tax year or prior
Any provision of an income tax treaty under which a partial or complete exemption from withholding may be claimed, the country
residence, and a statement of sufficient facts to justify an exemption under the treaty.
A statement signed by you, and verified by a declaration that it is made under penalties of perjury, that all the information
given is true
and that to your knowledge no relevant information has been omitted.
If satisfied with the information, the IRS will determine the amount of your tentative income tax for the tax year
on gross income effectively
connected with your trade or business in the United States. Ordinary and necessary business expenses can be taken into account
if proven to the
satisfaction of the Commissioner or his delegate.
The Commissioner or his delegate will send you a letter, directed to the withholding agent, showing the amount of
the final payment of compensation
that is exempt from withholding and the amount that can be paid to you because of the exemption. You must give two copies
of the letter to the
withholding agent and must also attach a copy of the letter to your income tax return for the tax year for which the exemption
Allowance for Personal Exemption
Withholding on payments for independent personal services is generally based on the amount of your compensation payment minus
the value of one
exemption ($3,500 for 2008).
To determine the income for independent personal services performed in the United States to which the 30% (or lower treaty)
rate will apply, you
are allowed one personal exemption if you are not a U.S. national and are not a resident of Canada, Mexico, or the Republic
of Korea (South Korea).
For purposes of 30% withholding, the exemption is prorated at $9.56 a day in 2008 for the period that labor or personal services
are performed in the
United States. To claim an exemption from withholding on the personal exemption amount, fill out the applicable parts of Form
8233 and give it to the
Eric Schmidt, who is a resident of Germany, worked under a contract with a U.S. firm (not as an employee) in the United States
for 100 days during
2008 before returning to his country. He earned $6,000 for the services performed (not considered wages) in the United States.
Eric is married and has
three dependent children. His wife is not employed and has no income subject to U.S. tax. The amount of the personal exemption
to be allowed against
the income for his personal services performed within the United States in 2008 is $956 (100 days × $9.56), and withholding
at 30% is applied
against the balance. Thus, $1,513.20 in tax is withheld from Eric's earnings (30% of $5,044 ($6,000 - $956)).
U.S. nationals or residents of Canada, Mexico, or the Republic of Korea (South Korea).
If you are a nonresident alien who is a resident of Canada, Mexico, or the Republic of Korea (South Korea), or who
is a national of the United
States, you are subject to the same 30% withholding on your compensation for independent personal services performed in the
United States. However, if
you are a U.S. national or a resident of Canada or Mexico, you are allowed the same personal exemptions as U.S. citizens.
For the 30% (or lower treaty
rate) withholding, you can take $9.56 per day for each allowable exemption in 2008. If you are a resident of the Republic
of Korea (South Korea), you
are allowed personal exemptions for yourself and for your spouse and children who live with you in the United States at any
time during the tax year.
However, the additional exemptions for your spouse and children must be further prorated as explained in chapter 5 under Exemptions.
Students and business apprentices from India.
If you are eligible for the benefits of Article 21(2) of the United States-India Income Tax Treaty, you are allowed
an exemption for your spouse
only if your spouse will have no gross income for 2008 and cannot be claimed as a dependent on another U.S. taxpayer's 2008
return. You are also
allowed an exemption for each dependent not admitted to the United States on “F-2,
” or “M-2
” visas if they meet the same rules
that apply to U.S. citizens. For the 30% (or lower treaty rate) withholding on compensation for independent personal services
performed in the United
States, you are allowed $9.56 per day for each allowable exemption in 2008.
Withholding From Other Income
Other income subject to 30% withholding generally includes fixed or determinable income such as interest (other than portfolio
dividends, pensions and annuities, and gains from certain sales and exchanges, discussed in chapter 4. It also includes 85%
of social security
benefits paid to nonresident aliens.
Refund of taxes withheld in error on social security benefits paid to resident aliens.
Social security benefits paid to a lawful permanent resident (green card holder) are not subject to 30% withholding.
