Article Series: What Everyone Must Know About Payroll
Series by Suhas Pandit, Director of Client Payroll Services for ASIWorks, Inc. regarding International payroll issues.
International Payroll Profile #1
Click hereInternational Payroll Profile #2
Click hereInternational Payroll - Q & A
Click hereInternational Payroll Profile #4
Click hereInternational Payroll Profile #5
Click hereWhat Everyone Must Know About Payroll - #1
This is the first in a series of articles about what everyone considering working for a company in the United States should know. Before turning the page, stop and consider. Why are you working in the United States? If you answer, "to earn money," then read on.
As Director of Payroll Services and a native of Maharashtra, India, I have seen what happens when neither the worker nor the employer understands International Payroll rules. Employers make unnecessary payroll deductions, and workers have less take home pay. Not knowing the rules for International workers can also keep employers from hiring otherwise excellent applicants.
Consider what happened to Mr. Kumar -- Mr. Kumar applied for a job with a small business in a local shopping mall. His education and experience were great – just what the employer was looking for. Mr. Kumar filled out the job application. Everything was going well until he got to the blank space for his social security number. He did not have a social security card. He wasn’t sure he could get one legally. At the interview, Mr. Kumar nervously watched the employer read his application. He could tell the employer was pleased with his education and experience. The employer told Mr. Kumar that his resume was very good. Then he asked for Mr. Kumar to fill in the blank for his social security number. Mr. Kumar told the employer that he did not have a social security card. The employer told Mr. Kumar he could not hire him. Mr. Kumar, a qualified applicant and an excellent worker, simply left. No job. No money for his family. The employer would continue to work very long hours, doing the job of two people, until he could find someone like Mr. Kumar to join the business.
As Director of Payroll, I have seen this situation too many times. At ASIWorks, we encourage our clients to call their ASI payroll consultant while the applicant is still there to ask – I have an applicant who looks very good, but he does not have a social security card. Can I hire him?
So much has been written about forged social security cards and the U.S. government fraud detection, many employers have forgotten this simple fact. Employers cannot require non-resident aliens, like Mr. Kumar, to produce their social security card as proof of authorization to work in the U.S. Mr. Kumar can produce any approved document to show his work authorization.
A complete payroll service does more than print checks and pay workers; a complete payroll service provides help when you need it – someone to call to ask the all important question – Can I hire him?
In the U.S. labor market today, 15% of all workers are foreign-born. About 1 out of every 4 of these foreign-born workers is Asian. These official numbers are conservative. We all know there are a large number of undocumented foreign-born workers.
Because there are so many foreign-born workers today, all employers and all payroll services must know how International Payroll works. If they don’t, we run the risk of keeping too many talented people like Mr. Kumar from working legally in the United States. And we keep many hard working employers from knowing what to ask for instead of a social security card.
What Everyone Must Know About Payroll - #2
I decided many years ago to dedicate my professional life to helping foreign-born workers in the United States -- not simply because I am one myself, but also because our Asian community is filled with talented well-educated men and women who obey U.S. immigration rules. Since one out of every four foreign-born workers holding jobs legally in the U.S. is Asian, I must handle International Payroll rules every day.
The most frequently asked question is about payroll taxes – Where is my money? Workers want to understand why so much money is taken out of their checks. The typical situation looks like this.
Ms. Singh came to the U.S on an F visa status temporarily as an exchange student. As newly hired worker has been counting the days until her first payday. She has made her budget and knows exactly how she will spend her money. She plans to repay her family for the loan they gave her to come to the United States, repay her roommate for the subway money lent to her while she awaited her paycheck, and buy the uniform her employer requires her to wear.
Ms. Singh opened her envelope and looked at her first pay stub. She was very upset and confused. She thought she would get more money. The stub showed that the employer had deducted Social Security and Medicare taxes from her check. Ms. Singh waited to speak to the owner at the end of the day. Ms. Singh practiced how she would ask the owner to give her the rest of her money and thought about how she intended to spend it.
At the end of the day, Ms. Singh met with the owner who patiently explained, “we use a payroll service and they say it’s the law.” The owner went on to quietly reassure Ms. Singh that this had come up before and the payroll service had told him everyone must pay Social Security and Medicare taxes.
Ms. Singh went home upset, with less money than she had planned. She got out her budget. She had to purchase the uniform for her job. She had to repay her roommate. So, she decided not to repay the loan from her family until her next paycheck.
Unfortunately, the payroll service was wrong. This situation could have been avoided. All workers do not pay Social Security and Medicare taxes. Non-resident alien workers, like Ms. Singh, do not pay. The payroll service did not know that as an exchange Student which means that Ms. Singh does not pay U.S Federal, Social Security or Medicare taxes.
