Nonresident Alien Tax Compliance Guidelines
The information contained in this guide is designed to serve as a reference tool for tax management purposes for Eastern Michigan University when making payments to or on behalf of nonresident aliens including employees and foreign entities.
The Controller’s Office is responsible for oversight and review of the U. S. tax liability for all payments made by the University to or on behalf of a nonresident alien individuals/foreign entity. The tax manager along with designated department representatives will work together to make all tax withholding and reporting decisions.
This process includes data collection, tax withholding, reporting decisions, compliance monitoring, and year-end reporting. To make this process as easy and efficient as possible for both the University and the foreign nationals/foreign entities to whom the University makes payments, the University will use the GLACIER Nonresident Alien Tax Compliance System Online Software Program.
Refer to the following Internal Revenue Service (IRS) resources below:
- References for Foreign Students and Scholars
- IRS Publication 515 - Withholding of Tax on Nonresident Aliens and Foreign Entities [PDF]
Overview
All payments made by the University to or on behalf of an individual or entity must be reviewed to determine the U. S. tax residency status of the payee or beneficiary of the payment.
For U. S. tax purposes, there are four categories of tax residency status: U. S. Citizen, Permanent Resident Alien, Resident Alien for U. S. Tax Purposes, and Nonresident Alien for U. S. Tax Purposes.
Payments made to or on behalf of a nonresident alien are generally subject to income tax withholding unless specially exempted, either by the U.S. tax law or an income tax treaty.
There are tax treaties with over 63 countries, each of which contains specific requirements for exemption. If a nonresident alien wishes to claim an exemption from U.S. income tax withholding because of an income tax treaty, the individual must file one or both of the following two forms to claim the exemption:
- Form W-8BEN (non-service scholarship/fellowship, stipend, and royalty payments)
- Form 8233 (consultant, honoraria, independent contractor and employee payments)
The GLACIER on-line system will review the information in the Individual Record to determine whether the individual qualifies for a tax treaty exemption. Failure to collect all necessary information may result in the University incorrectly deducting tax from payments that may otherwise be exempt from taxation.
All payments made to or on behalf of a nonresident alien generally are required to be reported to the Internal Revenue Service (IRS), regardless of whether the payment is taxable.
Examples of payments made to nonresident aliens include, but are not limited to:
- Compensation
- Stipends
- Payments of Certain Travel Expenses
- Honoraria Scholarships/Fellowships
- Salary/Wages
- Living Allowances
- Independent Contractor Payments
- Consultant
According to Section 1441 of the U. S. tax code, the university is a withholding agent by being an entity who pays income to foreign individuals and foreign entities. The tax manager along with other designated employees at the university are responsible for the oversight of tax withholdings on payments made to foreign persons and foreign entities.
If the withholding agent fails to withhold the requisite tax and the nonresident alien payee fails to pay the tax due, the withholding agent will be liable for the tax that was required to be withheld, the individual’s tax liability and applicable interest and penalties.
Note: Payments do not have to be paid in cash or made directly to the individual to be considered income. Payments made to a third party on behalf of the individual are also subject to the withholding and reporting rules.
Each payment requires the review of certain key factors, including the (i) individual’s U. S. tax residency status, (ii) individual’s immigration status, and (iii) type of payment made to the individual.
In some cases, if the individual does not perform any activities in the U.S. related to the payment, the payment will not require tax withholding or reporting.
The amount of U. S. income tax with U. S. withholding depends on the type of payment:
- Scholarship/fellowship/grant/stipend payments (non-service): 14%
- Consultant/honoraria/Independent contractor payments: 30%
Compensation paid to employees: Graduated withholding
Determining U. S. Tax Residency Status Using Glacier
When an individual who is a nonresident alien and working for the university is identified, the Tax Manager who is the GLACIER Administrator will complete the following actions: 1) provide the individual with guidelines to create his/her individual record in GLACIER, and 2) provide the individual with an appointment to come into the office for a complete analysis of their NRA/RA determination. The GLACIER system will use the information entered to apply the "substantial presence test," which is used by the IRS to determine U.S. tax residency. The substantial presence test [PDF] is the only method that may be used to determine an individual's U.S. residency status.