For U.S. income tax purposes,
green card holders continue to be resident aliens until their lawful permanent resident status under immigration laws is either
taken away or is
administratively or judicially determined to have been abandoned. See Green Card Test
in chapter 1. If you are a green card holder and tax
was withheld in error on your social security benefits because you have a foreign address, the withholding tax is refundable
by the Social Security
Administration (SSA) or the IRS. SSA will refund taxes erroneously withheld if the refund can be processed during the same
calendar year in which the
tax was withheld. If SSA cannot refund the taxes withheld, you must file a Form 1040 or 1040A with the Department of the Treasury,
Service Center, Austin, TX 73301 to determine if you are entitled to a refund. You must also attach the following to your
Form 1040 or 1040A.
A copy of Form SSA-1042S, Social Security Benefit Statement.
A copy of the “green card.”
A signed declaration that includes the following statements: The SSA should not have withheld income tax from my social security
because I am a U.S. lawful permanent resident and my green card has been neither revoked nor administratively or judicially
determined to have been
abandoned. I am filing a U.S. income tax return for the tax year as a resident alien reporting all of my worldwide income.
I have not claimed benefits
for the tax year under an income tax treaty as the resident of a country other than the United States.
Other income not subject to withholding of 30% (or lower treaty) rate.
The following income is not subject to withholding at the 30% (or lower treaty) rate if you file Form W-8ECI with
the payer of the income.
Income (other than compensation) that is effectively connected with your U.S. trade or business.
Income from real property that you choose to treat as effectively connected with a U.S. trade or business. See Income From Real
Property in chapter 4 for details about this choice.
Special rules for withholding on partnership income, scholarships, and fellowships are explained next.
Tax Withheld on Partnership Income
If you are a foreign partner in a U.S. or foreign partnership, the partnership will withhold tax on your share of effectively
income from the partnership. The partnership will give you a statement on Form 8805, Foreign Partner's Information Statement
of Section 1446
Withholding Tax, showing the tax withheld. A partnership that is publicly traded will withhold tax on your actual distributions
connected income. In this case the partnership will give you a statement on Form 1042-S, Foreign Person's U.S. Source Income
Subject to Withholding.
The withholding rate on your share of effectively connected income is generally the highest rate of tax that applies to you
(35% for 2008). However,
the partnership may withhold at the highest rate that applies to a particular type of income allocable to you if you gave
the partnership the
appropriate documentation (generally, Form W-8BEN). Long-term capital gain is an example of a particular type of income to
which a highest tax rate
applies. Claim the tax withheld as a credit on your 2008 Form 1040NR.
Withholding on Scholarships and Fellowship Grants
There is no withholding on a qualified scholarship received by a candidate for a degree. See chapter 3.
If you are a nonresident alien student or grantee with an “F,” “J,” “M,” or “Q” visa and you receive a U.S. source grant or
scholarship that is not fully exempt, the withholding agent (usually the payer of the scholarship) withholds tax at 14% (or
lower treaty rate) of the
taxable part of the grant or scholarship that is not a payment for services. However, if you are not a candidate for a degree
and the grant does not
meet certain requirements, tax will be withheld at the 30% (or lower treaty) rate.
Any part of a scholarship or fellowship grant that is a payment for services is subject to graduated withholding as discussed
Withholding on Wages.
Alternate Withholding Procedure
Your withholding agent may choose to use an alternate procedure by asking you to fill out Form W-4 and the Personal Allowances
to Form W-4). Use the following instructions instead of the Form W-4 instructions to complete the worksheet.
Enter the total of the following amounts on line A.
Include the prorated part of your allowable personal exemption. Figure the amount by multiplying the number of days
you expect to be in the United
States in 2008 by the daily exemption amount ($9.56).
Include expenses that will be deductible on your return. These include away-from-home expenses (meals, lodging, and
transportation), certain state
and local income taxes, charitable contributions, and casualty losses, discussed earlier under Itemized Deductions
in chapter 5. They also
include business expenses, moving expenses, and the IRA deduction discussed under Deductions
in chapter 5.
Nontaxable grant or scholarship.
Include the part of your grant or scholarship that is not taxable under U.S. law or under a tax treaty.
Enter -0- unless the following paragraph applies to you.
