The IRS has issued a notice that explains how to compute withholding on wages earned by nonresident alien employees working in the United States [Notice 2011-12, 2011-8 IRB].
Background. The withholding calculations for nonresident alien employees are different than for other employees, because nonresident alien employees are not entitled to the standard deduction that is built into the withholding tables. Notice 2005-76, 2005-2 CB 947, requires employers to add an amount to wages before determining withholding under the wage bracket or percentage methods in order to offset the standard deduction built into the withholding tables. The addback amount varies by pay period (i.e., weekly, biweekly, monthly, etc.).
In 2009 and 2010, there was an additional adjustment that needed to be made because nonresident aliens were not eligible for the Making Work Pay credit in the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5). This adjustment was explained in Notice 2009-91, 2009-48 IRB 717. However, the above adjustment does not have to be made in 2011, because the Making Work Pay credit can no longer be claimed after Dec. 31, 2010.
In the new notice, the IRS states that Notice 2009-91, 2009-48 IRB 717, should not be followed effective with wages paid after Dec. 31, 2010, due to the expiration of the Making Work Pay credit. Withholding calculations should now be calculated using the procedures explained in Notice 2005-76, 2005-2 CB 947.