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Archives
April 2003
Department of Labor Proposes Changes to Wage and Hour Laws
The Department of Labor recently proposed changes to its rules defining categories of employees who are exempt from the minimum wage and maximum hours provisions of the Fair Labor Standards Act. The proposed changes reflect DOL's first attempt in more than 50 years to comprehensively overhaul these rules.Major proposed changes include increasing the minimum salary level for exempt workers to $425 a week and consolidating the duty tests used to evaluate exempt employees in a short test for each category of exempt worker. The new definition of exempt executive employees requires that such employees manage an enterprise or recognized department or subdivison, customarily and regularly direct the work of two or more employees, and have the authority to hire and fire other employees (or provide recommendations on such decisions that are given weight). The new definition of exempt administrative employees replaces the portion of the previous short test that required the exercise of discretion and independent judgment with a requirement that such employees hold a position of responsibility.
The increase in the minimum salary level would ensure that employees making less than $22,100 annually are subject to the minimum wage and overtime provisions of the law. Whether the changes in the definitions of particular categories of exempt employees will be significant for nonprofit organizations will depend on the final wording of the regulations and the particular responsibilities of the employees at issue. The proposed rules do not necessarily exclude or include more types of nonprofit employees from the definitions of exempt employees than the existing rules.
DOL is seeking written public comment on its proposed new rules on or before June 30, 2003. For additional information, go to www.wageandhour.dol.gov.
By Anne Spielberg
Not a "Foriegn" Concept: Employing Visitors in the U.S. The IRS has recently released Publication 513, "Tax Information for Visitors to the United States," which is intended to assist short-term visitors to the U.S. determine whether they need to file U.S. tax returns. Publication 513 covers some of the same material that was already covered in the more comprehensive IRS Publication 519, "U.S. Tax Guide for Aliens." However, the release of Pub. 513 does serve as a reminder of some of the important employment eligibility and income tax withholding issues confronting employers interested in hiring foreign employees. This article covers some of the basic tax and immigration concepts you should be aware of. Although many of much of this article is beyond the scope of Publication 513, the article barely scratches the surface of the issues that you will probably need to consider if your organization is considering hiring a visitor to this country.
Employment Eligibility
You may not employ foreign individuals in the United States unless they have appropriate employment authorization, and most foreign visitors simply are not eligible to be employed in the U.S. The federal government requires employers to ascertain the employment eligibility of all employees. Employees must provide documents demonstrating their identity and employment eligibility. Employers must record that employee has provided the proper documents by filling out Section 2 of Form I-9 and retaining the form in its employment files. If any new employee cannot provide the necessary I-9 documentation by the end of the her third day of work, you should not continue to employ her. The Form I-9 is issued by the Bureau of Citizenship and Immigration Services (BCIS), formerly the INS, and is available on the BCIS website.
If you want to hire a person who is not properly documented to work in the U.S., you may or may not be able to assist the applicant in obtaining the necessary work authorization. In this situation, you will almost certainly need to consult a qualified immigration attorney. Each category of visa that a visitor to the United States could have carries specific restrictions and limitations. Since employment is probably the most restricted of all immigration benefits, it simply may not be possible to obtain a visa that will enable a particular individual to work in a designated position. In any case, the candidate should not begin his or her employment unless and until he or she obtains appropriate work authorization.
Note that the restrictions on hiring foreign visitors only apply to paid work in the United States. Volunteer work by foreign visitors is not restricted in this way, so a visitor without employment eligibility may accept, for example, an unpaid internship position. Undocumented workers may only work as a true volunteer. As you might expect, the BCIS will view with skepticism arrangements that appear designed to circumvent immigration-related employment restrictions. For this reason, it is a good idea to consult an immigration attorney prior to retaining an undocumented worker as a volunteer in a position that is normally filled by a paid employee, or in a position that you plan to convert later to a paid position.
Citizenship and National Origin Discrimination
Another issue that you should be aware of in dealing with foreign job applicants is discrimination. It is illegal to discriminate against work-authorized individuals on the basis of national origin or, in most cases, to discriminate against a job applicant based on whether he is a U.S. citizen. As a result, it is impermissible for employers in most circumstances to establish a "US citizen only" hiring policy, although there are exceptions for government-related work. It is also unlawful for an employer to specify which I-9 documentation an employee must provide. If an employee provides documentation that establishes his identity and work authorization and is listed on the I-9 form, you cannot require that the employee provide additional documentation.
It may seem like these laws would put employers in a tricky position. You have to be careful not to hire unauthorized foreign workers, and yet you run the danger of practicing employment discrimination if you excessively scrutinize job applicants who appear foreign. In reality, it should not be unreasonably difficult to comply with the law in most cases. Employers are not required to absolutely guarantee that their employees are authorized to work. Employers will not be liable if they attempt in good faith to comply with the Form I-9 documentation requirements, even if it turns out later that an employee is in fact not authorized to work.