If you are a student who qualifies under Article 21(2) of the United States-India Income Tax Treaty, and you are not
claiming deductions for
away-from-home expenses or other itemized deductions (discussed earlier), enter the standard deduction on line B. The standard
deduction amount for
2008 is $5,450.
Lines C and D.
Enter -0- on both lines unless the following paragraphs apply to you.
If you are a resident of Canada, Mexico, the Republic of Korea (South Korea), or a U.S. national, an additional daily
exemption amount may be
allowed for your spouse and each of your dependents.
If you are a resident of India who is eligible for the benefits of Article 21(2) of the United States-India Income
Tax Treaty, you can claim an
additional daily exemption amount for your spouse only if your spouse will have no gross income for 2008 and cannot be claimed
as a dependent on
another U.S. taxpayer's 2008 return. You can also claim an additional amount for each of your dependents not admitted to the
United States on
” or “M-2
” visas if they meet the same rules that apply to U.S. citizens.
Enter any additional amount for your spouse on line C. Enter any additional amount for your dependents on line D.
Lines E, F, and G.
No entries should be made on lines E, F, and G.
Add the amounts on lines A through D and enter the total on line H.
Complete lines 1 through 4 of Form W-4. Sign and date the form and give it with the Personal Allowances Worksheet
to your withholding agent.
If you file a Form W-4 to reduce or eliminate the withholding on your scholarship or grant, you must file an annual
U.S. income tax return to be
allowed the exemptions and deductions you claimed on that form. If you are in the United States during more than one tax year,
you must attach a
statement to your yearly Form W-4 indicating that you have filed a U.S. income tax return for the previous year. If you have
not been in the United
States long enough to be required to file a return, you must attach a statement to your Form W-4 saying you will file a U.S.
income tax return when
After the withholding agent has accepted your Form W-4, tax will be withheld on your scholarship or grant at the graduated
rates that apply to
wages. The gross amount of the income is reduced by the amount on line H of the worksheet and the withholding tax is figured
on the remainder.
You will receive a Form 1042-S from the withholding agent (usually the payer of your grant) showing the gross amount of your
taxable scholarship or
fellowship grant less the withholding allowance amount, the tax rate, and the amount of tax withheld. Use this form to prepare
your annual U.S. income
Income Entitled to Tax Treaty Benefits
If a tax treaty between the United States and your country provides an exemption from, or a reduced rate of, tax for certain
items of income, you
should notify the payor of the income (the withholding agent) of your foreign status to claim a tax treaty withholding exemption.
Generally, you do
this by filing either Form W-8BEN or Form 8233 with the withholding agent.
File Form W-8BEN for income that is not personal services income. File Form 8233 for personal services income as discussed
Employees and independent contractors.
If you perform personal services as an employee or as an independent contractor and you can claim an exemption from
withholding on that personal
service income because of a tax treaty, give Form 8233 to each withholding agent from whom amounts will be received.
Even if you submit Form 8233, the withholding agent may have to withhold tax from your income. This is because the
factors on which the treaty
exemption is based may not be determinable until after the close of the tax year. In this case, you must file Form 1040NR
(or Form 1040NR-EZ if you
qualify) to recover any overwithheld tax and to provide the IRS with proof that you are entitled to the treaty exemption.
Students, teachers, and researchers.
Students, teachers, and researchers must attach the appropriate statement shown in Appendix A
(for students) or Appendix B
(for teachers and researchers) at the end of this publication to the Form 8233 and give it to the withholding agent. For treaties
not listed in
the appendices, attach a statement in a format similar to those for other treaties.
If you received a scholarship or fellowship and personal services income from the same withholding agent, use Form
8233 to claim an exemption from
withholding based on a tax treaty for both types of income.
Special events and promotions.
Withholding at the full 30% rate is required for payments made to a nonresident alien or foreign corporation for gate
receipts (or television or
other receipts) from rock music festivals, boxing promotions, and other entertainment or sporting events, unless the withholding
agent has been
specifically advised otherwise by letter from the IRS. This is true even if the income may be exempt from taxation by provisions
of a tax treaty. One
reason for this is that the partial or complete exemption is usually based on factors that cannot be determined until after
the close of the tax year.
