In the United States, both citizens and non citizens who earn income are taxed. Resident aliens refer to people who have established permanent residency status in the United States. Nonresident aliens are people who have entered the country to live, work, or do business. Each category has significantly different tax consequences, so it’s important to file with the correct status. Our California-area CPA firm offers a brief outline to help you make the most sense out of these differences.
Resident Alien Tax Status:
The IRS treats a resident alien in essentially the same way as a U.S. citizen if the person meets either the “Green Card Test” or the “Substantial Presence Test.” Qualified resident aliens are taxed by the same income tax rates as a U.S. citizen. They also have access to the same tax deductions and credits, such as education credits and foreign tax credits (for taxes paid to another country).
Green Card Test:
If you have an alien registration card, also known as a “green card”, you are deemed to be a resident alien for US tax purposes. As a lawful permanent resident of the United States of America, you must file your annual tax return with the IRS (Form 1040). As long as you do not abandon your status or your status is not taken away by USCIS, you must pay taxes on your worldwide income.
Example: Hanna, who is a German citizen, received her green card on January 14th. She is now subject to US taxes and filing requirements on any income she earns in the US and in Germany.
Substantial Presence Test:
If you are physically present in the US for:
31 days during the year, AND
more than 183 days within the past three years
You are deemed to be a resident alien for US tax purposes.
Example: Luis, a Portuguese citizen has been working seasonally in the U.S. for the last three years. In 2016, he was in the U.S. for five months. In 2015, he was present for three months and in 2014 he was present for two months. He is determined to have 190eligibledays for the substantial presence test.
Here’s how it’s calculated: if an individual is present in the U.S. for more than 31 days in the current year, add all the days from the current year plus a third of the days from the prior year and a sixth of the days from the year before that. If the total is 183 days or more, the person is deemed to be a resident alien. Importantexception to this rule: if the individual holds a “J”, “Q”, or “F” visa while physically present in the country.
If you want to exclude certain number of days from the “Substantial Presence Test” you must file Form 8843 which may help you to avoid being classified as a tax resident in the eyes of the IRS. This leads us to the nonresident alien tax status.
Nonresident Alien Tax Status:
Not meeting the above tests deems you a nonresident alien. In this status, only U.S.-sourced income is usually subject to tax. Income other than wages is usually taxed at 30% and is not eligible for deductions. However, payment for personal services is generally considered to be connected with a U.S. trade or business, and is eligible for deductions, most credits, and the graduated tax rates used by U.S. citizens.
Dual-status aliens that can demonstrate a closer connection to a foreign country may take advantage of classifying their tax home in the foreign country. This can be valuable if taxes are lower in the foreign country. However, granting the nonresident status is not automatic and everyone must file Form 8840 with their IRS Form 1040NR.
We all can agree that these tax rules and exemptions are very complicated! That is why we encourage everyone to seek out the guidance of a tax professional such as MiklosCPA. We can explain these complicated regulations like these and ensure that you file correctly. MiklosCPA has helped businesses and individuals over the years handle their accounting needs and address tax questions such as resident alien statuses.
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In today’s interconnected global economy, it is not uncommon for individuals or businesses to maintain foreign financial interests such as bank accounts and other overseas assets. However, you may be required by US laws to report these interests through the Foreign Bank Account Report (FBAR) when filing taxes.
Who needs to file FBAR?
Any United States person that has a financial interest in at least one financial account outside the United States.
AND the total value of all foreign financial accounts exceeds $10,000.
“United States person” also includes any business entities, such as corporations, Limited Partnerships, and LLCs formed in the United States that have foreign financial accounts. It also entails any resident in the United states, whether a citizen of the US or resident alien.
Individuals that need to file FBAR must answer the FBAR related questions on Schedule B of the individual 1040 form. FBAR itself can be E-filed for individuals and businesses. The due date to file FBAR is April 15th, just like with the individual tax filing due date.
FBAR is one of many things an individual or business should be aware of when filing taxes. Businesses especially may need the additional info due to their specific circumstances. Having a knowledgeable support team like us at MiklosCPA to anticipate those needs and other future requirements can save a business time and money from incorrectly rushed tax filings. We are a California-based tax and accounting firm that supports businesses with their tax and accounting needs through a “virtual office” service. This allows businesses to charge ahead with what’s most important, growing the business. If you would like to learn more about us, please contact us.
Employees need incentives to stay with companies long term, and businesses offering an IRA plan is one way to encourage long-term workers. However, the process involved in preparing and managing an IRA may be costly and time-consuming. Payroll Deduction IRAs are a viable alternative to traditional IRAs. They require little cost to start and little to maintain. The tax advantages and simplicity involved in establishing and maintaining this kind of IRA also are attractive to employees.
Setting up Payroll Deduction IRA
The employer sets up a Payroll Deduction IRA similarly to how many businesses establish traditional IRAs, through financial institutions such as banks or insurance companies. They can decide if the IRA will be treated in a fashion like a traditional IRA (not taxed going in, taxed taking out) or as a Roth IRA (taxed going in, not taxed taking out). The employer withholds set amounts from employees and contributes to the IRAs.
