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IRS Bulletin 2005-46 Withholding on Wages of Nonresident Alien Employees, published November 14, 2005, includes Notice 2005-76 in which the IRS outlines new withholding rules for employees classified as nonresident aliens for federal tax purposes. This notice changes the method by which an employer must calculate the federal withholding amount for NRA wages issued on or after January 1, 2006.

The rule changes are designed to eliminate or reduce a general over-withholding of federal income tax on NRA employee wages for services performed in the U.S. The new IRS rule will instead assess withholding on a basis that closely approximates an individual's income tax liability. This notice requires employers to withhold taxes based on a calculation of actual earned income with an artificial amount, based on payroll frequency, added to the wages of a nonresident alien employee.