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University of Connecticut Payroll Department

Taxation of Specialty Workers

For UConn employees who have entered the United States in a specialty worker category such as H-1B, O-1, or TN the remuneration for personal services, which is considered compensation, is subject to both federal and Connecticut state income taxes. However, if you are engaging in either research or teaching you may be eligible to enjoy a tax treaty benefit. While there is no requirement that individuals enter in a specific immigration status to claim a benefit under a Teacher/Researcher article, the Internal Revenue Service (IRS) requires that immigration documents support the primary purpose claim of either teaching or research. Individuals who enter in one of the above statuses have a very complex tax situation. This is due to the fact that H-1B, O-1, and TN’s are not considered to be exempt from the substantial presence test and must begin counting days of presence immediately upon arrival. The substantial presence test is a mathematical test defined by the IRS that determines tax residency. A non-resident is considered to have passed the substantial presence test, thus being considered a tax resident if the following criteria are met:
  1. Present in the United States for 31 days during the current year AND
  2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting
    • All the days you were present in the current year, AND
    • 1/3 of the days you were present in the first year before the current year, AND
    • 1/6 of the days you were present in the second year before the current year

Example:
2011 - present in the United States for 100 days
2010 - present in the United States for 365 days
2009 - present in the United States for 153 days

To determine if you meet the test count all days in 2011 = 100, 1/3 of the days in 2010 = 122, and 1/6th of the days in 2009 = 26 days. Since the grand total (100+122+26 = 248) is greater than 183 days this individual would be considered a tax resident for calendar year 2011.


Please note that once you become a tax resident of the United States, this can affect treaty eligibility. Generally tax treaties contain language known as a “savings clause.” A savings clause safeguards the rights of each contracting state (the United States/foreign country) to tax its own residents as if there was no tax treaty. This would essentially mean that once a non-resident alien became a U.S. tax resident all benefits under the treaty would be lost and the individual would be taxed under U.S. tax law. However, most treaties contain an “exception” to the savings clause when it comes to the use of the Teacher/Research treaty articles. In other words the fact that an individual has become a tax resident by passing the substantial presence test does not necessarily negate the eligibility and use of a tax treaty benefit.

In order to determine treaty eligibility individuals must make an appointment with Karla Desjardins in the Payroll Department. Karla will review the appropriate documentation and apply the applicable treaty benefit to those who are eligible. If it is determined, based on information provided by employee, that a treaty benefit is appropriate, Karla will prepare the appropriate Internal Revenue Service tax form for employee signature, either form 8233 (Exemption from withholding on Compensation for Independent Personal Services of a Non-Resident Alien Individual), or form W-9 (Request for Taxpayer Identification Number and Certification). The federal tax exemption will begin in the next payroll cycle, and continue until the terms of the tax treaty agreement have been met.

If the individual is not eligible for a tax treaty benefit and is a non-resident for tax purposes the standard non-resident graduated withholding rate will be applied upon first payment. This rate is single (regardless of marital status), 1 withholding allowance, and the letters NRA denoted next to box 6.

If it is determined that the individual is a tax resident, the individual will NOT be subject to the IRS prescribed standard non-resident withholding rate. The individual may fill out the federal form W-4 in a manner best suited for their personal situation. The federal form W-4 offers instructions or the following IRS on-line withholding calculator can also provide assistance.

Please note that the State of Connecticut does not recognize federal tax treaties. Specialty workers will be taxed in accordance with their form CTW4 election. The form CTW4 offers instructions, or you can find additional information on the CT Department Of Revenue Services website.