2015 UPDATE: IRS ISSUES NEW GUIDANCE ON TAXATION OF H-2A WORKERS
This guide provides an overview of the long-awaited guidance from IRS on the taxation of H-2A workers. This guide supersedes or supplements previously published guides.
Federal Income Tax Withholding for H-2A WorkersOn November 6, 2014, the IRS issued long-awaited clarification on taxation of H-2A workers. Additional resources are available on the IRS webpage on "Foreign Agricultural Workers on H-2A Visas" at http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Agricultural-Workers. Further, the IRS has issued its new Publication 5144 "Federal Income Tax and FICA Withholding on Foreign Agricultural Workers with an H-2A Visa." The most notable of these new guidelines and clarifications are outlined below. There is no mandatory withholding of U.S. Federal income tax on wages paid to H-2A workers, however, workers may voluntarily elect to have income taxes withheld upon the consent of BOTH the employer and the employee. The primary purpose of voluntary withholding is so that workers will not unexpectedly owe a large tax liability at the end of the year. This is specifically for workers who earn more than $600 for their work (see IRS Publication 50). It should be noted that as a general rule H-2A Workers are NEVER subject to FICA, Social Security, or Medicare withholding regardless of how long they are working in the U.S. The purpose of the original rules against employers withholding for H-2A workers are outdated (approximately 50-70 years old). The IRS acknowledges that these rules were created when agricultural income was so small that it never affected workers, but now workers often owe high amounts due to the increase in agricultural wages over the years. The normal rules for withholding for Non-Resident Aliens should be followed for H-2A workers (see IRS Publication 15, Chapter 9). Withholding for Resident Aliens should be computed using the same rules that apply to U.S. workers. To determine the tax status of your workers, please see IRS Publication 519. Generally, foreign workers become resident aliens if they are in the U.S. for at least 183 days in one calendar year; or if they are present in the U.S. for 122 days in one calendar year for three consecutive years (they become a resident alien in the third year). If the worker is NEVER here for more than 121 days in a calendar year, he/she will always remain a non-resident alien. If H-2A workers voluntarily have taxes taken out, they must have either a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). It is recommended to wait 10-14 days after the workers' arrival before applying for an SSN as the Social Security Administration (SSA) verifies information through the Department of Homeland Security database, which may not be updated until a few days or even weeks after the workers arrive. SSA has to verify the workers' information in this database before SSNs are obtained. If the worker is leaving the U.S. within two weeks of trying to obtain an SSN, SSA will not issue a number. There are some Income Tax Treaties with other countries, which may affect the tax liability of certain H-2A workers. Please see IRS Publication 901 and IRS Publication 515, which include three tables used to determine treaty provisions that may be applicable to H-2A workers.
Reporting of Wages/Forms to report wages of more than $600It is important to note that ALL wages paid to workers, whether they request withholding or not, must be reported on the W-2 and Form 943. On the W-2, employers must complete Section 1 to include H-2A wages; may or may not complete Section 3 for withholding; and should NOT complete section 5 or the employer will be billed. On Form 943, Section 1, employer should include the number of agricultural workers, including both H-2A and domestic; Sections 2 and 4 only apply to domestic workers; Section 6 does not apply to H-2A workers; and Section 8 may or may not include wages based on the workers' choice of whether or not to withhold. H-2A workers may submit Form 1040ES to the IRS to make estimated payments if they do not want to do voluntary withholding, but believe they may be subject to owing taxes at the end of the year. Back-up Withholding: This occurs when a worker does not obtain an SSN or ITIN, but requests voluntary withholding. When this occurs, wages become subject to federal withholding at a rate of 28%. If this occurs, these wages are reported on the 1099-MISC in block 3, "Other Income." Back-up withholding is also reported by the employer on the 945, Annual Return of Withheld Federal Income Tax. If this is not reported, the IRS may recoup this money from the employer.