The payroll service should not have taken money from Ms. Singh to pay U.S. Social Security or Medicare taxes because Ms. Singh is a non-resident alien. This is a very expensive mistake -- not simply in terms of dollars and cents, but also in terms of the impact on lives. Ms. Singh, like most foreign-born workers, is in the United States to make money and help her family back home.
At ASIWorks, we are sensitive to how a payroll error like this can hurt. If the payroll service takes money away erroneously, many lives are affected. Moreover, it takes time to correct the mistake and get the money back from the U.S. Internal Revenue Service.
Whether an owner handles payroll for himself or hires a payroll service, the first step is to know who is a resident alien worker and who is a non-resident alien worker. Both are legal workers, but they do not have the same responsibility to pay the same amount of U.S. taxes.
The increase in the number of foreign-born workers has created a need for owners and payroll services, like ASIWorks, to know International Payroll regulations well. Doing the payroll is more than simply writing and mailing checks. Employers need a good payroll service to help ensure that foreign-born owners and workers get the right size slice of the American dream.
What Everyone Must Know About Payroll - #3
I have received several questions about payroll taxes. In this article, I will answer a few of the questions, which might be of interest to you.
DO I PAY FEDERAL INCOME TAX?
I qualify as a non-resident alien. I am from Hyderabad, India. I am a student. But I needed to work to earn extra money. I do have a scholarship. I got a part-time job that allows me to go to school and have time to study. My employer is an Indian company with a branch office in the United States. My friend told me my employer was going to ask me to fill out US IRS withholding tax forms, and another form that proves I can work in the U.S. My employer said I didn’t need to do any of that because I am an Indian student working for an Indian chain store – not a U.S. company. I mentioned this to my best friend the other day and he said he thought I was supposed to fill out payroll tax forms regardless of who I was working for in the United States. I told him my employer said that was not true. We argued. I am writing to you to settle the argument. Who’s right my employer or my friend?
Signed, Confused Student
Dear Confused Student, Based on the information you gave me, your friend is right. Your employer should ask you to complete form - W-4: Employee’s Withholding Allowance Certificate and you will have to file 1040NR. Because you are a nonresident alien and a student, when you fill out the W-4 you must request one withholding as if you are single, regardless of whether or not you are married; but because you are an Indian student you may claim an unlimited number of exemptions. Be sure to write “Nonresident Alien” above the dotted line on line 6 of the form W-4.
In 2006, the amount of federal tax you will pay is calculated using a different method because you are an Indian student. The employer or the payroll service being used must follow a special method to calculate taxable income, and must use a special table to determine the amount of taxes to be withheld.
Under U.S. law, the money you earn inside the United States is subject to federal taxes. Any money you earn when you go home for visits or go to work in another country is unusually not subject to U.S. federal income tax.
Although you didn’t ask, if you have a student visa and are in a degree granting educational program, some or all of the money you received from your scholarship may be exempt from taxes. Grants-in-aid for such things as room and board and books are not reported to the US. Internal Revenue Service, and are not subject to U.S. income tax.
I suggest you talk to a Student Financial Aid officer at your school as soon as possible. Explain the situation and ask what you should do to be in compliance with U.S. law. If you don’t want to do that, then contact a payroll service, like ASIWorks, Inc. and find out what you should do to protect yourself and your future.
DO CONSULTANTS PAY TAXES?
Last year I quit my job as a programmer and became a full-time consultant. I am self employed and work from home. I am also a nonresident alien. I thought when I became self-employed I would not have to pay federal taxes anymore. I overheard some people talking at the next table in a restaurant down town. They were talking about one of their friends who did not pay his taxes. The U.S. Internal Revenue Service audited him and told him he owed several thousand dollars in back taxes. I think the guy they were talking about was a consultant, like me. I have been thinking about this and getting a little worried. Do I have to file a U.S. federal tax return even though I am a consultant?
Signed, Self employed Programmer
Dear Self Employed:
It is true that because you are self-employed, there is no employer to withhold federal and possibly state taxes from your paycheck. The responsibility to pay your taxes and all your other business expenses now rests with you alone. Under U.S. tax law, you do have to pay taxes on the money that you earn in the United States. Unlike when you were an employee, the amount of taxes you pay is calculated differently. As a consultant, you pay a flat fee. The good news is that there are exceptions to this general rule, such as, if you qualify as a commercial traveler or you are a commuting worker who is a resident of Canada or Mexico. You are now self-employed. To avoid future tax problems contact a payroll service, such as ours, to help you get started filing withholding tax returns at least quarterly. As you can see, International Payroll is complicated. And, a mistake can be very costly. If you take the time to set up your tax filings now, you won’t have to worry about the U.S. Internal Revenue Service on April 15th. Good luck with your consulting business.
