Section 18.2 - Foreign Nationals
Date: March 2008
Approved: Senior Associate Vice President for Business and Finance
Note: This policy is intended for the purpose of informing University employees and other University-related individuals about relevant tax issues. This policy does not constitute legal or tax advice. Individuals should consult with their attorneys or tax professionals for advice on personal issues.
Overview
U. S. Citizenship and Immigration Services (USCIS) within the Department of Homeland Security and Internal Revenue Service (IRS) regulations govern University payments to foreign nationals including but not limited to foreign national employees, independent contractors, and students. The purpose of this document is to provide guidance to unit personnel regarding the special documentation and processing requirements governing employment and other payments to foreign nationals. The special documentation and processing requirements governing employment and other payments to foreign nationals are in addition to the standard University document and processing requirements governing employment and payments to United States citizens.
Definitions
Foreign nationals, also referred to as aliens, are persons who are non-United States citizens. The IRS distinguishes between two types of aliens for federal income tax purposes: resident and nonresident aliens. The taxability of payments to nonresident aliens (and some resident aliens) is subject to special rules.
Resident Alien - A resident alien is a non-United States citizen who satisfies either the "green card test" (see "Green Card Test" in this section) or the "substantial presence test" (see "Substantial Presence Test" in this section) during the calendar year as described in IRS Publication 519, U.S. Tax Guide for Aliens. The tax status of an individual who is a resident alien by substantial presence may change from year to year. Therefore, the Office of Business and Financial Services (OBFS), University Payroll must confirm the United States tax status of all resident aliens on the University payroll at the beginning of each calendar year or prior to the individual's first payment during the current calendar year.
Green Card Test - Generally, foreign nationals that have been issued an alien registration receipt card, also known as a "green card," by the USCIS are permanent residents and should be considered resident aliens for federal income tax purposes. Foreign nationals continue to have permanent resident status unless it is taken away from them or it is administratively or judicially determined to have been abandoned.
Substantial Presence Test - A foreign national is a resident alien if the individual is physically present in the United States for at least 31 days in the current calendar year and present 183 days or more based on counting: all days present during the current year, plus 1/3 of the days present in the preceding year, plus 1/6 of the days present in the second preceding year. Certain days of presence are disregarded such as: (1) days spent in the United States for a medical condition that developed while the foreign national was present in the United States and unable to leave, (2) days regular commuters spend traveling to or from Canada or Mexico, (3) a day of less than 24 hours spent while in transit between two locations outside the United States, and (4) days when the foreign national was an exempt individual. The individual is considered a resident alien for federal income and employment tax purposes from the first day of physical presence in the United States in the year that the test is satisfied.
Exemptions - Special exemptions to the substantial presence test may apply to certain foreign nationals. Two such classes of foreign nationals are: (1) students on F, J, M, or Q visas, and (2) teachers and trainees on J or Q visas. Students do not count their days of physical presence for five calendar years. A student may be exempt from counting days of United States physical presence beyond five calendar years if he or she proves to the IRS that he or she does not intend to reside permanently in the United States. A determination that the exemption may be extended beyond five years must be obtained from the District Director of the IRS for the extension to apply. Teachers, trainees, or any other J or Q non-students do not count days of United States physical presence in a calendar year provided that the individual has not been in the United States as a F, J, M, or Q student or a J or Q non-student for any two of the six prior calendar years. Partial calendar years are considered full calendar years for these limitation purposes.
Nonresident Alien - A nonresident alien is a non-United States citizen who does not satisfy either the "green card test" (see "Green Card Test" in this section), or the "substantial presence test" (see "Substantial Presence Test" in this section) during the calendar year. A nonresident alien's United States tax status may change from year to year. Therefore, the OBFS, University Payroll must confirm the United States tax status of all nonresident aliens prior to the individual's first payment during the calendar year.