Operating a Payroll Deduction IRA
Generally any employee can participate in a Payroll Deduction IRA. Employees set the amounts they wish to contribute to the IRA and can withdraw at anytime. However, withdrawing from the IRA may be subject to taxes and penalties (if they are below 59 ½ years of age). Employees are always 100% vested in their Payroll Deduction IRA funds. For 2017, the contribution limit for employees to Payroll Deduction IRAs is $5,500.
So long as the employer keeps involvement in the IRA to a minimum, the IRA will not be treated like a regular IRA program under Federal law. This includes annual filings and other fiduciary requirements. The employer may simply pay some fees to the IRA provider and some internal costs. This translates into a low-cost savings plan provided by employers.
Employers may terminate the Payroll Deduction IRA at any time should they decide it no longer serves their purposes. Employers simply inform their provider to end the IRA. No IRS filing is necessary. Employees can continue to provide funds to their IRA by discussing it with the IRA provider.
Deciding on an IRA for your business is one of many questions business owners consider on top of other operational and accounting needs. Having a supporting team knowledgeable in accounting can help answer those future-looking questions. We at MiklosCPA can be such a firm. We are based in California, but utilize contemporary “virtual office” services coupled with personalized, periodic communications to support you and your business needs. If you would like to learn more about our services, please contact us.
Business owners utilize a staff of employees and independent contractors for their regular operations and projects. Sometimes the lines may blur between who is an employee or an independent contractor. This can lead to improper classifications of employees. Businesses may end up withholding incorrect employee-related taxes. For more info on how to properly classify employees, check out our other article.
Missed Class on Classifying Employees?
In the best situations, businesses act proactively to correct mis-classifications of employees. In more dire and negligent circumstances, the IRS steps in and forces employers to explain and correct their classifications of employees and contractors.
A “Notice of Determination of Worker Classification” from the IRS provides employers a chance to rectify their employee classification per recommendations from an audit, or take their case to the US Tax Courts. It provides three determinations:
Worker Classification – IRS determined that one or more individuals who provide services to the firm should be classified as employees.
Section 530 treatment – Depending on the timeliness of filing your business tax returns and statuses of workers after 12/31/1977, you may be granted some tax relief. You may also get nothing at all on this.
Amount of Employment Tax – The IRS determines the amount of employment-related taxes that is owed.
To Court or Not to Court?
Upon receiving the notice, you can decide if you want to take this further and file a petition to the US Tax Court. The deadline to file a petition is before the 91st day after the mailing date of the original Notice of Determination. The US Tax Court website provides more detailed information that will be needed to properly file the petition and prepare interested parties for the court system.
On the other hand, if you wish to not petition the issue further in court, you can accept the findings in the determination. Simply sign the waiver form (Form 2504-WC) that comes attached with the notice and send back to the IRS. Keep in mind that interest accrues on any penalties, so send the waiver as soon as possible to avoid more unnecessary interest costs.
Properly classifying employees can be an additional unseen cost for businesses. Having a team of professionals assist your business to prevent such unnecessary costs will pay dividends for your business in the future. That is where we can come in with the assist. Miklos CPA is a California-based tax and accounting firm that helps businesses with their taxation questions and accounting needs. We post articles like this periodically for our clients and for those seeking information on a certain tax topic. If you would like to know more about our services, contact us!
Managing a nonprofit can sometimes become overwhelming. Regardless, don’t forget to file your annual returns with the IRS, otherwise not doing so will cause the IRS to automatically revoke your nonprofit status!
Stay (Filing) Woke to Avoid Revoke
Tax-exempt nonprofits must file annual informational returns. If not filed for 3 consecutive years, tax-exempt status becomes automatically revoked. The IRS publishes on their website a list of those automatically revoked organizations. It lists details like revocation date, Employer Identification Number (EIN), and other information. Definitely not a list you want your nonprofit to wind up on.
Lost and Rebound
If the worst happens and your organization loses its nonprofit status, all is not lost. Your organization’s status can be reinstated! However, you will have to re-apply and start from the beginning with form 1023 or form 1024. The IRS provides 4 ways of reinstatement:
Streamlined Retroactive Reinstatement – For tax-exempt nonprofits who file a 990-EZ or 990-N. The organization must not have previously lost its status. It must also be less than 15 months since automatic revocation. Complete form 1023 or 1024 and send to the IRS with appropriate fees.
Retroactive Reinstatement (Within 15 months) – Similar to the above process, but with some additional work. Organizations who cannot file a 990-EZ or 990-N, or have had their status previously revoked must use this route. They will need to file all form 990s for the missing tax years. Additionally, they must attach a statement establishing a reasonable cause why they could not file for one tax year.
Retroactive Reinstatement (After 15 months) – Similar to the previous two, but now reasonable cause must be established for ALL three years.
Post-Mark Date Reinstatement – organizations may apply for reinstatement after the post-mark date of their application by completing the form 1023 or 1024, attaching appropriate user fees, and send to the IRS.
We regularly post articles like these on our website and social media pages. Our clients and readers find these articles useful for their own business needs or to further their own “good to know” knowledge. We are not just interested in informing others, but also supporting them with their particular business needs. MiklosCPA is a California-based accounting firm that has helped many businesses with their tax and accounting needs using our cloud-based services united with regular and personalized communication. If you would like to learn more about our services, contact us!
MiklosCPA is a top-rated cloud-based Certified Public Accounting firm in Los Angeles, Orange County, California serving small businesses and start-ups.
