IRS confirms CW workers are not exempt from FICA

The U.S. Internal Revenue Service has confirmed that workers with Commonwealth-only visa or status, including those from the Philippines, are not exempt from Social Security and Medicare taxes.

IRS, the U.S. government agency responsible for tax collection and tax law enforcement, posted for the first time a statement on its website under “What’s New” on Publication 80 about Filipino workers in the CNMI and the new CW transitional visa classification.

“Workers on the CW visa, including those from the Philippines, are not exempt from Social Security and Medicare taxes,” IRS says.

It adds, “Unless temporary workers in the CNMI are eligible for an exemption from Social Security and Medicare taxes based on some other circumstances (for example, a Filipino resident holding a valid U.S. H-2 visa), employers are required to withhold and pay Social Security and Medicare taxes.”

IRS says Filipino residents admitted to the CNMI are not treated as exempt from Social Security and Medicare taxes on the basis of holding a work permit under CNMI immigration law.

While the CNMI is transitioning to full implementation of U.S. immigration law, a new transitional CW visa classification is available for workers in the CNMI.

The one-paragraph information can be accessed at http://www.irs.gov/publications/p80/ar01.html#en_US_2011_publink1000233890.

Since late November to early December, some employers in the CNMI have already started withholding and paying Social Security and Medicare taxes from their Filipino employees who, prior to Nov. 28, 2011, were considered exempt from paying these taxes.

Workers from Korea have been considered not exempt from the taxes but different interpretations of laws and policies resulted in some employers not withholding and paying these taxes for years.

Many employers, however, have remained on a wait-and-see mode, trying to get a memo or circular directly from IRS regarding the application of the Federal Insurance Contribution Act taxes as a result of federalization of local immigration.

FICA covers Social Security and Medicare taxes.

“Now that IRS has already posted something on its website that CW workers are not exempt, we have no choice but to comply,” said a 50-year-old businessman who has been in construction business in the CNMI for 14 years.

He said his business may further let go of some foreign workers to cope with the additional personnel expense brought by the withholding and payment of Medicare and Social Security taxes. Because many of his employees are from the Philippines, this would be the first time that the employer and his employees will be paying these federal taxes.

Ricky Pineda, an accountant at Taro Sue furniture store, said yesterday that the FICA taxes are negatively affecting both the employees and employer. He said Taro Sue started withholding and paying taxes this month. Other businesses that have been deducting and paying these federal taxes from their employers did not want to have their business names published at this time.

A worker earning the CNMI’s minimum wage of $5.05 an hour will have a monthly FICA tax deduction of over $45.

Employee’s FICA contribution is 5.65 percent of their salary for 2011—4.2 percent for Social Security and 1.45 percent for Medicare. This is on top of the CNMI taxes that foreign workers pay.

But IRS says that the rate for employee’s share of Social Security is scheduled to increase to 6.2 percent for wages paid after Feb. 29, 2012. This means additional dollars deducted from workers’ wages.

“However, Congress was discussing an extension of the 4.2 percent employee tax rate for Social Security beyond Feb. 29, 2012,” IRS says.

For employers, this means an additional expense of almost $62 a month in employer’s share for every employee required to pay FICA taxes. Employer’s share is 7.65 of the employee’s salary—6.20 percent for Social Security and 1.45 percent for Medicare, unchanged from 2011.

Employers in the CNMI, including members of the Saipan Chamber of Commerce, have long been seeking continued exemption from the FICA taxes for Filipino workers. Many, if not most, of the foreign workers employed in the CNMI are from the Philippines.

Chamber president Douglas Brennan, when asked for comment yesterday on the information from IRS, said the Chamber has not changed its position “and disagrees with the recent IRS printing where Filipino CW-1 transitional workers would be subject to Social Security and Medicare taxes.”

He said umbrella permit holders and its established predecessor, the CNMI immigration work and entry permit, were “temporary and to mirror the U.S. H-2 visa.”

“Just because USCIS has changed the name of the immigration vehicle from an umbrella permit to a CW-1 visa does not mean they are no longer temporary work classifications. We’re talking about the same people, let alone the fact that USCIS has established them as temporary and to be transitioned out of the CNMI in 2014,” Brennan told Saipan Tribune in an e-mail response.

USCIS stands for U.S. Citizenship and Immigration Services, one of the component agencies under the Department of Homeland Security.

“Why when CNMI temporary foreign national workers, and their employers, have poured nearly $60 million into the black hole of the IRS over the past 25 years is IRS now deciding they are going to get additional monies from those transitional workers that will only be here another two years?” Brennan asked. “It is arguably against both the low-income employee that does not qualify for H-1B and other U.S. visa classification where they would pay FICA tax, and businesses that employ them and are having a hard time staying afloat right now, to do so.”

The Fitial administration is also opposed to the removal of federal tax exemption for Filipino, as well as Korean, workers.

Some Filipino workers, while trying to comply with the IRS information, said they don’t believe they will actually benefit from paying federal taxes when their CW permits are only up to 2014. After that or when they lose their employment, they won’t get a single cent from their Social Security or Medicare contributions.