Taxpayer Identification Numbers
Foreign nationals performing services for and receiving payments from the University must obtain and furnish the University with either (1) a Social Security Number (SSN) issued by the Social Security Administration (SSA), or (2) an Individual Taxpayer Identification Number (ITIN) issued by the IRS.
Social Security Number
Every foreign national must either have an SSN or be in the process of obtaining an SSN for University employment. If an individual does not already have an SSN, he or she must file Form SS-5, Application for a Social Security Card (see Form SS-5 under "Foreign National Forms and Publications" at the end of this section), along with (1) proof of identity (for example, a valid passport or birth certificate), and (2) work authorization or proof of eligibility to be in the United States (for example, Form I-94, Arrival-Departure Record and Form DS-2019 (formerly known as Form IAP-66), Certificate of Eligibility for Exchange Visitor (J-1) Status) with the local SSA Office. Call 1-800-SSA-1213 to determine the nearest location.
An individual's visa status may permit certain types of employment, and holders of such visas are required to obtain an SSN, (for example, F-1, J-1, J-2, and H-1B). Generally, individuals who are not eligible to obtain an SSN may not be employed by the University. A copy of the card or proof of application for an SSN should be retained in the individual's file, and a copy should be sent to the OBFS, University Payroll.
Individual Taxpayer Identification Numbers
Effective July 1, 1996, the following individuals, if ineligible to obtain an SSN, are required to obtain an ITIN:
- United States resident aliens required to file a United States tax return;
- Aliens that are claimed as a spouse or dependent on a United States tax return;
- Nonresident aliens that choose to file a joint return with a United States citizen or resident alien spouse; and
- Nonresident aliens required to file a United States tax return to claim a refund.
Form W-7, Application for IRS Individual Taxpayer Identification Number (see Form W-7 under "Foreign National Forms and Publications" at the end of this section), must be completed and submitted to the IRS or to a Certified Acceptance Agent accompanied by the required documentation to substantiate the individual's foreign status and identity. The University is a Certified Acceptance Agent (see Section 18.1, IRS Requirements for Certifying Acceptance Agent for the detailed policies and procedures).
It may take several weeks (or even several months) before the ITIN is issued. Therefore, the unit personnel should encourage foreign nationals to apply as soon as the individual knows that the University will be making payments to him or her since the University is required to report and withhold on his or her behalf. An ITIN may be applied for and obtained prior to entry into the United States. The name and location of the closest IRS or United States Consular office abroad should be provided to a foreign national in need of an ITIN to avoid delay or denial of payment.
If an ITIN is not available before the first payment is due, the following procedures must be adhered to:
- The foreign national must sign a Statement of Certification confirming that an ITIN has been applied for or will be applied for at the time the foreign national's tax return is filed;
- The foreign national must provide a copy of his or her ITIN application; and
- The foreign national must provide the University with his or her ITIN once received.
In such circumstances, the University is required to withhold all applicable federal (at a rate of 30%) and state (at a rate of 5%) income withholding taxes and Federal Insurance Contributions Act (FICA) tax. The University will not grant tax treaty exemption benefits to a foreign national without an ITIN. If the University has not received proof of the ITIN, the University will follow-up with the unit and the foreign national when 60 days from the payment date have passed.
ITIN notification letters should be carefully inspected to avoid confusion with foreign identification numbers. A copy should be retained in the foreign national's file and a copy sent to the OBFS, University Payroll. Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, should be completed by the foreign national to avoid backup withholding. (See Form W-8BEN at the end of this section under "Foreign National Forms and Publications.")
Tax Reporting When a Foreign National Does Not Have an ITIN
Situations exist where payments are made to foreign nationals prior to receipt of an ITIN. Under these circumstances, the University will include "Applied for" in the SSN/ITIN field on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding. Also, the University will attach an affidavit to Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. This affidavit will state that the University has performed its due diligence in requesting ITIN information. As soon as the University receives an ITIN from a foreign national, the University will prepare and submit a corrected Form 1042-S.
