Immigration and labor regulations explained
By L.J. D’Arrigo
Counsel, Whiteman Osterman & Hanna LLP
IRS Updates Guidance on H-2A
After much lobbying, the IRS finally issued updated guidance for employers participating in the H-2A program in December 2011.
It is a common misconception that H-2A workers are always exempt from income tax withholding and liability. The new IRS guidance continues to provide for a clear exemption from U.S. Social Security and Medicare taxes under IRC 3121(b) (1), but H-2A workers may still be subject to income taxes, unless specifically exempted under a treaty with the U.S. government. 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 has not historically been considered to be wages and thus exempt under the IRS withholding system.
The H-2A Employer’s New Withholding Obligations
Beginning in calendar year 2011, an employer is now required to report all compensation paid to H-2A workers over the 600 threshold on Form W-2, Wage and Tax Statement using box 1 (wages, tips and other compensation), rather than Form 1099-MISC. This is a departure from prior guidance prohibiting the reporting of income on Form W-2. The H-2A employer will not withhold Social Security or Medicare taxes. This is a prospective rule in that employers who have already reported compensation paid to H-2A workers on Form 1099 for 2011 are NOT required to amend or re-report this income.
The general withholding rule has always been that 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 any taxes for H-2A workers.
Although wages paid to H-2A workers do not trigger any withholding requirements, they are considered wages/income for the purposes of W-2 reporting. If the employee earns more than $600 for the year in which they are employed, the employer is required to issue Form W-2 to the employee.
Voluntary Federal Income Tax Withholding
The IRS has now amended its guidance to allow for “voluntary withholding.” Although employers are not required to withhold federal income tax from compensation paid to H-2A workers (unless back-up withholding applies in certain cases), they are now permitted to withhold upon worker request. 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), or Form 1040, 1040A, or 1040-EZ if they are considered to be “resident aliens”.
H-2A workers are in reality subject to income tax on the income they earn and will owe federal income tax upon filing their income tax return at the end of the year. This often comes as not only a surprise, but an actual hardship to the H-2A workers who incorrectly assume that they are not required to pay taxes as H-2A workers. To alleviate the unexpected burden on H-2A workers subject to income tax, the IRS has implemented revised guidance specifically allowing an employer to withhold federal income taxes from the worker’s pay as long as both parties agree. The H-2A worker must provide a completed Form W-4, Employee’s Withholding Allowance Certificate, to the employer in order for taxes to be withheld. It is also advisable for the employer to obtain a signed authorization form from the H-2A worker expressly authorizing the employer to withhold taxes and that such withholding is at the request of the employee. It is still unclear about how the New York State Department of Taxation and Finance will address withholding issues.
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.
Leonard J. D’Arrigo is an NYFB member and an immigration attorney with Whiteman Osterman & Hanna LLP in Albany. He can be reached at (518) 487-7642