There are a few basic strategies that will help prevent claims of citizenship and nationality discrimination, and yet assist you in documenting employee's work eligibility. First, it is not a good idea to inquire about an applicant's citizenship status or nationality before hiring her. Instead, you should consider simply reminding all job applicants that they will be required to provide documentation of employment eligibility if they are hired.Second, if an employee provides facially genuine documentation that satisfies the I-9 requirements, you must accept it. Third, make photocopies of all such documentation and keep them in the employee's personnel file with the I-9 form. Fourth, you should not hire or continue to employ anyone who provides documentation that is clearly fraudulent or who you learn is in fact not eligible for employment.
Income Tax Withholding
Once you have hired a foreign employee, you may wonder how to withhold income tax for that person. The good news is that most of the time you will withhold income tax, social security, and Medicare as you would for any other employee. IRS Publication 15, Circular "E", the "Employer's Tax Guide" covers the applicable rules. Issues may become more complicated if an employee is in the United States for only a short period or is on a visa to which special rules apply, including persons on student "F" category visas.
If an employee has not attained a "substantial presence" in the US, he is considered a "Nonresident Alien" under the tax code. A Nonresident Alien's wages will generally be subject to a 30% flat-rate withholding on US-source income, unless the US has a tax treaty with the employee's home country, in which case treaty rules will apply. If you are familiar with terms used in immigration law, note that the IRS terminology is not completely consistent with immigration law concepts. Although all persons who are lawful permanent residents (i.e. "green card" holders) for immigration purposes are always Resident Aliens for tax purposes, persons with temporary visas who have attained "substantial presence" are also considered Resident Aliens and are taxed in the same way as green card holders.
The "substantial presence test" involves a multi-part numerical formula that takes into account the number of days the employee has been in the US during the current tax year and the previous two years. A person who has been in the US for over 183 days in a single calendar year will generally meet the substantial presence test and may be treated as a resident alien for withholding purposes in that year, for example. Be aware, however, that there are a number of exceptions, caveats and options that must be considered in determining whether to treat an employee as a resident or nonresident. One exception that relates to a fairly common group of foreign workers is that time spent in the U.S. on an "F" category student visa generally does not count toward tax-purposes residence. For more details on resident/nonresident distinction, IRS Publication 515, "Withholding of Tax on Nonresident Aliens and Foreign Entities" is a good place to start.
As a final nuance, a U.S. organization may lawfully hire an employee or contractor to provide services outside the U.S., even if the person is not eligible to work in the United States. There are no immigration-related restrictions on this kind of employment because the work is performed outside the United States. In addition, a payment to a Nonresident Alien working outside the United States is not subject to US income tax and withholding. However, you should document the employee's foreign status by requiring the him to fill out an IRS Form W-8BEN and submit it to you, along with a photocopy of the his (foreign) identification card or passport. These documents do not need to be sent to the IRS, but you should keep them on file. In the event of an IRS audit, you may need them to demonstrate that payments to the foreign employee were exempt from withholding and reporting requirements.
For more information on employment eligibility of foreign persons, see the BCIS website at: www.immigration.gov.
For more information on citizenship and nationality discrimination, see the Department of Justice, Office of Special Counsel for Immigration-Related Unfair Employment Practices website at: www.usdoj.gov/crt/osc.
For further information of taxation of foreign persons employed in the US, see the IRS publications listed below. The IRS Publications are all available online.
Publication 513, "Tax Information for Visitors to the United States."
Publication 15, Circular "E", "Employer's Tax Guide."
Publication 515, "Withholding of Tax on Nonresident Aliens and Foriegn Entities."
Publication 519, "U.S. Tax Guide for Aliens."
By Paul J. Tanis and Miguel de Baca
Nonprofit Group Sheds Light on IRS Audit Campaign
A press release by the Alliance for Justice and other nonprofit organizations has illuminated the focus of a recent IRS audit campaign on public charities that lobby. Recent reports have suggested that 501(c)(3) organizations that elect to use the Section 501(h) test to measure their lobbying were specifically targeted for audit by this campaign. According to the Alliance, IRS officials confirmed that while a recent nationwide project focused on public charities that lobby, the Section 501(h) election was not a factor in selecting groups for audit. IRS officials reiterated the agency's longstanding position that charities that elect to measure their lobbying under the clearer 501(h) test, rather than the vague "no substantial part" test, are at no greater risk of audit. The Alliance also announced that the audit project focusing on lobbying expenditures was recently halted altogether.