Penalty Fees for Payments to a Foreign National Who Does Not Have an ITIN
The IRS may assess a $50.00 penalty fee to the University for each individual Form 1042S submitted without an ITIN. The OBFS, University Payroll will track the penalties assessed by the IRS for each campus on an annual basis. Each year, the total amount of penalties for each campus that the University is required to pay will be charged to the Office of the Provost of each campus.
Foreign Source Income
Note: This Section only applies to nonresident aliens
Foreign source income (with respect to nonresident aliens) refers to income earned by a nonresident alien, in the capacity of an employee or an independent contractor, for services performed outside the U.S. The source of compensation is determined by the location where the activity is performed. See Foreign Source Income Chart.
Also, in situations where a nonresident alien receives a scholarship, fellowship, grant, or an achievement award for activities performed or to be performed outside of the U.S., such amount is considered foreign source income. Grants from foreign sources to nonresident aliens for activities (excluding employment/independent contractor related services) performed within the U.S. are considered foreign source income. The source of scholarships/fellowships is determined by a combination of location of activity and location of "payor" (i.e., entity which has discretion over actual distribution of funds). See Foreign Source Income Chart.
Foreign source income is not subject to U.S. tax withholding and reporting requirements for nonresident aliens.
The University requires one of the Forms W-8 to be completed before making a foreign source income payment. The OBFS, University Payroll reviews payments to non-resident aliens to determine if the income is foreign sourced. The OBFS, University Payables then processes foreign source income payments.
See Foreign Source Income Chart and IRS Publication 519, U.S. Tax Guide for Aliens, for additional information.
Payments to University Employees
Every employee hired after November 6, 1986 must complete Form I-9, Employment Eligibility Verification, to verify employment eligibility and identity pursuant to immigration law. For additional information regarding I-9s and the I-9 process at the University, please see the University Form I-9 page.
Every employee must complete a Form I-9, Employment Eligibility Verification as part of the University's Employment Eligibility Process to verify an employee's citizenship status and employment eligibility pursuant to immigration law. The employing unit must initiate and assure completion of the Tax Reporting and Withholding Checklist for Foreign National Reimbursements to determine the employee's United States tax status and assure proper withholding and reporting compliance measures.
Required Foreign National Information
The Foreign National Information System (FNIS) is a web portal that captures passport and visa information for each foreign national to assist in determining tax status and treaty benefit analysis. If the foreign national does not provide the appropriate and required information using FNIS (the OBFS, University Payroll will provide the applicable web portal link, when necessary, to the foreign national in order to access FNIS), then the Foreign National Tax Information Form is required.
The Foreign National Tax Information Form is a document created by the University to assist in gathering the background information needed to comply with the special federal income and employment tax rules that pertain to payments made to foreign nationals. The Foreign National Tax Information Form must be completed, reviewed, and submitted to the designated units prior to making any payment to a foreign national. Payments may be delayed or denied altogether if information is inaccurate or not provided, and the sponsoring unit may be responsible for any related taxes, interest, and/or penalties.
Payment sponsoring units are encouraged to send the foreign national a copy of the form as soon as it is determined that he or she will receive payments of any sort to avoid delay or denial in processing payments. The form must be signed by the foreign national payee. Copies of all required documents must be maintained in the payee's file, and a copy along with the attached documents must be sent to the OBFS, University Payroll. Since a foreign national's United States tax status may change from year to year, each foreign national should complete a new Foreign National Tax Information Form prior to any payments being made in a new calendar year or sooner if a change in status occurs. This form is available at the end of this section under "Foreign National Forms and Publications."
Royalties
Generally, United States source royalty payments are subject to federal income tax withholding at a rate of 30% or lower if a United States tax treaty applies. Nonresident aliens claiming exemption from federal income tax withholding based on a United States tax treaty must provide the OBFS, University Payroll with an accurate and complete Form W-8BEN. (See "Scholarship, Fellowship and Grant Recipients" in this section for an explanation of the requirements for filing a Form W-8BEN.)