The substantial presence test is a method used by the IRS to determine if an individual should be taxed as a nonresident alien or a resident alien. This test is applied each year and, in general, is a calculation of the number of days that an individual has been or will be physically present in the U.S. during a three calendar year period.
Scholarship Income
Only non-qualified taxable scholarship and fellowship payments made to a nonresident alien student through the student's account must be reported to the IRS. Qualified amounts include (i) tuition and fees required for enrollment, and (ii) fees, books, supplies, and equipment required for courses of instruction, are not subject to U.S. taxation or required to be reported to the IRS for any student, regardless of whether the student is a U.S. citizen, resident alien or nonresident alien. Amounts that do not qualify under these two categories are subject to U.S. taxation.
While the IRS does not require the University to withhold tax on taxable scholarship/fellowship payments made to U.S. citizens and permanent residents, tax must be withheld on such payments made to nonresident aliens.
Foreign students who receive income from the University need to request access to GLACIER to complete his or her Individual Record. Foreign students who do not provide the required data may be taxed at the maximum rates of tax withholding until the forms are completed and all necessary information provided.
Nonresident alien students who receive scholarships or fellowships that are subject to U.S. tax will be notified by the tax manager that any applicable tax withholding has been charged to his or her student account; in addition, the student will be issued a form 1042-S and may need to file a tax return.
The U.S has tax treaties with over 40 states. Each income tax treaty is unique and may not contain the same exemption provisions as another treaty. The mere existence of an income tax treaty between the U.S. and the individual's home country does not mean that an individual will automatically be exempt from tax withholding; the individual must meet all of the qualifications as set forth in the treaty and must complete and submit all required tax treaty exemption forms.
If an individual qualifies for a tax treaty exemption, the University may exempt the individual from U.S. tax withholding, but only if the individual completes Form 8233 (entities must complete W8-BEN-E). If the required exemption form is not completed, the University is required to calculate and deduct the tax even though the individual may otherwise qualify for the tax treaty exemption.
The form used to claim the tax withholding exemption is determined by the type of income received; individuals who receive several types of income may be required to file different forms.
All applicable tax treaty exemption forms will be completed by the GLACIER system.
Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding)
Form W-8BEN is used to claim a tax treaty exemption for scholarships, fellowships, grants and stipends that do not require the performance of a service. Unlike Form 8233, which is valid for only one year, Form W-8BEN is valid for a period of three calendar years if the individual provides his or her social security number or ITIN.
Form W-8 BEN-E (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)
Form W-8 BEN-E is used by foreign entities to document their status for purposes of chapter 3 and chapter 4. The Form W-8BEN-E should be provided to the withholding agent or payer before income is paid. Failure to provide a Form W-8BEN-E may lead to withholding at a 30% rate or more.
Form 8233 (Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual)
Form 8233 is used to claim a tax treaty-based exemption from federal tax withholding on income received for personal services (i.e., wages, salary, consultant fees, or honoraria). Form 8233 must be filed by all individuals who desire to claim a tax treaty exemption for services performed.
Form 8233 is valid only for the calendar year in which it is filed; the form must be re-filed for each year that the exemption is claimed.
The exemption from withholding becomes effective for payments made to an individual 10 days after the date on which the university files the Form 8233 with the IRS.
Employees who claim a tax treaty exemption for compensation income are required to provide an additional statement detailing the specifics of the exemption claimed; there is no additional statement required for non-employees (i.e., consultants and honoraria recipients).
Immigration Classification
If not a U. S. citizen, every person who enters the U.S. has either an immigration or nonimmigrant status. The most frequent immigration classifications we deal with are the following:
- B-1 Business visitors. No work authorization. May receive honoraria, reimbursement for travel expenses and per diem, in limited situations. May not receive consulting fees.
- B-2 Visitors for pleasure. No work authorization. Eligible to receive honoraria, reimbursement for travel expenses and per diem, in limited situations. May not receive consulting fees.
- F-1 Students. Work authorized for host institution under limited conditions.
