n-09-91.pdf

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# Part III - Administrative, Procedural, and Miscellaneous

Withholding on Wages of Nonresident Alien Employees Performing Services Within the
United States

Notice 2009-91

## I. PURPOSE

This notice modifies the rules in Notice 2005-76, 2005-2 C.B. 947, for
determining the amount of income tax employers must withhold under section 3402 of
the Internal Revenue Code (Code) from wages paid for services performed by
nonresident alien employees within the United States. The modification is effective with
respect to wages paid on or after January 1, 2010.

Notice 2005-76 provides rules for determining the amount of withholding on
wages paid to nonresident alien employees. These rules need to be modified to reflect
changes made in the withholding tables as a result of the enactment of section 36A of
the Code (the "Making Work Pay Tax Credit") in the American Recovery and
Reinvestment Act of 2009 (Public Law No. 111-5) (ARRA). Nonresident alien
individuals are not eligible for the Making Work Pay Tax Credit under section 36A. The
modified rules provide for withholding on the wages of nonresident alien employees that
more closely approximates their income tax liability.

II. BACKGROUND

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## A. Income Tax Withholding on Wages of Nonresident Alien Employees

Generally, employers are liable for the withholding of income tax on remuneration
for services performed within the United States by a nonresident alien employee.
Section 3402(a)(1) of the Code provides that, except as otherwise provided in section
3402, every employer making a payment of wages shall deduct and withhold from such
wages a tax determined in accordance with tables or computational procedures
prescribed by the Secretary. Section 3402(a)(1) further provides that any tables or
procedures prescribed under section 3402(a)(1) shall be in such form, and provide for
such amounts to be deducted and withheld, as the Secretary determines to be
appropriate to carry out the purposes of chapter 1 (imposition of individual income tax).

Income tax withholding tables in Publication 15 (Circular E), Employer's Tax
Guide, for use with the percentage and wage bracket methods of withholding, are based
on the assumption that the employee receiving the wages is entitled to a standard
deduction in determining his or her income tax liability. However, in the case of a
nonresident alien individual, section 63(c)(6)(B) provides that the standard deduction
shall be zero. Notice 2005-76 addresses this difference in treatment by directing an
employer to add an amount to the wages of a nonresident alien employee solely for
purposes of calculating the income tax withholding for each payroll period.

## B. Making Work Pay Tax Credit

Section 36A, which was added to the Code by the ARRA, provides a credit
against income tax to an eligible individual in an amount equal to the lesser of (1) 6.2
percent of earned income, or (2) $400 ($800 in the case of a joint return). The credit is

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reduced or completely eliminated for individuals with modified adjusted gross income
exceeding threshold amounts. Section 36A(d)(1)(A)(i) provides that an eligible
individual for purposes of section 36A does not include a nonresident alien individual.
As currently enacted, the Making Work Pay Tax Credit does not apply to taxable years
beginning after December 31, 2010. See section 36A(e). Under the ARRA, taxpayers'
reduced tax liability under the provision is expeditiously implemented through revised
income tax withholding. See H.R. Conf. Rep. 111-16, 111th Cong., 1st Sess. (2009) at
517. Accordingly, the income tax withholding tables have been revised to take the
Making Work Pay Tax Credit into account in determining the amount of income tax to be
withheld.

## C. Reason for Change to Withholding Procedures for Nonresident Alien Employees

The income tax withholding tables reflect two tax benefits for which nonresident
alien employees are not eligible: (1) the standard deduction; and (2) the Making Work
Pay Tax Credit. If adjustments from the generally applicable procedures for using the
income tax withholding tables are not made in determining income tax withholding for
nonresident alien employees, the withholding on the wages of such employees will
generally be less than their tax liability. This notice modifies the rules for employers to
use in calculating income tax withholding on nonresident alien employees to offset the
effects of both the standard deduction and Making Work Pay Tax Credit as assumed
under the withholding tables.

The modification applies only to the procedure used by employers in calculating
income tax withholding on wages paid to nonresident alien employees as set forth in

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part III.B. of Notice 2005-76. The requirements in Notice 2005-76 (part III.A.) relating to
the completion of Form W-4, Employee's Withholding Allowance Certificate, by
nonresident alien employees, continue in effect.

## III. WITHHOLDING RULES THAT WILL BE IN EFFECT FOR NONRESIDENT ALIEN EMPLOYEES ON OR AFTER JANUARY 1, 2010

Beginning with wages paid on or after January 1, 2010, employers are required
to calculate income tax withholding under section 3402 of the Code on wages of
nonresident alien employees by making two modifications rather than the one
modification described in Notice 2005-76 (part III.B). First, employers need to add an
amount to wages before determining withholding under the wage bracket or percentage
method in order to offset the standard deduction built into the withholding tables.
Second, employers need to determine an additional amount of withholding from a
separate table applicable only to nonresident alien employees to offset the effect of the
Making Work Pay Tax Credit built into the withholding tables. The specific steps to be
followed for each of these two modifications will be set forth in Publication 15 and other
IRS forms or publications.

## IV. EFFECT ON OTHER DOCUMENTS

### Notice 2005-76 is modified for wages paid after December 31, 2009, during any period when the Making Work Pay Tax Credit provided under section 36A is in effect. V. DRAFTING INFORMATION

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The principal author of this notice is Alfred G. Kelley of the Office of Associate
Chief Counsel (Tax Exempt & Government Entities). For further information regarding
this notice contact Alfred G. Kelley on (202) 622-6040 (not a toll-free call).