Third Party Payments
Payments made by the University to a third party on a nonresident alien's behalf are considered payments to the nonresident alien. Therefore, the University must withhold the appropriate federal income tax withholding, which depends on the type of payment, and report the payment to the IRS as if it had been made directly to the nonresident alien. However, expenses that qualify under either the Accountable Plan or Fringe Benefit rules may be excluded from the nonresident alien's gross income. See Tax Reporting and Withholding Checklist for Foreign National Reimbursements.
Employee Federal Tax Withholding - Federal Income Tax
Generally, the taxability of payments to resident aliens is similar to United States citizens (see also Section 4, University Payroll). Salaries, wages, or any other payments for personal services paid to nonresident alien employees are subject to income tax withholding unless the amount is exempt under a United States tax treaty. However, special withholding rules apply. The special withholding rules limit a nonresident alien's withholding allowances by:
- Requiring nonresident aliens to write "nonresident alien" or "NRA" on line six (6) of Form W-4;
- Permitting only one personal exemption and single status even if married; and
- Not permitting a nonresident alien to claim to be exempt from income or payroll tax withholding.
These limitations must be reflected on the Form W-4, Employee's Withholding Allowance Certificate (see Form W-4 under "Foreign National Forms and Publications" at the end of this section), to be completed upon hire by the nonresident alien employee. Nonresident alien employees may not be allowed to change their Form W-4 without submitting the proper documentation to the OBFS, University Payroll to substantiate the requested change. If the appropriate documentation is provided to the OBFS, University Payroll, a revised Form W-4 and a copy of the documentation must be maintained in the employee's file and a copy must be sent to the OBFS, University Payroll. Individuals who do not submit an accurate and complete Form W-4 will be subject to withholding at single rates with no exemptions. The OBFS, University Payroll is responsible for monitoring federal income and employment tax withholding on payments to foreign nationals to facilitate compliance with these special rules. Generally, payments made directly to nonresident aliens will have the withholding deducted before payment is made to the individual. However, IRS regulations contain two exceptions to the withholding requirement. The first exception applies when:
- The nonresident alien is employed by either: (1) A United States employer's office in a foreign country or United States Possession, or (2) A foreign employer not engaged in a United States trade or business; and
- The nonresident alien is in the United States for no more than a total of 90 days during the taxable year; and
- The income totals no more than $3,000 for the taxable year.
The second exception is when a tax treaty between the United States and the nonresident alien's home country exists. A nonresident alien claiming exemption from taxation because of a tax treaty between the United States and the nonresident alien's home country must file Form 8233, Exemption From Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual, with the OBFS, University Payroll. This form is available in the OBFS, University Payroll and at the end of this section under "Foreign National Forms and Publications."
Before accepting Form 8233, the University must review the form for accuracy. Once the form is accepted, the University will mail it to the IRS. The exemption from withholding becomes effective for payments made at least ten days after the form is mailed to the IRS. This form must be re-filed each calendar year to claim the tax treaty exemption.
Federal Insurance Contributions Act (FICA) Tax
Foreign national employees who meet the requirements to be resident aliens for tax purposes must pay FICA tax on United States sourced salaries or wages. Nonresident alien students holding F-1, J-1, M-1, or Q-1 visas are exempt from becoming a resident alien for the first five years in the United States; therefore, these nonresident alien students are not subject to FICA tax if the services performed are consistent with the purpose of their visa. Nonresident alien scholars holding F-1, J-1, M-1, or Q-1 visas are exempt from becoming a resident alien for the first two years in the United States; therefore, these nonresident alien scholars are not subject to FICA tax if the services performed are consistent with the purpose of their visa. In addition, their compensation is exempt from federal unemployment taxes; although, the University is exempt from unemployment taxes on all payments. However, these exemptions do not pertain to individuals employed in violation of USCIS regulations applying to his or her particular immigration status. FICA taxes must be withheld from payments to nonresident alien employees who satisfy the substantial presence test from their first day of physical presence in the United States in the year they satisfy the test.