The required letter should be requested from the:
Central Withholding Agreement Program
Internal Revenue Service
SE:S:C:CP:IIC MS 0175
1220 SW 3rd Ave.
Portland, OR 97204
Entertainers and athletes can also apply for reduced withholding on the basis of their net income after expenses.
See Central withholding
under Withholding From Compensation,
You will be required to pay U.S. tax, at the time of your departure from the United States, on any income for which you incorrectly
treaty exemption. For more details on treaty provisions that apply to compensation, see Publication 901.
Tax Withheld on Real Property Sales
If you are a nonresident alien and you dispose of a U.S. real property interest, the transferee (buyer) of the property generally
must withhold a
tax equal to 10% of the amount realized on the disposition.
A distribution by a qualified investment entity to a nonresident alien shareholder that is treated as gain from the sale or
exchange of a U.S. real
property interest by the shareholder is subject to withholding at 35%. Withholding is also required on certain distributions
and other transactions by
domestic or foreign corporations, partnerships, trusts, and estates. These rules are covered in Publication 515.
For information on the tax treatment of dispositions of U.S. real property interests, see Real Property Gain or Loss in chapter 4.
If you are a partner in a domestic partnership, and the partnership disposes of a U.S. real property interest at a
gain, the partnership will withhold tax on the amount of gain allocable to its foreign partners. Your share of the income
and tax withheld will be
reported to you on Form 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax, or Form 1042-S, Foreign
Person's U.S. Source
Income Subject to Withholding (in the case of a publicly traded partnership).
Withholding is not required in the following situations.
The property is acquired by the buyer for use as a residence and the amount realized (sales price) is not more than $300,000.
The property disposed of is an interest in a U.S. corporation if any class of stock of the corporation is regularly traded
on an established
The property disposed of is an interest in a U.S. corporation that is not regularly traded on an established market and you
give the buyer a copy of a statement issued by the corporation certifying that the interest is not a U.S. real property interest.
You (the seller) give the buyer a certification stating, under penalties of perjury, that you are not a foreign person, and
name, U.S. taxpayer identification number, and home address.
The buyer receives a withholding certificate from the Internal Revenue Service.
You give the buyer written notice that you are not required to recognize any gain or loss on the transfer because of a nonrecognition
provision in the Internal Revenue Code or a provision in a U.S. tax treaty. The buyer must file a copy of the notice with
the Ogden Service Center,
P.O. Box 409101, Ogden, UT 84409. You must verify the notice as true and sign it under penalties of perjury. The notice must
contain the following
A statement that the notice is a notice of nonrecognition under regulation section 1.1445-2(d)(2).
Your name, taxpayer identification number, and home address.
A statement that you are not required to recognize any gain or loss on the transfer.
A brief description of the transfer.
A brief summary of the law and facts supporting your claim that recognition of gain or loss is not required.
You may not give the buyer a written notice for any of the following transfers: the sale of your main home on which you exclude
gain, a like-kind
exchange that does not qualify for nonrecognition treatment in its entirety, or a deferred like-kind exchange that has not
been completed at the time
the buyer must file Form 8288. Instead, a withholding certificate (described next) must be obtained.
The amount you realize on the transfer of a U.S. real property interest is zero.
The property is acquired by the United States, a U.S. state or possession, a political subdivision, or the District of Columbia.
A distribution from a domestically controlled qualified investment entity that is treated as a distribution of a U.S. real
only because an interest in the entity was disposed of in an applicable wash sale transaction. See Wash sale under Real Property Gain
or Loss in chapter 4.
The certifications in (3) and (4) must be disregarded by the buyer if the buyer has actual knowledge, or receives notice from
a seller's or buyer's
agent, that they are false.
The tax required to be withheld on a disposition can be reduced or eliminated under a withholding certificate issued
by the IRS. Either you or the
buyer can request a withholding certificate.
A withholding certificate can be issued due to any of the following.
The IRS determines that reduced withholding is appropriate because either:
The amount required to be withheld would be more than your maximum tax liability, or
Withholding of the reduced amount would not jeopardize collection of the tax.
