H-2A and Taxes: What are the Rules?
It is no wonder that tax issues concerning the H-2A program are so complicated when the IRS, the New York State Department of Labor, and U.S. Department of Labor don’t understand the rules either! I recently spent an evening reviewing the myriad of IRS publications covering foreign workers and agricultural employers. This included IRS Publications 519, 51, 15, 501, 901, 515 and a host of others. Each of these publications referenced sections found in the other. I thought my head was going to explode. Another complicating factor is that there is no real guidance on this issue aside from a very brief section on the IRS website. It is a common misconception that H-2A workers are always exempt from income tax payments. IRS regulations provide for a clear exemption from US Social Security and Medicare taxes only under IRC 3121(b)(1). As a general rule, agricultural workers hired under the H-2A program are exempt from withholding taxes because they are working under the condition that their jobs are temporary or only for a season, which would be limited to less than one year. Hence, their compensation is not considered to be wages and thus exempt under the IRS withholding system. However, the exemption is not that simple since there are certain compliance requirements that the temporary H-2A worker must meet in order to qualify for withholding tax exclusion.
The H-2A Employer’s Withholding Obligation
As a general rule, payments made to H-2A workers are not considered “wages" for income tax withholding purposes on Form W-2 or Form 943. Therefore, an employer does not withhold anything for H-2A workers. However, in order for the H-2A worker to qualify for withholding tax exclusion, they must provide the employer with a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). Failure to produce the SSN or ITIN to the employer will subject the employee’s wages to backup withholding taxes, which will continue until the H-2A worker submits the required documentation the employer.
Although wages paid to H-2A workers do not trigger any withholding requirements, they are considered wages/income for the purposes of 1099 reporting. If the employee earns more than $600 for the year in which they are employed, the employer is required to issue Form 1099MISC. The wages should be included under Block 3 as “Other Income" and not under Block 7 (Non-Employee Compensation). The employer will not withhold any income tax on the payment unless the employee neglects to produce their SSN or ITIN number.
The H-2A Worker’s Tax Filing Requirements
Because wages paid to H-2A workers are considered to be taxable income, the worker must either file Form 1040NR or 1040NR-EZ if they are considered to be “non-resident" aliens (earning more than the allowable personal exemption of $3,650), or Form 1040, 1040A, or 1040-EZ if they are considered to be “resident aliens".
Since under current IRS regulations, the employer does not withhold income taxes from the wages of H-2A works using Form W-2, the worker may have a significant and unexpected tax liability at the end of the year. Since most H-2A workers assume that they are not required to pay income taxes, it can often be a hardship to pay this tax liability at the end of the year. The IRS is currently in the process of amending its regulations to specifically allow an H-2A employer to treat H-2A workers as W-2 employees, which would allow tax withholding, at least on a voluntary basis.
Another complicating factor is that the U.S. has tax treaties with many countries specifically limiting tax liability for non-resident aliens working in the U.S. for a defined period of time. For example, the U.S. has a tax treaty with Mexico provides for an exemption from income taxation for “non-resident" Mexican nationals in the U.S. for less than 183 days during a 12 month period. In assessing the worker’s tax liability at the end of the year, the foreign worker must factor in any tax treaty provisions that apply. Since this can be burdensome and confusing for the foreign worker, the employer should have a system in place to assist the workers in performing this analysis.
The H-2A workers tax liability is also dependent on whether they are considered a “non-resident alien" or “resident alien" for tax purposes as defined by the Internal Revenue Code. If they are considered a “resident alien," they are generally treated for taxation purposes as a U.S. citizen would be.
H-2A tax issues can be extremely confusing to the foreign worker who is not familiar with how our tax systems works, which is further complicated by language barriers. Best practice is to establish a tax plan at the beginning of the H-2A work contract, so that the worker will understand their potential tax liability at the end of the season and be able to adequately put money aside. The employer may also want to discuss a plan of voluntary withholding, which would help to alleviate the burden on the worker to set money aside for tax liability.