Compensation excluded from federal income tax by a United States tax treaty may still be subject to FICA taxes. Such compensation must be reported on Form W-2, Wage and Tax Statement, as wages subject to FICA taxes unless otherwise exempt, even if it is not reportable as wages for federal income tax purposes. Foreign national students working on campus may be exempt from FICA taxes under the same rules that apply to United States citizen students.
Foreign National Student Work Hour Requirement
Foreign national students are limited to a 20 hour work week. For additional information, contact the campus International Offices at:
- UIC Office of International Services at (312) 996-3121;
- UIS Office of International Affairs at (217) 206-6678;
- UIUC Office of International Student Affairs for students at (217) 333-1303; and
- UIUC Office of International Faculty and Staff Affairs for faculty and staff at (217) 333-8225.
Also, information can be obtained at the following sites:
Travel Expense Reimbursement
Nonresident alien employees may be eligible for reimbursement under the Accountable Plan or Fringe Benefit rules provided the employee complies with University reimbursement requirements. Expenses qualifying under the Accountable Plan or Fringe Benefit rules are not subject to federal income and employment tax. Furthermore, qualifying expenses are not required to be reported on Form W-2 nor Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding. See Tax Reporting and Withholding Checklist for Foreign National Reimbursements.
Federal Tax Reporting
Taxable portions of salaries, wages, or other payments for personal services paid to nonresident alien employees are reported on Form W-2. Compensation paid to nonresident alien employees for personal services that is excluded from federal income tax pursuant to a United States tax treaty is reported on Form 1042-S. (See "United States Tax Treaty Exemptions" in this section.) In addition, the University is required to file a transmittal Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, by March 15 of the succeeding calendar year. The OBFS, University Payroll is responsible for monitoring payments to nonresident alien employees for compliance with the reporting requirements of Form W-2 and Form 1042-S.
Payments to Non-Employees - Independent Contractors and Guests
The purpose of this section is to provide guidance to unit personnel arranging for visiting nonresident alien consultants, scholars, and dignitaries who will receive a University payment. This includes University payments either directly to or on behalf of the nonresident alien for services and/or qualified travel expenses. Services as defined in this document include lecturing, consulting, or other activities performed by a nonresident alien for payment under terms and conditions specified in a contract or an honorarium. The process for contracting for these services or making such payments as honoraria are detailed in Section 17.1, Consultants and Other Contractors for Professional Services.
Qualified travel expenses as defined in this document include reimbursable expenses incurred by the nonresident alien for hotel, meals, and transportation, the payment of which can only be made in accordance with the documentation requirements of the University's travel policies.
Travel Expense Reimbursement
A nonresident alien non-employee may be eligible for travel expense reimbursements under the Accountable Plan rules provided the non-employee complies with University reimbursement requirements and, if applicable, the University is indicated as one of the nonresident alien's program sponsors. Expenses qualifying under the Accountable Plan rules are not subject to federal tax reporting or withholding. For additional information on the required documentation, reference the Foreign National Payment Eligibility Grid and Tax Reporting and Withholding Checklist for Foreign National Reimbursements. This form must be completed and submitted to OBFS, University Payroll if it appears there is no tax withholding or reporting required.
Tax Withholding and Exemptions
The IRS requires tax withholding and/or reporting for payments made either directly to or on behalf of the nonresident alien for services performed in the United States. The IRS does not require tax withholding and/or reporting for reimbursements to nonresident aliens for qualified travel expenses, provided the expense qualifies under either the Accountable Plan or the Fringe Benefit rules and the non-employee satisfies the reimbursement requirements. See Tax Reporting and Withholding Checklist for Foreign National Reimbursements.
