Internal Revenue Bulletin: 2012-51
December 17, 2012
FICA Taxes on Wages Paid to Residents of the Philippines for Services Performed in the Commonwealth of the Northern Mariana Islands
This document provides that the IRS will not assert that any taxpayer has understated liability for taxes under the Federal Insurance Contributions Act (FICA) by reason of a failure to treat services performed before January 1, 2015, in the Commonwealth of the Northern Mariana Islands (CNMI) by a resident of the Republic of the Philippines as employment under section 3121(b) of the Internal Revenue Code (Code). Employers must withhold and pay FICA taxes on remuneration paid to residents of the Philippines who do not hold an H-2 status for services performed as employees in the CNMI after December 31, 2014, unless those workers are eligible for FICA exemption based on some circumstances other than the exemption in section 3121(b)(18).
Sections 3101 and 3111 of the Code impose FICA taxes on wages with respect to employment. FICA taxes consist of the Old-Age, Survivors and Disability Insurance tax (social security tax) and the Hospital Insurance tax (Medicare tax). These taxes are imposed on both the employee and the employer. I.R.C. §§ 3101 and 3111.
The term “wages” is defined in section 3121(a) for FICA purposes as all remuneration for employment, with certain specific exceptions. Section 3121(b) defines the term “employment” to include any service, of whatever nature, performed within the United States by an employee for the person employing him, irrespective of the citizenship or residence of either, with certain specific exceptions. The CNMI is included in the definition of the United States for FICA purposes. I.R.C. § 3121(e); Article 6, Section 601(c), Covenant to Establish a Commonwealth of the Northern Mariana Islands in Political Union with the United States (Covenant), Pub. L. No. 94-241, 90 Stat. 263 (codified as amended) at 48 U.S.C. § 1801 note (2006); Zhang v. United States, 640 F.3d 1358 (Fed. Cir. 2011), cert. denied, 132 S.Ct. 2375 (2012).
Under section 3121(b)(18) of the Code, services that residents of the Philippines perform while temporarily admitted to Guam under section 101(a)(15)(H)(ii) of the U.S. Immigration and Nationality Act (U.S. INA) (H-2 status), 8 U.S.C. § 1101(a)(15)(H)(ii), are excepted from employment for FICA tax purposes. Section 601(c) of the Covenant provides that “[r]eferences in the Internal Revenue Code to Guam will be deemed also to refer to the Northern Mariana Islands, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof or of this Covenant.” Section 606(b) of the Covenant states that “those laws of the United States which impose excise and self-employment taxes to support or which provide benefits from the United States Social Security System. . . will become applicable to the Northern Mariana Islands as they apply to Guam.” Therefore, section 3121(b)(18), in combination with the Covenant, provides an exception from employment for FICA purposes for services performed by residents of the Philippines temporarily in the CNMI in H-2 status.
Prior to November 28, 2009, the CNMI had its own immigration laws with its own immigration categories, and the U.S. INA did not apply in the CNMI (except for very limited purposes not relevant for purposes of FICA tax). However, CNMI immigration laws provided a CNMI temporary work status under the Northern Mariana Islands Commonwealth Code, 3 C.M.C. section 4303(q)(8)(B), which was similar in some ways to H-2 status. Both laws similarly defined a nonimmigrant worker as one temporarily in the United States or the CNMI to perform temporary services or labor. Therefore, the IRS determined that the exemption from FICA under section 3121(b)(18) applied to residents of the Philippines admitted to the CNMI on the similar CNMI temporary status and amended Publication 80, Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands, to reflect this position.
On May 8, 2008, Congress enacted the Consolidated Natural Resources Act of 2008 (CNRA), Pub. L. 110-229, 122 Stat. 854, which extended federal immigration laws to the CNMI. The transition period for implementation of the United States immigration law in the CNMI began on November 28, 2009, and is scheduled to end on December 31, 2014. As a result of the CNRA, CNMI immigration laws no longer apply and CNMI work permits no longer exist. Nonresidents in the CNMI must apply for a federal immigration status if they wish to remain in the CNMI.
The CNRA authorized nonresidents to work in the CNMI for a two-year period beginning November 28, 2009, and ending November 27, 2011, if they had received a transitional conditional permit (commonly referred to as an “umbrella permit”) from the CNMI government as of November 28, 2009. Additionally, the CNRA established a new Commonwealth Only Transitional Worker (CW) nonimmigrant visa classification for workers in the CNMI. The CW visa classification enables workers who are ineligible for other employment-based nonimmigrant U.S. visa classifications ( e.g. , H-2 status) to continue working in the CNMI through the end of the transition period on December 31, 2014 (or longer if the U.S. Secretary of Labor extends the CW program, as is authorized by the CNRA).
Section 3121(b)(18) provides an exception from “employment” for temporary services that residents of the Philippines perform only in H-2 status. Residents of the Philippines temporarily present in the CNMI under any immigration status other than H-2 status, including the CW visa classification, are not eligible for the FICA exemption in section 3121(b)(18). Unless an individual is eligible for FICA exemption based on some other circumstances, FICA taxes will apply to remuneration paid to residents of the Philippines performing services as employees.
However, many residents of the Philippines currently employed in the CNMI have been seeking to determine their proper immigration status. As a result, these workers and their employers have been or are uncertain about their immigration status. For this reason, and in order to ease the CNMI’s transition to federal immigration law, the IRS will not assert that any taxpayer has understated liability for FICA taxes by reason of a failure to treat services performed before January 1, 2015, in the CNMI by a resident of the Republic of the Philippines as employment under section 3121(b) of the Code. However, employers must withhold and pay FICA taxes on wages paid to residents of the Philippines who do not hold an H-2 status for services performed in the CNMI after December 31, 2014, unless those workers are eligible for FICA exemption based on some circumstances other than the exemption at section 3121(b)(18).
The principal author of this announcement is Don Parkinson of the Office of Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this announcement, contact Mr. Parkinson at (202) 622-6040 (not a toll-free call).
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