Nonresident Alien Tax Compliance

Tuesday, February 9, 2010

Mary Alice Boyd

Agenda• Overview of the Tax System• Federal Income Taxes• State Income Taxes• Social Security/Medicare Taxes• Types of Income• Treaty Benefits• Procedures• Best Practices• Resources• Questions

Overview of the Tax SystemSystem Residency Status

• US Tax System US CitizensLawful Permanent ResidentsResident Alien for Tax Purposes

• Nonresident Alien Tax Nonresident Alien for Tax System Purposes

Federal Income Taxes

All US payments to NRAs are subject to 30% withholding except for:• Wages subject to wage withholding• 14% for non-service scholarships/fellowships

(qualifying F, M, J, or Q status only)• Exceptions under the tax code or a treaty

State Income Taxes• Non-wage compensation of more than $1,500

during the calendar year to a nonresident contractor for personal services performed in NC in connection with a performance, an entertainment or athletic event, a speech, or the creation of a film, radio, or television program, you must withhold NC income tax at the rate of 4% from this non-wage compensation

Social Security/Medicare TaxesApply to compensation for employment services

Exceptions for Social Security/Medicare taxes:• Student FICA Exception

– Students working on the campus of the institution where they are enrolled and regularly attending classes

– Same rules for US citizens• NRA FICA Exception

– Nonresident aliens– In F-1, J-1, M-1, or Q-1/Q-2 status– Engaged in employment consistent with the

purpose of the visit• Totalization agreement exception with a

certificate of coverage

Types of income and what income is taxable?

Compensation• Dependent

– Wages / Salary / Stipend Taxable / Treaty Exempt– Travel Reimbursement / Payment “Accountable Plan”

• Independent– Ind Per Services / Consulting Fees Taxable / Treaty Exempt– Honorarium / Guest Speaker Fees Taxable / Treaty Exempt– Travel Reimbursement / Payment “Accountable Plan”

Scholarships/Fellowships – Tuition / Fees Excluded under Section 117– Room / Board Taxable / Treaty Exempt– Stipend Taxable / Treaty Exempt– Book Allowances Excluded under Section 117– Travel Reimbursement / Payment Taxable / Treaty Exempt

Prizes and Awards TaxableRoyalties Taxable / Lower Treaty Rate

Compensation• Dependent Wages

– Subject to graduated withholding rates with restrictions– Unless exempt from withholding under a treaty

• Independent Wages– Subject to 30% withholding

– Unless exempt from withholding under a treaty

Honorarium Payments• 9-5-6 Rule

– Covered aliens may accept an honorarium payment for usual academic activity

– lasting not longer than 9 days at any single institution, and

– If the alien has not accepted such payment from more than 5 institutions

– In the previous 6-month period

– Covered aliens: B-1, B-2, VWB, VWT, aliens from Canada and aliens with valid border-crossing card

Are travel expenses taxable?• The “Accountable Plan” rules only apply when there is

a compensatory relationship – Employees and Independent Contractors who

receive compensation

• The “Accountable Plan” rules do not apply if there is not a compensatory relationship

– Students and scholars who receive non-service scholarships and fellowships

Other Payments• Scholarships and Fellowships

– Subject to14% withholding to F, J, M and Q status individuals

– Unless exempt from withholding under a treaty or the Internal Revenue Code

• Prizes and Awards– Subject to 30% withholding

Treaty Benefit Eligibility• The US has tax treaties with over 60 countries

• Treaties offer tax exemptions for foreign nationalswho were or are tax residents (not citizens) of a treaty country and meet specific criteria as definedby the treaty

• Many foreign nationals understand and expect these benefits

Considerations When Granting Treaty Benefits

• US tax status: NRA or RA• Social Security Number or ITIN• Country of tax residency• Primary purpose of visit as evidenced by

– DS-2019 for J exchange visitors– I-129 petition and letters for H-1B, O-1, Q– I-20 for F and M visitors– Conducting research, teaching, training, other

paid activities• Status of the organization (educational, research,

medical, etc.)• Type of income paid

Procedures for Paying Nonresident Aliens

• Step 1 – Complete required forms• Step 2 – Submit forms to Tax Office • Step 3 – Submit DPR and required forms to A/P

Step 1 – Complete required forms• Taxpayer Information Form (Vendor Information

Form)

• Foreign National Information Form (FNIF)• Visitor and Student version• Copies may be necessary

• Form W-8BEN

• http://finance.uncc.edu/Forms/FormsHome.html

Step 2 – Submit forms to Tax Office

• Tax Office will review FNIF for completeness and payment eligibility

• Copies of immigration documents may be necessary at this point

• Once reviewed, tax office will let you know if individual is eligible for payment, and if there will be tax withholdings, treaty benefits, etc.

Step 3 – Submit DPR and required forms to A/P

• A/P and any other necessary parties will review • DPR and forms will be sent to Tax Office for

sign off

Best Practices• As soon as you know you will have a foreign visitor,

start the paperwork– Don’t start paperwork after the visitor has performed services

or you risk not being able to pay the visitor• All payments to nonresident aliens should be processed on a DPR• All travel guidelines and requirements apply to foreign visitors

– Accountable plan (nontaxable)– Use this for travel portion of trip to make less of the payment taxable

• Keep the gross-up option in mind• NRA rules and regulations are mandated by the IRS, NC Department

of Revenue, US Immigration Services, and US Department of Homeland Security

• Let visitors know we have a tax office if they want to discuss the tax implications of their payment

• When in doubt, call or email the Tax Office

Resources• Tax Office Website

– Tax Guide for NRAs: http://finance.uncc.edu/Tax/TaxLinks.html

• IRS Publications – 15T, Employer’s Tax Guide– 515, Withholding on Nonresident Aliens and

Foreign Entities– 519, US Tax Guide for Aliens

Questions

Mary Alice BoydTax Manager(704) 687-5819mboyd37@uncc.edu

Rebecca UrquhartTax Accountant(704) 687-5742rmurquha@uncc.edu