IRS regulations require that the nonresident alien provide documentary evidence of USCIS status (see Foreign National Payment Eligibility Grid for requirements).
Generally, the withholding rate is 30% for Federal taxes and 5% for State of Illinois taxes unless a tax treaty between the United States and the nonresident alien's home country exists that exempts the individual or lowers the tax rate. The individual must apply for tax treaty benefits at the OBFS, University Payroll. Payments made directly to the nonresident alien will have the withholding deducted before payment is made to the individual. Payments made on behalf of the nonresident alien will be grossed up to cover applicable taxes.
IRS regulations contain two exceptions to the withholding requirement. The first exception applies when:
- The nonresident alien is employed by either: (1) a United States employer's office in a foreign country or United States Possession, or (2) a foreign employer not engaged in a United States trade or business;
- The nonresident alien is in the United States for no more than a total of 90 days during the taxable year; and
- The income totals no more than $3,000 for the taxable year.
The second exception is when there is a tax treaty between the United States and the nonresident alien's home country. A nonresident alien claiming exemption from taxation because of a tax treaty between the United States and the nonresident alien's home country must complete, sign, and submit Form 8233 at the OBFS, University Payroll Service Center.
The OBFS, University Payroll must review the Form 8233 for accuracy. Once the form is accepted, the OBFS, University Payroll will mail it to the IRS. The exemption from withholding becomes effective for payments made at least ten days after the form is mailed to the IRS.
If the nonresident alien qualifies for an SSN they should apply for an SSN. The nonresident alien must be eligible for employment in order to qualify for an SSN. If the nonresident alien does not qualify for an SSN, he or she must apply for an ITIN. The nonresident alien can apply for an ITIN at the OBFS, University Payroll Service Center at each campus. The OBFS, University Payroll has been delegated authority to act as a Certified Acceptance Agent of the IRS. The IRS takes several weeks (or even several months) to issue an ITIN. Payments to or on behalf of the nonresident alien will not be made until an ITIN has been received. Treaty benefits cannot be extended until an ITIN or SSN has been received by the OBFS, University Payroll.
IRS regulations require the University to report payments directly to or on behalf of the nonresident alien. The OBFS, University Payroll will issue Form 1042-S to the nonresident alien for tax reporting.
Passport and Form I-94, Arrival/Departure Card Requirements
In order for an individual from another country to enter the United States, they must possess a valid passport, unless they are passport exempt, for example, Canadians. En route to the United States, the carrier will distribute Form I-94 to non-United States citizens and permanent residents. These individuals will be inspected by an USCIS official at the Port of Entry. USCIS will "stamp" Form I-94 with the appropriate status. The "stamp" will indicate the status granted, for example, B-1, F-1, etc., as well as indicate the length of authorized stay. The foreign national should assure the status indicated by the "stamp" matches the foreign national visa status.
Scholarship, Fellowship, Grant, and Miscellaneous Payments
Scholarships, fellowships, tuition waivers, and grants awarded to nonresident alien students may be subject to federal income tax withholding based on the student's visa type, the degree path, and the existence of a United States tax treaty with the recipient's country of residence. The federal income tax withholding rate may be 0%, 14%, or 30% depending on the circumstances, and the tax rate may apply to only a portion of the payment. Generally, those portions of a scholarship, fellowship, tuition waiver, or grant which are used to pay tuition, fees, books, supplies, or equipment are not taxable under Internal Revenue Code §117 where the recipient is a candidate for a degree. Any portion of the scholarship, fellowship, tuition waiver, or grant over and above the five items mentioned above may be taxable. For non-degree candidates the entire payment may be taxable. (See "United States Tax Treaty Exemptions" in this section for discussion relating to United States tax treaties and scholarships, fellowships, and grants.)
