China Tax Treaty & Forms 1042s, 1040(nr), & 8833

[Joe]

We are a research institute and recently hired an individual from China on an H1B visa. His primary purpose is to conduct scientific research. Article 19 of the tax treaty with China exempts his related compensation from Fed Income taxes for a period not to exceed three years. At the end of the year, do we report the exempt wages on Form 1042S and report zero Fed wages and withholding on Form W-2? If he meets the substantial presence test & is required to file Form 1040, where does he report the information from Form 1042S and should it be attached to Form 1040? Is Form 8833 required to document the tax treaty exemption?

[taxexpert]

The W-2 should show zero income and withholding for income tax purposes but your employee is not exempt from Social Security and Medicare tax, so income should be shown and tax withheld for Social Security and Medicare. The employee is not required to attach Form 8833, but this form is recommended by the IRS to report the exemption.