Nonresident alien employees may be authorized to work based on their Visa type and type of work. Office of International Services assists the departments and foreign visitors in obtaining the proper work authorization. Once obtained, the department will process a new hire through PeopleSoft to place the new employee on payroll using same procedures as preparing for U.S. citizens.
I. Initial process before and upon arrival on campus.
Once the department notifies the Office of International Services that a foreign visitor will be employed by the department, the Office of International Services will work with the department and the foreign visitor to ensure proper work authorization documents (DS2019, I-20).
Using the completed International Visitor Tax Information Request form, Payroll Services will determine the individual's residency status. If tax treaty benefits are applicable, the individual will fill out an IRS Form 8233, Exemption From Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual, and attachment certifying their status. Refer to the appendix on forms on how to complete this form. Any questions an employee has concerning their tax treaty benefits should be addressed to Payroll Services. The department completes the process of a new hire and other documentation as required in the same manner as processing new employees who are U.S. citizens. Payroll cannot make any payment until the individual has signed up for benefits (insurance, W-4, etc) in the orientation process. It is important for foreign visitors to check in the Payroll Services Office.
II. Annual requirements.
If an employee is eligible for tax treaty benefits, then Payroll Services must have a Form 8233, Exemption From Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual, and attachment certifying their status before each calendar year. Tax treaty benefits cannot be applied retroactively. Refer to the appendix on forms on how to complete this form. Any questions the employee has concerning their tax treaty benefits should be addressed to Payroll Services. The individual completes the form and the attachment in the Payroll Services. Payroll will then forward the form to IRS within 5 days. The exemption from withholding becomes effective for payments made after 10 days from the date the Form 8233 is mailed to the IRS. If Payroll Services receives the Form 8233 after a payroll has been created, the international visitor will not be exempt from tax withholding for that payroll. No refund will be granted.
III. Tax withholding.
Tax withholding will depend on the employee's residency for tax purposes. For further information on withholding, refer to IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Corporations.
A. Resident Aliens for tax purposes
A resident alien is taxed on his/her worldwide income from whatever source and is subject to the same withholding requirements as an U.S. citizen working in the U.S. Withholding using the graduated tax rates and as dictated by the W-4 is required regardless of whether the services for which the compensation is received are performed within or outside the U.S.
Resident aliens must complete IRS Form W-9, Request for Taxpayer Identification Number and Certification, to substantiate their claim as a resident alien. The completed form is filed with Payroll Services.
As a general rule, resident aliens will not be eligible for tax treaty benefits. In a few cases, though, a resident alien may use a tax treaty benefit.
Example: A Chinese researcher on a J-1 visa is an "exempt individual" for 2 years after which time he is considered a resident alien for tax purposes. However, the tax treaty between the U.S. and the People's Republic of China does allow a resident alien to use the tax treaty benefits but for a period not longer than 3 years (Protocol section of the treaty).
B. Nonresident Aliens for tax purposes
A nonresident alien is subject to U.S. tax on U.S. source income, which is income derived from personal services performed in the U.S. Any income earned outside the U.S. is not taxed by the U.S.
For purposes on calculating payroll, tax treaty benefits will override information provided on the
W -4. Taxes are withheld using the graduated tax rates.
All employees, including nonresident aliens, must complete a W-4 even if they elect to use tax treaty benefits. Generally, the nonresident alien must claim Single with 1 allowance. They cannot follow the instructions printed on the W-4, but follow these instructions:
1. Only a student from India who qualifies in accordance with the U.S. - India tax treaty may claim a standard deduction. All others, including teachers/professors from India, cannot claim any standard deduction.
2. In completing the W-4 worksheet, they may claim only 1 allowance except:
· residents of Canada, Mexico, and American Samoa are entitled to claim the same personal allowances as U.S. citizens,
· residents of Japan and Korea are entitled to claim an allowance for themselves, their spouse and dependent children who are present with them in the U.S.,
· students from India are entitled to claim one additional allowance for a spouse based upon benefits set forth in the U.S.-India tax treaty.
3. All nonresident aliens must claim "single" regardless of actual marital status.
4. Additional withholding. IRS is mandating an additional amount of $ 7.60 per week or $33.10 per month be withheld. This amount goes on line #6.
5. Exemption. The exemption line must be left blank. Nonresident aliens cannot claim an exemption. This is not the same as "exempt individual" or exemption resulting from tax treaty benefits.