All of your realized gain is exempt from U.S. tax.
You or the buyer enter into an agreement for the payment of tax providing security for the tax liability.
Get Publication 515 and Form 8288-B for information on procedures to request a withholding certificate.
Credit for tax withheld.
The buyer must report and pay over the withheld tax within 20 days after the transfer using Form 8288, U.S. Withholding
Tax Return for Dispositions
by Foreign Persons of U.S. Real Property Interests. This form is filed with the IRS with copies A and B of Form 8288-A, Statement
of Withholding on
Dispositions by Foreign Persons of U.S. Real Property Interests. Copy B of this statement will be stamped received by the
IRS and returned to you (the
seller) if the statement is complete and includes your taxpayer identification number (TIN). You must file Copy B with your
tax return to take credit
for the tax withheld.
A stamped copy of Form 8288-A will not be provided to you if your TIN is not included on that form. In this case,
to get credit for the tax
withheld, you must attach to your U.S. income tax return substantial evidence of withholding (for example, closing documents)
and a statement that
contains all of the following information.
Your name and TIN.
The buyer's name, address, and TIN.
A description and location of the property.
The date of the transfer.
The amount realized on the transfer.
The amount of tax withheld.
Social Security and Medicare Taxes
If you work as an employee in the United States, you must pay social security and Medicare taxes in most cases. Your payments
of these taxes
contribute to your coverage under the U.S. social security system. Social security coverage provides retirement benefits,
survivors and disability
benefits, and medical insurance (Medicare) benefits to individuals who meet certain eligibility requirements.
In most cases, the first $97,500 of taxable wages received in 2007 for services performed in the United States is subject
to social security tax.
All taxable wages are subject to Medicare tax. Your employer deducts these taxes from each wage payment. Your employer must
deduct these taxes even if
you do not expect to qualify for social security or Medicare benefits. You can claim a credit for excess social security tax
on your income tax return
if you have more than one employer and the amount deducted from your combined wages for 2007 is more than $6,045. Use the
appropriate worksheet in
chapter 3 of Publication 505, Tax Withholding and Estimated Tax, to figure your credit.
If any one employer deducted more than $6,045, you cannot claim a credit for that amount. Ask your employer to refund the
In general, U.S. social security and Medicare taxes apply to payments of wages for services performed as an employee in the
regardless of the citizenship or residence of either the employee or the employer. In limited situations, these taxes apply
to wages for services
performed outside the United States. Your employer should be able to tell you if social security and Medicare taxes apply
to your wages. You cannot
make voluntary payments if no taxes are due.
Students and Exchange Visitors
Generally, services performed by you as a nonresident alien temporarily in the United States as a nonimmigrant under subparagraph
(F), (J), (M), or
(Q) of section 101(a)(15) of the Immigration and Nationality Act are not covered under the social security program if the
services are performed to
carry out the purpose for which you were admitted to the United States. This means that there will be no withholding of social
security or Medicare
taxes from the pay you receive for these services. These types of services are very limited, and generally include only on-campus
training, and economic hardship employment.
Social security and Medicare taxes will be withheld from your pay for these services if you are considered a resident alien
as discussed in chapter
1, even though your nonimmigrant classification (“F,” “J,” “M,” or “Q”) remains the same.
Services performed by a spouse or minor child of nonimmigrant aliens with the classification of “F-2,” “J-2,” “M-2,” and “Q-3”
are covered under social security.
Nonresident Alien Students
If you are a nonresident alien temporarily admitted to the United States as a student, you generally are not permitted to
work for a wage or salary
or to engage in business while you are in the United States. In some cases, a student admitted to the United States in “F-1,” “M-1,” or
“J-1” status is granted permission to work. Social security and Medicare taxes are not withheld from pay for the work unless the
considered a resident alien.
Any student who is enrolled and regularly attending classes at a school may be exempt from social security and Medicare taxes
on pay for services
performed for that school.
