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403b Contributions for Non Resident Aliens - W-2 Implication

Hi everyone,

I am a payroll specialist for a non-profit research institution in California. We have several employees who are on tax treaties from various countries.

My question arises when an employee’s tax treaty expires, but they contributed to 403(b) the entire year. Should the 403b contributions withheld while the tax treaty was in effect be deducted from federal wages after the treaty expires? Or are only 403b deferrals after the tax treaty end date utilized to reduce federal wages?

For example, I have an employee who contributed 403b each payroll of the year - to use round numbers $50.00 a pay period. His tax treaty expired at the end of September, so all wages after are reported in box 1 of the W-2 less 403b contributions withheld from October through December, so his box 1 would report $5,700 ($6,000 in gross wages less $300.00 in 403b deferrals from Oct through Dec). In box 12E - all 403b deferrals for the year are listed, $1,200.

My concern is that the 403b deferrals from Jan - Sept are not reducing box 1, but I can't find anything anywhere that says they should or should not.

Should box 1 read a) $4,800 ($6,000 federal wages less $1,200 403b deduction for the year or b) $5,700 ($6,000 ferderal wages less $300 403b decutions from Oct - Dec)

Any assitance you can provide is GREATLY appreciated and supporting documentation is a huge help as well!

Comments

  • Hello Kay,
    Do you mean "Visa's" rather than "Tax Treaties" or do you mean their tax treaty exemptions no longer apply regardless of the Visa? (Somehow that seems odd to me, but I think I understand what that would be - that would be the date the non-immigrant status expires?). Or did the treaty between the US and the country of origin expire without a new treaty?

    I was not able to find anything specific to your question but I would think that the pretax deductions from non-taxable compensation would not be eligible for serving as an offset to taxable compensation. That is, if US tax does not apply to the earnings during a certain period of time, then US tax rules do not apply to deductions or payments made during that same period of time. Check to see if you actually have two short tax years during the calendar year - one to which the treaty exemptions apply and one to which they do not (I can see this where the residency status changes during the year due to meeting the time requirements). Page 4 of Publication 571 discusses "excluded" v. "deducted" in the section on benefits from a 403(b) - excluded income does not appear on the W-2 - Deductions go on the employee's tax return.

    You may need to report differently for state and local tax purposes. You may also need both a W-2 and a 1042-S - The gross wages reported on Form 1042-S might be exempt due to the tax treaty - and any amounts contributed to the 403(b) would already be exempt as part of the gross - Those amounts would not be shown of Form W-2 at all.
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