6. Nonresident aliens are not entitled to Earned Income Credit.
IV. Social Security.
Tax treaty benefits do not apply to Social Security, also known as FICA or OASI.
Social Security will be deducted based on compensation unless the nonresident alien can use the exemption under Section 3121(b)(19) of the Treasury Regulations. In order to claim this exemption, the individual must be:
· a nonresident alien,
· present in the U.S. under an F or J visa, and
· performing services in accordance with the primary purpose of the visa's issuance (J-2 spouse is not eligible for this exemption).
Generally speaking, J-1 visa holders (teachers and trainers) will be exempt from Social Security for 2 calendar years and F-1 visa holders (students) and J-1 visa holders who are students will be exempt for 5 calendar years.
Social Security will also be deducted at the beginning of the calendar year in which the nonresident alien becomes a resident alien for tax purposes.
Example: Natasha arrived in the U.S. on 12/15/00 on a J-1 visa to teach. For tax purposes, she is a nonresident alien for calendar years 2000 and 2001. For these two years she will meet the three tests of section 3121 (b)(19) and will be exempt from Social Security taxes. Beginning on January 1, 2002, when she becomes a resident alien, she will begin to pay Social Security taxes.
V. End of year tax reporting.
A. Resident Aliens
Resident aliens will receive a W-2 for compensation and benefits earned during the year.
B. Nonresident Aliens
Nonresident aliens could receive two forms at year-end
· Form 1042-S for compensation payments, which are exempt from taxation under a tax treaty. If the nonresident alien is not using or is not eligible for tax treaty benefits, then no Form 1042-S will be issued. Instructions on the reverse of the Form 1042-S explain the various codes.
· Form W-2 for compensation other than those exempt by a tax treaty.
Example: When both a Form 1042-S and a Form W-2 will be issued for the same year: Under the tax treaty with Korea, a student being compensated during training may have $2,000 per annum exempt from taxation. If this student earned $12,000 during the year (before the tax treaty benefit), he would receive a Form 1042-S for the $2,000 and a Form W-2 for $10,000.
The existence of a tax treaty does not mean that an individual will automatically qualify for exemption from taxation. An individual must meet the qualifications for exemption as set forth in the tax treaty. The applicable provision which the individual is claiming must be annotated on line 3.c.(1) of Form 8233, Exemption From Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual.
I. Claiming a tax treaty benefit.
A nonresident alien must complete a Form 8233. Refer to the appendix on forms on how to complete this form. Any questions the individual has concerning their tax treaty benefits should be addressed to Payroll Services. The individual completes the form and the attachment in the Payroll Services. Payroll Services will then forward the form to IRS within 5 days. The exemption from withholding becomes effective for payments made after 10 days from the date the Form 8233 is mailed to the IRS. The Form 8233 must be filed with Payroll for each applicable calendar year. Tax treaty benefits cannot be applied retroactively.
II. Relationship between a tax treaty and W-4.
Although every employee must provide a signed W-4 claiming their tax withholdings, an employee claiming a tax treaty benefit will have these benefits override the information provided on the W-4.
III. Resident aliens claiming tax treaty benefits.
As a general rule, resident aliens will not be eligible for tax treaty benefits. In a few cases, though, a resident alien may use a tax treaty benefit. Example: A Chinese researcher on a J-1 visa is an "exempt individual" for 2 years after which time, he is considered a resident alien for tax purposes. However, the tax treaty between the U.S. and the People's Republic of China does allow a resident alien to use the tax treaty benefits but for a period not longer than 3 years (Protocol section of the treaty).
IV. Tax treaty exemptions for students, teachers, and researchers.
Each tax treaty categorizes exemptions based on the type of income such as income earned as student, income earned from researching, etc. Some treaties cover all three categories: students, teachers, and researchers; others may not cover all of them. For example, the tax treaty with Denmark exempts only income earned from teaching.
It is imperative that the individual determines the proper type of income they are earning which is based on the primary purpose of the visit to the U.S. based on the visa status.
V. Specific qualifications of tax treaties.
Each tax treaty is slightly different. Some treaties may indicate that the exemption is valid only for a certain length of time while others indicate annual dollar limits. For more detail, refer to Appendix III, which is an IRS table listing, the different kinds of income that may be fully or partly exempt from U.S. taxation.