For a copy of the press release, please visit the Alliance for Justice web site at www.allianceforjustice.org.
By Amy Licht
IRS Rules on Internet UBIT Issues
In a recent Private Letter Ruling, the Internal Revenue Service determined that a tax-exempt organization can use its web site to provide banner advertising and links to a third-party service provider without incurring Unrelated Business Income Tax (UBIT).
The Basics of UBIT
Generally speaking, exempt organizations are subject to UBIT on revenue produced by (1) trade or business activities that are (2) regularly carried on and (3) not substantially related to their charitable, educational or other exempt purposes. The sale of advertising in an exempt organization's periodical or on its web site is an unrelated trade or business and any resulting net revenue is subject to UBIT.
In contrast, the Internal Revenue Code specifically excludes royalty payments from UBIT. An exempt organization may license its name, logo or other intangible property for use by a commercial provider of services or products, such as a credit card company or internet provider. Income from a passive licensing agreement is royalty income and is not subject to UBIT. However, if the organization takes an active role, such as advertising or promoting the commercial provider's products or services, or providing any other "substantial return benefit" to the commercial entity, this may result in UBIT.
Corporate Sponsorship
The exempt organization may publicly acknowledge a commercial entity without payments from it being subject to UBIT. However, this special exemption for acknowledgment of commercial sponsorship does not apply to income from the sale of acknowledgments placed in an exempt organization's periodicals.
The letter ruling examined the case of a Section 501(c)(5) agricultural organization that had entered a license agreement with two insurance companies. The Service determined that the exempt organization's posting of information about the insurance providers on its web site, including hyperlinks to their home pages, did not cause the licensing income to be treated as anything other than a royalty. The ruling allows that in some circumstances a link to a sponsor page could result in taxable income. The regulations provide an example: a link from a tax-exempt organization's web site to a sponsor's page that contains an endorsement of the sponsor's product by the organization is an advertisement and any amount paid to the organization by the sponsor in exchange for the link is unrelated business income.
Is It a Periodical?
The ruling is interesting because it answers an outstanding question: whether, for UBIT purposes, an organization's website will generally be deemed a "periodical"under IRS regulations. The distinction between periodical and non-periodical publications is significant for organizations that sell online advertising because it affects the extent to which expenses may be deducted in calcuating UBIT. Expenses attributable to the periodical section of a web site containing paid advertisements may be less valuable in reducing taxable income than expenses attributable to other areas of the website containing paid advertising.
Although the regulations provide that periodicals may be published electronically, periodicals must also be "regularly scheduled." The Service noted that if an organization posts an online version of a print periodical on its website, that portion of the site will be considered a "periodical." Therefore, web sites themselves are not "periodicals" but some component parts may be treated as periodicals.
The Usefulness of Two Contracts
Significantly, the ruling also indicated that an exempt organization can hold separate royalty and advertising agreements with an individual commercial entity. The Service determined that income resulting from an agreement to sell advertising space in periodicals and on webpage banners constituted unrelated business and was subject to UBIT. However, a licensing agreement with the same commercial entity did not result in UBIT. The letter ruling thus appears to validate the two-contract approach organizations have often used in recent years to avoid tainting tax-free royalty income with the unrelated business income in complex business arrangements with one commercial entity.
Although it is not binding guidance, the letter ruling does provide interesting insights into how organizations can structure business relationships and provide information about commercial vendors while minimizing potential UBIT liability.
By Amy Licht
Filtered Philanthropy: A New Online Service Will Screen for Terrorist-Affiliated and Corrupt Charities
The creation of CharityGuard represents a new trend in cautious grantmaking, recognizing a growing concern over potential misuse of donated funds. In part, the concern stems from the recent release of the Treasury Department's "Anti-Terrorist Financing Guidelines." The Guidelines, which are voluntary, suggest particularly demanding procedures for U.S.-based charities to guard against unknowingly financing terrorism [see NN 12/02].CharityGuard will likely make it more feasible for smaller grantmaking organizations to comply with the Treasury's exacting best-practices on vetting potential foreign grant recipients. On the other hand, some organizations are concerned that this new era of heightened screening will promote undue suspicion of legitimate organizations simply because someone makes a false accusation in the press.
Whether the concern is anti-terrorism or internal corruption, the existence of CharityGuard highlights the importance of having sound procedures in place to evaluate potential grantee organizations and an increase in the demand for this due diligence in grant-making on a worldwide basis.
For more information:
GuideStar: http://www.guidestar.org/news/features/charity_guard.stm.
The Treasury Department's guidelines for grantmaking to foreign organizations: http://www.treas.gov/press/releases/docs/tocc.pdf.
By Miguel de Baca
This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required.
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