Filipino, Korean workers now subject to FICA taxes

Most Filipino and Korean workers will have another deduction on their paychecks, this time for U.S. Social Security and Medicare taxes as a result of the federalization of CNMI immigration.

The U.S. Internal Revenue Service said that Filipino workers in the CNMI are no longer exempt from the Federal Insurance Contribution Act, unless they hold a valid H-2 U.S. visa.

FICA covers Social Security and Medicare taxes.

This latest development means FICA taxes will be deducted from most Filipino and Korean workers’ payroll, in addition to the local taxes they currently pay the CNMI government.

Most Filipino and Korean workers are previously exempt from paying these federal social security taxes.

An IRS letter dated Oct. 5, 2011, a copy of which was obtained by Saipan Tribune yesterday, mentioned Filipino workers only.

A separate document from a major accounting firm in the CNMI talked about Korean workers’ social security coverage.

“Unless an individual is eligible for FICA exemption based on some other circumstances, FICA taxes will apply to these Filipino workers,” said Lynne Camillo, branch chief of IRS’s Employment Tax Branch 2, in an Oct. 5 letter outlining changes to the way Social Security taxes are applied to Filipino workers in the CNMI.

Filipinos and Koreans in Commonwealth-only worker, or CW, status do not meet the eligibility criteria for a U.S. H-2 status.

For affected Filipino and Korean workers previously exempt from U.S. Social Security payroll tax, this latest development means an additional 5.65 percent deduction from their payroll for Social Security (4.20 percent) and Medicare (1.45 percent), said a Filipino accountant in the CNMI for 15 years.

Deloitte & Touche LLP, through Joe M. Arnett, tax partner-in-charge for Guam/Micronesia, issued a statement yesterday based on the IRS letter.

“Based upon the opinions expressed in her [IRS’ Lynne Camillo] letter, after Nov. 27, 2011, Filipinos working in the CNMI will be subject to FICA tax withholding unless they hold a valid H-2 US Visa,” said Deloitte & Touche.

Another accounting firm, Ernst & Young, has also advised its Korean clients about the application of FICA among most Korean workers in the CNMI.

In an interview yesterday, Philippine Consul General Medardo Macaraig said that while he has heard that some Filipinos in the CNMI favor paying U.S. Social Security taxes, others are not. He said he will have to consult with the Filipino community in the CNMI on the matter.

Right now, Macaraig said, Filipino workers have to follow the U.S. government’s policy.

But he said if there is a push for affected Filipinos in the CNMI to retain exemption from the FICA tax, this will have to be taken up by the Philippine government with the United States government. Macaraig said they will further review this development related to immigration.

A Filipino accountant who has been in the CNMI for 15 years and has been petitioned for a CW status, said she favors being subject to U.S. Social Security, citing this as an “investment.”

“I will have something to look forward to when I reach retirement,” she said.

She said if an affected employee’s social security deduction is 5.65 percent, the employer contribution will be 7.65 percent.

“Now, employers will have to remit those to IRS,” the accountant said.

Richard Pierce, executive director of the Saipan Chamber of Commerce, when asked for comment, said “obviously, this has been much more important to employers in the CNMI than at IRS.

“Employers have requested information on the FICA issue from IRS and the Social Security Administration ever since the regulations governing CW-1 visa issuance were first printed. I personally received a request from a senior GAO official in the midst of preparing another economic report on the CNMI asking if I knew how Filipino contract employee FICA taxation would be handled after Nov. 28, 2011. Neither one of us knew what IRS surely knew back then,” Pierce said.

INA and exemptions

Deloitte & Touche said the IRS letter explains that FICA-or social security taxes-“applies to wages paid by employers for employment in the CNMI. An exemption in the Internal Revenue Code applies to Filipinos working temporarily in Guam under section 101(a)(15)(H)(ii) of the Immigration and Nationality Act (H-2 status).”

By reference to sections 601(c) and 606(b) of the Covenant to Establish a Commonwealth of the Northern Mariana Islands in Political Union with the United States, services performed in the CNMI by Filipinos admitted to the CNMI as nonimmigrant workers were also exempt from FICA as a result of the Guam exemption.

This determination is based upon a provision in CNMI immigration law that also provided nonimmigrant status to working Filipinos.

The exemption (3 CMC section 4303(q)(8)(B)) was similar in practice to that of the U.S. H-2 status. Therefore, the exemption from FICA that applied to Filipinos working in Guam applied to nonimmigrant Filipinos admitted to the CNMI on CNMI visa.

However, with the enactment of the Consolidated Natural Resources Act of 2008-the law that placed CNMI immigration under federal control-CNMI immigration laws no longer apply and the CNMI visa is no longer available to workers in the CNMI.

As the CNMI transitions to U.S. immigration law, a new status-the CW-was created for nonimmigrant workers who are ineligible for other employment-based nonimmigrant visa classifications.

“These workers do not meet the eligibility requirements for U.S. H-2 visas status. Because Filipino workers temporarily present in the CNMI under a CW classification do not hold an H-2 visa, they are no longer eligible for the FICA exemption previously extended to them,” said Deloitte & Touche’s Arnett.

GAO report

The U.S. Government Accountability Office, in a July 2011 report on the status of transition to federal immigration law, said that Social Security coverage for certain foreign workers in the CNMI is “unknown.”

GAO, the investigative arm of Congress, was referring to certain Filipino and Korean workers and their employers with regard to the Social Security payroll tax.

It said data for 2009 from the CNMI Division of Revenue and Taxation show that workers from Korea and the Philippines totaled 12,406 and represented 75 percent of foreign workers, or 44 percent of all workers, in the CNMI.

GAO said that given the transition to federal immigration law, it is uncertain whether Filipino and Korean workers who obtain CNMI-only work permits will be covered by Social Security.

“If these workers are deemed to be covered, they and their employers will be subject to Social Security payroll taxes. The IRS and SSA will need to consider CNRA’s impact on Filipino and Korean workers with regard to Social Security coverage,” GAO said.