- F-2 Spouse and dependents of students. No work authorization.
- H-1B Professionals. Work authorized for sponsoring employer.
- J-1 Exchange Visitors including students, scholars, teachers and researchers. Work authorized under certain conditions.
- J-2 Spouse and dependents. Work authorized under certain conditions. Fiancée of U.S. citizen. Work authorized.
- TD “Trade NAFTA” dependent. No work authorization.
- V Spouse and dependents of U.S. lawful permanent resident aliens. Work authorized. WB Waiver of visa for business. No work authorization. Eligible to receive only reimbursement for travel expenses and per diem; however, may in some limited cases receive an academic honorarium.
- WT Waiver of visa for tourism. No work authorization. Eligible to receive only reimbursement for travel expenses and per diem; however, may in some limited cases receive an academic honorarium.
Determining Your Tax Status
Qualifications for Claiming Resident Alien Status
You are considered a Resident Alien if you meet the qualifications for one of the two tests shown
below for the current calendar year:
1. Lawful Permanent Residency Test (also called the "Green Card" Test): If you have been given
the privilege according to the immigration laws of residing permanently in the United States as an
immigrant, and this status has not been revoked or abandoned, then you are a lawful permanent
resident of the U.S.
2. Substantial Presence Test: To satisfy the Substantial Presence Test:
2.1 A student, temporarily present in the United States under an "F" or "J" visa, must be in the
U.S. for five (5) calendar years (counting all or part of a year as a full year) plus 183 days in
the current year. The five (5) calendar years need not be consecutive. Once a cumulative total of
five (5) calendar years is reached during the student's lifetime s/he will never be an exempt
individual as a student again.
2.2 A teacher or trainee, temporarily present in the United States under a "J" visa, must be in
the U.S. for at least two (2) calendar years (counting all or part of a year as a full year) plus
183 days in the current year.
2.3 Aliens on all other Visa types must be present in the United States for 183 days or more
during the calendar year to claim resident alien status for U.S. tax purposes.
Taxation of Resident Aliens:
Resident aliens are taxed like U.S. citizens, including FICA withholding (Social Security and
Medicare Tax), on their world-wide income and may claim the same deductions and exemptions as U.S.
citizens.
Taxation of nonresident aliens
Nonresident aliens are taxed on most income from U.S. sources and have taxes withheld at graduated
rates based on the Form W-4 submitted. There are certain restrictions on completing the W-4 form:
1. "Single" marital status must be checked regardless of actual marital status
2. Only one withholding allowance may be claimed (residents of American Samoa, Canada, Mexico,
South Korea, and the Northern Mariana Islands can claim their dependents)
3. On line 6, write "NRA"
4. Line 7 must always be blank
FICA (Social Security and Medicare Taxes) Withholding
All Aliens are subject to FICA taxes regardless of their visa type except for:
- Students holding an F-1 or J-1 visa are exempt from FICA for the first five (5) calendar years
they are in the U.S. Once they become a resident alien under the Substantial Presence Test they are
eligible for FICA tax on January 1 of the calendar year they become a resident alien. - Teachers and researchers holding a J-1 visa are exempt from FICA for either the first two (2)
calendar years they are in the U.S. or for 2 out of the last 6 calendar years in the U.S.
regardless of INS status. Once they become a resident alien under the Substantial Presence Test
they are subject to FICA tax beginning on January 1 of the calendar year they become a resident
alien. - A refund can be made if an individual leaves the U.S. within the first 183 days of the year in
which they became a resident alien.
Note: A student is exempt from FICA during any term in which he or she is registered for classes at
half-time or greater, regardless of resident or non-resident status. FICA must be withheld in any
term the resident alien student is not registered for classes, such as during the summer months.
In order for the Payroll Office to determine your tax residency, every non US citizen must request access to Glacier and complete the process.
Summary
Once again, the information contained in this guide is designed to serve as a reference tool for tax management purposes for Eastern Michigan University when making payments to or on behalf of nonresident alien employees and foreign entities. If you have any questions, please contact Dawn Bush, tax manager at 734.487.2393 or [email protected].