Government Entity Toolkit
This Toolkit is designed to provide a concise guide to the basic requirements for compliance with Federal tax laws in major areas of interest to governmental organizations. The Toolkit consists of three parts:
(1) A Public Employer’s Toolkit, which provides information to government entities and payroll officers working for government entities in meeting their federal employment tax obligations
(2) A Compliance Toolkit, which provides information to help government entities and their powers of attorney understand the enforcement process; and
(3) An International Withholding Issues Toolkit, addressing requirements and procedures for withholding tax from nonresident aliens.
Public Employer’s Toolkit
If you are a new employer, or new to dealing with federal employment tax, the first place to go for information is IRS Publication 15, Employer’s Tax Guide (Circular E). This publication is revised each year and contains the basic information employers need to be able to collect adequate information so they can determine and pay their and their employees’ portion of employment tax liability, file correct tax returns, and withhold federal taxes, where necessary.
You may also want to consult the following Publications that include information specific to government entities:
Public Employer’s Tax Guide
Publication 963, Federal-State Reference Guide
Publication 15-A, Employer’s Supplemental Tax Guide
Publication 15-B, Employer’s Guide to Fringe Benefits
FSLG Taxable Fringe Benefits Guide
The following list includes most federal tax forms and instructions you are likely to need to process payroll and file necessary returns with the IRS. You can download the forms and instructions from the links. Note: Some of the forms are information copies only and cannot be used for filing. A list of all IRS forms (in fillable format) and publications is available at http://www.irs.gov/.
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Form W-2, Wage and Tax Statement ( with instructions).
This form must be issued to recipients of wages and filed with the IRS.
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Form W-3, Transmittal of Wage and Tax Statements.
This form is used to transmit the Form W-2 to the IRS.
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Form W-4, Employee's Withholding Allowance Certificate.
This form must be furnished to each employee upon hiring to determine correct withholding. Employee may submit new certificate at any time.
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Form W-9, Request for Taxpayer Identification Number and Certification ( with instructions).
This form must be furnished to each person who receives a payment from a government entity in order to verify the recipient’s taxpayer identification number. Examples of such payments are interest payments made by a government entity and payments made to persons who are not employees of the government entity.
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Form 843, Claim for Refund and Request for Abatement ( with instructions). This form is used to request a refund or request an abatement of certain taxes, interest and penalties, including those related to employment tax.
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Form 941, Employer's Quarterly Federal Tax Return ( with instructions).
This form must be filed each quarter by an employer, including a government entity, who pays wages during a calendar quarter.
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Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund ( with instructions).
This is an amended return to correct information reported on a previous quarter Form 941.
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Form 944, Employer's Annual Federal Tax Return ( with instructions).
This form may be filed by certain employers with small payrolls who have been notified by the IRS that they can file on an annual basis, instead of filing Form 941 quarterly.
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Form 945, Annual Income Tax Withholding Return ( with instructions).
This form must be filed by each employer, including a government entity, to report withholding (including back up withholding) on payments other than wages. Examples of such payments made by a government entity are pensions, annuities, and IRAs.
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Form 1099-MISC, Miscellaneous Income ( with instructions).
This form must be filed by any payer, including a government entity, who makes certain payments for services to recipients who are not employees.
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Form 1096, Annual Summary and Transmittal of U.S. Information Returns.
This form is used to transmit Form 1099-MISC to the IRS.
You may be required to provide the following non-tax forms to new employees. They are available from other Federal agencies:
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Form I-9, Employment Eligibility Verification.
Required for all new hires. This form can be obtained from U.S. Citizenship and Immigration Services.
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Form SSA-1945, Statement Concerning Your Employment in a Job Not Covered by Social Security.
Employees covered under a public retirement system, as well as other categories of government workers, may not be covered by social security. State and local government employers are required to notify employees hired on or after January 1 2005, in jobs not covered by social security, of the effects of the Windfall Elimination Provision and the Government Pension Offset. The law requires newly hired public employees to sign Form SSA-1945, indicating that they are aware of a possible reduction in their future social security benefit entitlement. For more detailed information about this law, see http://www.socialsecurity.gov/form1945.
For further on-line information about employer responsibilities, visit the web page for Employment Taxes for Businesses.
Government Entity Compliance Toolkit
The following information explains what a government entity can expect during a compliance check or an examination conducted by FSLG. It also provides information with regard to adequate record keeping by government entities, disclosure constraints on the IRS and consent by government entities authorizing the IRS to disclose tax information to third parties.
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What Occurs During an Examination – What a government entity can expect during an examination, including the types of questions asked during an examination, the kinds of information requested, and possible outcomes of an examination.
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What Occurs During a Compliance Check – What a government entity can expect during a compliance check, including the types of questions asked during a compliance check, the kinds of information requested, and possible outcomes of a compliance check, also includes sample compliance check opening and closing letters, pro forma information document requests, etc.
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Disclosure Laws – Constraints on the IRS with regard to disclosure of tax information of a government entity to third parties. Providing consent for disclosure to the IRS, including power of attorney provisions, third party contact procedures, etc.
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Appeals Process – Information about IRS Appeals Office and procedure for requesting review by the Office of Appeals of an adverse determination made by FSLG after an examination.