The U.S. Citizenship and Immigration Services (USCIS) permits on-campus work for students in “F-1” status if it does not displace a U.S.
resident. On-campus work means work performed on the school's premises. On-campus work includes work performed at an off-campus
location that is
educationally affiliated with the school. On-campus work under the terms of a scholarship, fellowship, or assistantship is
considered part of the
academic program of a student taking a full course of study and is permitted by the USCIS. Social security and Medicare taxes
are not withheld from
pay for this work unless the student is considered a resident alien.
Students in “F-1” status may be permitted to participate in a curricular practical training program that is an integral part of an established
curriculum. Curricular practical training includes work/study programs, internships, and cooperative education programs. In
this case, the educational
institution endorses the Form I-20. Social security and Medicare taxes are not withheld from pay for this work unless the
student is considered a
Employment due to severe economic necessity and for optional practical training is sometimes permitted for students in “F-1” status. Students
granted permission to work due to severe economic necessity or for optional practical training will be issued Form I-688B
or Form I-766 by the USCIS.
Social security and Medicare taxes are not withheld from pay for this work unless the student is considered a resident alien.
Students in “M-1” status who have completed a course of study can accept employment for practical training for up to 6 months and must have
Form I-688B or Form I-766 issued by the USCIS. Social security and Medicare taxes are not withheld from “M-1” students' pay for these services
unless the student is considered a resident alien.
In all other cases, any services performed by a nonresident alien student are not considered as performed to carry out the
purpose for which the
student was admitted to the United States. Social security and Medicare taxes will be withheld from pay for the services unless
the pay is exempt
under the Internal Revenue Code.
Nonresident aliens are temporarily admitted to the United States as nonimmigrant exchange visitors under section 101(a)(15)(J)
of the Immigration
and Nationality Act through the sponsorship of approved organizations and institutions that are responsible for establishing
a program for the
exchange visitor and for any later modification of that program. Generally, an exchange visitor who has the permission of
the sponsor can work for the
same reasons as the students discussed above. In these cases, permission is granted by a letter from the exchange visitor's
sponsor or by endorsement
from the program sponsor on Form DS-2019, Certificate of Eligibility.
Social security and Medicare taxes are not withheld on pay for services of an exchange visitor who has been given permission
to work and who
possesses or obtains a letter of authorization from the sponsor unless the exchange visitor is considered a resident alien.
In all other cases, services performed by an exchange visitor are not considered as performed to carry out the purpose for
which the visitor was
admitted to the United States. Social security and Medicare taxes are withheld from pay for the services unless the pay is
exempt under the Internal
If you are a “J-1” visa holder, your spouse or child may be permitted to work in the United States with the prior approval of the USCIS and
issuance of Form I-688B or Form I-766.
Nonresident aliens temporarily admitted to the United States as participants in international cultural exchange programs under
101(a)(15)(Q) of the Immigration and Nationality Act may be exempt from social security and Medicare taxes.
“Q-1,” “Q-2,” and “Q-3” visa holders are aliens whose employment or training affords
the opportunity for culture-sharing with the American public. They are allowed to work in the United States for a specific
employer in an approved
cultural exchange program. The employer must be the petitioner through whom the alien obtained the “Q” visa. Social security and Medicare taxes
are not withheld from pay for this work unless the alien is considered a resident alien. Aliens with “Q” visas are not permitted to engage in
employment outside the exchange program activities.
Refund of Taxes Withheld in Error
If social security or Medicare taxes were withheld in error from pay that is not subject to these taxes, contact the employer
who withheld the
taxes for a refund. If you are unable to get a full refund of the amount from your employer, file a claim for refund with
the Internal Revenue Service
on Form 843, Claim for Refund and Request for Abatement. Attach the following items to Form 843.
A copy of your Form W-2 to prove the amount of social security and Medicare taxes withheld.
A copy of your visa.
Form I-94 (or other documentation showing your dates of arrival or departure).
If you have an F-1 visa, Form I-20.
If you have a J-1 visa, Form DS-2019.
If you are engaged in optional practical training, Form I-766 or Form I-688B.