What Everyone Must Know About Payroll - #4
You can be forgiven if you get confused when it comes to paying Federal and State payroll withholding taxes for your foreign-born staff. Many employers error on the side of caution and withhold the same taxes from all staff regardless of what their Visa status is. Their thinking goes something like this – I don’t want to get into trouble, so I’ll pay. If I make a mistake and withhold taxes from my workers when I should not have, the IRS will let me know.
Unfortunately, the IRS will not let you know you made a mistake unless your company is audited or if the employee files a complaint. Either way, no employer actually wants to be in either situation.
The confusion arises for many employers and workers too when it comes to visas. We all know that many people come to the United States on the visitor’s visa. Then, while in the United States some spend less time sightseeing and more time enrolling in school so that they can get a student visa.
Consider Mr. Patel who did come as a visitor, enrolled in college, and got a student visa. Mr. Patel worked part-time on weekends and holidays. His employer took regular payroll taxes out of his pay, because his employer thought since Mr. Patel was in the United States, he must pay taxes.
Mr. Patel’s employer was wrong. Even though Mr. Patel was in the United States all year long, he was not a resident. Why, because he had a student visa. Students are Non-Residents. Students are exempt from certain payroll taxes.
Let’s add a complication. Mr. Patel fell in love. His fiancée, Rekha, came to visit him in the United States. Rekha wanted to remain in the United States with Mr. Patel after they were married. Mr. Patel got her an interview with his employer. His employer refused to hire Rekha because she did not have a “green card.” Mr. Patel and Rekha were upset.
Unfortunately the employer did not know how he could hire Mr. Patel’s fiancée.
As Director of Payroll Services I encourage employers who are our clients to call me. I do more than simply write paychecks. I help employers answer International Payroll questions.
If Mr. Patel’s employer had called, I would have told him what the employer could have done. But, since the employer did not know that there might have been a way to hire Rekha, she returned to India to live with her family and wait for Mr. Patel to finished school in the United States and return to India.
What Everyone Must Know About Payroll - #5
As every employer already knows, 1 out of every 4 foreign-born workers are Asian. Some are resident workers, and even more are non-resident workers in the United States on different visas. Even well meaning employers who follow the U.S. withholding tax laws can run into problems. How? Because the foreign-born workers who were eligible to work when hired, can become ineligible without the employer knowing it.
One of my clients ran into this problem. He had to pay a large fine when it turned out that a young man– we’ll call him Raj Kumar -- was a non-resident in 2005 when he started working for my client. By 2006, however, Raj Kumar had been in the United States more than 183 days that year and no longer qualified as a non-resident worker. My client did not realize that he had a problem. Unfortunately, my client’s business was selected, by the Internal Revenue Service, for a random audit. He asked my company – ASIWorks, Inc. to help him prepare for the audit. When I conducted what is called a “compliance review” of his payroll records, I found Raj Kumar’s records.
I believe that this was an honest oversight by my client. He simply had not been keeping up with the changes in status of his foreign-born workers. He did not revisit their status after they were hired. His workers do not routinely volunteer information regarding any changes in their status.
When an information gap like this happens, employers are at risk. I strongly recommended to our client that he take advantage of the payroll management service. ASI gives employers easy-to-read management reports that can keep him out of trouble. He agreed, and now receives our payroll management reports, which track the work status of his foreign-born employees.
I developed our payroll management reports so that our clients can remain in compliance with federal payroll laws and avoid costly penalties. For example, another client called me to review one of the payroll management reports we recently sent him. The report listed all of his employees, their status as resident or non-resident workers, and the amounts withheld for Federal income tax, Social Security, Medicare and State withholding taxes. This employer called me because he thought I had made a mistake. The payroll management report showed that the amount paid for taxes withheld from his non-resident workers was different from the amount withheld from all of the other workers. He wanted to know why. Had I made a mistake, he asked?
I reassured him that the report was correct. The taxes for non-resident workers are calculated differently. As a part of our service, we automatically do this calculation so that the non-resident workers do not overpay. While we were talking I also reminded my client that one of our payroll management reports that several of his workers had Visas that expires in 30 days. He thanked me. He told me that his company had failed an audit before he became our client because of expired Visas.
What I have learned after 18 years in payroll management is that a complete payroll service must offer more than check writing today. A payroll complete service must also give clients payroll management reports that help the employer remain in compliance with federal and state laws.
ASIWorks, Inc. added payroll management reports to our service because we believe that our mission is to help our clients to be good corporate citizens. I want to be sure that our clients do not face penalties because unknowingly they staff on expired Visas working for them. Fortunately, our payroll management reports go a long way toward solving this problem.
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