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International Withholding Issues Toolkit
Federal, state and local governmental entities often act as withholding agents, and pay income to nonresident aliens. This discussion covers:
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The persons responsible for withholding (withholding agents),
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The types of income subject to withholding, and
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The information return and tax return filing obligations of withholding agents.
The discussion includes the rules that generally apply to payments of U.S. source income to nonresident aliens.
Withholding of Tax
Generally, a nonresident alien is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a nonresident are subject to U.S. tax at a rate of 30%, unless a lower amount is prescribed by a tax treaty. An in-depth discussion of tax treaties is beyond the scope of this article, and we recommend reviewing Publication 901, U.S. Tax Treaties.
The tax is generally withheld from the payment made to the nonresident alien. Nonresident alien (NRA) withholding is descriptively used to refer to withholding required under section 1441 of the Internal Revenue Code. Generally, NRA withholding describes the withholding regime that requires withholding on a payment of U.S. source income.
For general information about withholding, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
Withholding is required at the time you make a payment of an amount subject to withholding.
You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form 1042. Form 1042 is due March 15 of the following year. Note: Form 1042 has unique requirements to deposit tax; these differ from Form 941 tax deposits.
Withholding Agent
A withholding agent is the person responsible for withholding on payments made to a nonresident alien. You are a withholding agent if you have control, receipt, custody, disposal, or payment of any item of income of a nonresident alien that is subject to withholding.
Liability for tax
As a withholding agent, you are personally liable for any tax required to be withheld. This liability is independent of the tax liability of the nonresident alien to whom the payment is made. If you fail to withhold and the NRA fails to satisfy his or her U.S. tax liability, then both you and the nonresident alien are liable for tax, as well as interest and any applicable penalties. The applicable tax will be collected only once. If the nonresident alien satisfies the U.S. tax liability, you may still be held liable for interest and penalties for your failure to withhold.
Determination of amount to withhold
You must withhold on the gross amount subject to NRA withholding. You cannot reduce the gross amount by any deductions. If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. In no case, however, should you withhold more than 30% of the total amount paid; if this is done because of error or inaccurate estimate of income, the excess should be refunded to the recipient.
Persons Subject to NRA Withholding
NRA withholding applies only to payments made to nonresident aliens. It does not apply to payments made to U.S. persons. Usually, you determine the payee’s status as a U.S. or foreign person based on the documentation that person provides.
Nonresident Alien
A nonresident alien is an individual who is not a U.S. citizen or a resident alien.
A resident alien is an individual that is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year. Generally, resident aliens are taxed in the same way as U.S. citizens.
Green card test - An alien is a U.S. resident if the individual was a lawful permanent resident of the United States at any time during the calendar year. This is known as the “green card test” because these aliens hold immigrant visas (also known as “green cards”).
Substantial presence test - An alien is considered a U.S. resident if the individual meets the substantial presence test for the calendar year. Under this test, the individual must be physically present in the United States on at least:
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31 days during the current calendar year, and
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183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year.
Generally, the days the alien is in the United States as a teacher, student, or trainee on an “F, J, M, or Q” visa are not counted toward the substantial presence test. This exception is for a limited period of time. A discussion of students, scholars, teachers, researchers, exchange visitors, and cultural exchange visitors temporarily in the United States on “F, J, M, or Q” visas is beyond the scope of this article. This topic is discussed in another IRS article, Foreign Students and Scholars.
For more information on resident and nonresident status, the tests for residence, and the exceptions to them, please see Publication 519, Tax Guide for Aliens.
Exceptions to 30% Withholding Rule
Generally, you must withhold 30% from the gross amount paid to a nonresident alien unless you can reliably associate the payment with valid documentation that establishes either of the following.
The nonresident alien may provide you with one of the following forms. They deal with various exceptions to the general withholding rules. You may link to these forms for further information. See Publication 515.
Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding
Form W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States
Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Withholding
Form W-8EXP, Certificate of Foreign Government or Other Organization for United States Tax Withholding
Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual
Source of Income
Generally, income is from a U.S. source if it is paid for personal services rendered within the United States. This is considered U.S. sourced income. Payments to a nonresident alien for personal services rendered outside the U.S. are determined to be foreign-sourced income, and are considered non-taxable and non-reportable.
Scholarships, fellowships, and grants are sourced according to the residence of the payer. Those made by entities created or domiciled in the United States are generally treated as income from sources within the United States. Scholarship, fellowship and grant income are reportable on a Form 1042S to the nonresident alien. Those made by entities created or domiciled in a foreign country are treated as income from foreign sources, and are considered nontaxable and nonreportable.
The source of pension payments is determined by the portion of the distribution that constitutes the compensation element (employer contributions) and the portion that constitutes the earnings element (the investment income). The compensation element is sourced the same as compensation from the performance of personal services. The portion attributable to services performed in the United States is U.S. source income, and the portion attributable to services performed outside the United States is foreign source income. The earnings portion of a pension payment is U.S. source income if the trust is a U.S. trust.
The information contained in this article is not to be considered an official position of the Internal Revenue Service. If you would like to obtain official written advice on an issue, please visit our website, www.irs.gov, download IRS Revenue Procedure 2007-1, and follow the instructions contained in this revenue procedure.
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