A statement from your employer indicating the amount of the reimbursement your employer provided and the amount of the credit
or refund your
employer claimed or you authorized your employer to claim. If you cannot obtain this statement from your employer, you must
provide this information
on your own statement and explain why you are not attaching a statement from your employer or on Form 8316 claiming your employer
will not issue the
If you were exempt from social security and Medicare tax for only part of the year, pay statements showing the tax paid during
you were exempt.
File Form 843 (with attachments) with the Department of the Treasury, Internal Revenue Service Center, Philadelphia, PA 19255.
Self-employment tax is the social security and Medicare taxes for individuals who are self-employed. Nonresident aliens are
not subject to
self-employment tax. Residents of the U.S. Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands,
or American Samoa are
considered U.S. residents for this purpose and are subject to the self-employment tax.
Resident aliens must pay self-employment tax under the same rules that apply to U.S. citizens. However, a resident alien employed
international organization, a foreign government, or a wholly-owned instrumentality of a foreign government is not subject
to the self-employment tax
on income earned in the United States.
Self-employment income you receive while you are a resident alien is subject to self-employment tax even if it was paid for
services you performed
as a nonresident alien.
Bill Jones is an author engaged in the business of writing books. Bill had several books published in a foreign country while
he was a citizen and
resident of that country. During 2007, Bill entered the United States as a resident alien. After becoming a U.S. resident,
he continued to receive
royalties from his foreign publisher. Bill reports his income and expenses on the cash basis (he reports income on his tax
return when received and
deducts expenses when paid). Bill's 2007 self-employment income includes the royalties received after he became a U.S. resident
even though the books
were published while he was a nonresident alien. This royalty income is subject to self-employment tax.
Reporting self-employment tax.
Use Schedule SE (Form 1040) to report and figure your self-employment tax. Then enter the tax on Form 1040, line 58,
and attach Schedule SE to Form
Deduction for one-half of self-employment tax.
If you must pay self-employment tax, you can deduct one-half of the self-employment tax paid in figuring your adjusted
Get Publication 334, Tax Guide for Small Business, for more information about self-employment tax.
International Social Security Agreements
The United States has entered into social security agreements with foreign countries to coordinate social security coverage
and taxation of workers
employed for part or all of their working careers in one of the countries. These agreements are commonly referred to as totalization
these agreements, dual coverage and dual contributions (taxes) for the same work are eliminated. The agreements generally
make sure that social
security taxes (including self-employment tax) are paid only to one country. Agreements are in effect with the following countries.
Agreements with other countries are expected to enter into force in the future.
Generally, under these agreements, you are subject to social security taxes only in the country where you are working.
However, if you are
temporarily sent to work for the same employer in the United States and your pay would normally be subject to social security
taxes in both countries,
most agreements provide that you remain covered only by the social security system of the country from which you were sent.
You can get more
information on any agreement by contacting the U.S. Social Security Administration at the address given later. If you have
access to the Internet, you
can get more information at
To establish that your pay is subject only to foreign social security taxes and is exempt from U.S. social security
taxes (including the Medicare
tax) under an agreement, you or your employer should request a certificate of coverage from the appropriate agency of the
foreign country. This will
usually be the same agency to which you or your employer pays your foreign social security taxes. The foreign agency will
be able to tell you what
information is needed for them to issue the certificate. Your employer should keep a copy of the certificate because it may
be needed to show why you
are exempt from U.S. social security taxes. Only wages paid on or after the effective date of the agreement can be exempt
from U.S. social security
Some of the countries with which the United States has agreements will not issue certificates of coverage. In this case, either
you or your
employer should request a statement that your wages are not covered by the U.S. social security system. Request the statement
from the following
U.S. Social Security Administration
Office of International Programs
P.O. Box 17741
Baltimore, MD 21235-7741
Under most agreements, self-employed individuals are covered by the social security system of the country where they
reside. However, under some
agreements, you may be exempt from U.S. self-employment tax if you temporarily transfer your business activity to or from
the United States.
If you believe that your self-employment income is subject only to U.S. self-employment tax and is exempt from foreign
social security taxes,
request a certificate of coverage from the U.S. Social Security Administration at the address given earlier. This certificate
will establish your
exemption from foreign social security taxes.
To establish that your self-employment income is subject only to foreign social security taxes and is exempt from
U.S. self-employment tax, request
a certificate of coverage from the appropriate agency of the foreign country. If the foreign country will not issue the certificate,
request a statement that your income is not covered by the U.S. social security system. Request it from the U.S. Social Security
Administration at the
address given earlier. Attach a photocopy of either statement to Form 1040 each year you are exempt. Also print “Exempt, see attached statement
on the line for self-employment tax.
Estimated Tax Form 1040-ES (NR)
You may have income from which no U.S. income tax is withheld. Or the amount of tax withheld may be less than the income tax
you estimate you will
owe at the end of the year. If so, you may have to pay estimated tax.
Generally, you must make estimated tax payments for 2008 if you expect to owe at least $1,000 in tax and you expect your withholding
and credits to
be less than the smaller of:
90% of the tax to be shown on your 2008 income tax return, or
100% of the tax shown on your 2007 income tax return (if your 2007 return covered all 12 months of the year).
If your adjusted gross income for 2007 was more than $150,000 ($75,000 if your filing status for 2008 is married filing separately),
110% for 100% in (2) above if you are not a farmer or fisherman. Item (2) also does not apply if you did not file a 2007 return.
A nonresident alien should use Form 1040-ES (NR) to figure and pay estimated tax. If you pay by check, make it payable to
the "United States
How to estimate your tax for 2008.
If you filed a 2007 return on Form 1040NR or Form 1040NR-EZ and expect your income, number of exemptions, and total
deductions for 2008 to be
nearly the same, you should use your 2007 return as a guide to complete the Estimated Tax Worksheet in the Form 1040-ES (NR)
instructions. If you did
not file a return for 2007, or if your income, exemptions, deductions, or credits will be different for 2008, you must estimate
these amounts. Figure
your estimated tax liability using the Tax Rate Schedule in the 2008 Form 1040-ES (NR) instructions for your filing status.
If you expect to be a resident of Puerto Rico during the entire year, use Form 1040-ES or Forma 1040-ES (Español).
When to pay estimated tax.
Make your first estimated tax payment by the due date for filing the previous year's Form 1040NR or Form 1040NR-EZ.
If you have wages subject to
the same withholding rules that apply to U.S. citizens, you must file Form 1040NR or Form 1040NR-EZ and make your first estimated
tax payment by April
15, 2008. If you do not have wages subject to withholding, file your income tax return and make your first estimated tax payment
by June 16, 2008.
If your first estimated tax payment is due April 15, 2008, you can pay your estimated tax in full at that time or
in four equal installments by the
dates shown next.
April 15, 2008
June 16, 2008
Sept. 15, 2008
Jan. 15, 2009
If your first payment is not due until June 16, 2008, you can pay your estimated tax in full at that time or:
½ of your estimated tax by June 16, 2008,
¼ of the tax by September 15, 2008, and
¼ by January 15, 2009.
You do not have to make the payment due January 15, 2009, if you file your 2008 Form 1040NR or 1040NR-EZ by February 2, 2009,
and pay the entire
balance due with your return.
If your return is not on a calendar year basis, your due dates are the 15th day of the 4th, 6th, and 9th months of
your fiscal year, and the 1st
month of the following fiscal year. If any date falls on a Saturday, Sunday, or legal holiday, use the next day that is not
a Saturday, Sunday, or
Changes in income, deductions, or exemptions.
Even if you are not required to make an estimated tax payment in April or June, your circumstances may change so that
you will have to make
estimated tax payments later. This can happen if you receive additional income or if any of your deductions are reduced or
eliminated. If so, see the
instructions for Form 1040-ES (NR) and Publication 505 for information on figuring your estimated tax.
Amended estimated tax.
If, after you have made estimated tax payments, you find your estimated tax is substantially increased or decreased
because of a change in your
income or exemptions, you should adjust your remaining estimated tax payments. To do this, see the instructions for Form 1040-ES
(NR) and Publication
Penalty for failure to pay estimated income tax.
You will be subject to a penalty for underpayment of installments of estimated tax except in certain situations. These
situations are explained on
Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.
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