Associated Services - Miscellaneous Payments
Stipends - Payments for services performed by nonresident aliens (for example, Graduate Assistants) are taxable as wages and reportable on Form W-2. See "Employee Federal Tax Withholding - Federal Income Tax" in this section for a discussion regarding the withholding and reporting requirements for the payment of wages.
Stipends, tuition waivers, or any other grants bestowed upon resident or nonresident aliens that require the recipient to perform services in exchange for the payment (such as graduate assistantships) are taxable as wages and are reportable to the IRS on Form 941, Employer's Quarterly Federal Tax Return and Form W-2. See "Employee Federal Tax Withholding - Federal Income Tax" in this section for a discussion regarding payments to University employees for the withholding rules that pertain to wages paid to nonresident aliens.
Third Party Payments - Payments made by the University to a third party on a nonresident alien's behalf are considered payments to the nonresident alien. Therefore, the University must withhold the appropriate federal income tax, which depends on the type of payment, and report the payment to the IRS as if it had been made directly to the nonresident alien. However, expenses that qualify under either the Accountable Plan or Fringe Benefit rules may be excluded from the nonresident alien's gross income. See Tax Reporting and Withholding Checklist for Foreign National Reimbursements.
Federal Tax Withholding
Federal Income Tax Withholding -The University is required to withhold federal income taxes at the rate of 30% on any scholarship, fellowship, or grant to nonresident aliens used for educational expenses other than tuition, fees, books, supplies, equipment, or items not specifically excluded from federal income tax under a United States tax treaty. Moreover, the University will withhold federal income tax at the rate of 14% on any scholarship, fellowship, or grant payment if the recipient is F or J visa status.
The University is required to withhold federal income taxes at the rate of 30% on any payment classified as a prize or award. Basically, prizes and awards are payments for past activities or accomplishments while scholarships, fellowships, or grants are payments to aid the individual in pursuing his or her studies.
FICA Tax Withholding - The University is not required to withhold FICA taxes from compensation for personal services paid to nonresident aliens that do not constitute wages.
Reduced Withholding Procedures - The University is allowed to take a nonresident alien's personal withholding allowance into account when withholding federal income tax on scholarships, fellowships, or grant payments. The University must follow the procedures outlined in Revenue Procedure 88-24 when allowing a nonresident alien to reduce his or her federal income tax withholding on payments. Moreover, the OBFS, University Payroll must coordinate the use of the personal withholding allowance between the amount used for wages and the amount used for scholarships, fellowships, or grants so that the total yearly personal allowance is not exceeded.
Federal Tax Reporting - Generally, all United States sourced taxable and tax-exempt amounts paid to nonresident aliens in the form of scholarships, fellowships, grants, and financial aid must be reported to the IRS on Forms 1042 and 1042-S. The OBFS, University Payroll and the Office of Financial Aid are responsible for monitoring scholarships, fellowships, or grants to nonresident aliens for compliance with the reporting requirements of Forms W-2, 1042, and 1042-S.
Grossing-Up Payments
A grossed-up payment is the net amount plus taxes or any other withholdings.
When payments are subject to tax withholding and the department chooses to provide additional funds to cover the applicable taxes so that the individual receives a specified net amount, the department must note on the voucher to gross-up the payment.
The percentage of tax withheld varies in the gross-up calculation depending on the type of payment. The gross up calculator helps departments determine the required amount to fund the grossed-up payment in different situations. The grossed-up amount will be reported to the IRS for the individual recipient.
For additional information on gross-up calculations, please e-mail the University Payroll Service Center or call Chicago (312) 996-7200, Urbana (217) 265-6363, Springfield (217) 206-7211.
United States Tax Treaty Exemptions
Nonresident aliens may claim exemption from federal income tax withholding under a United States tax treaty. An income tax treaty is an arrangement between two governments under which each government agrees to limit or modify the application of its domestic tax laws in an attempt to avoid having the same income taxed by both governments. Tax treaties pertain to federal income taxes. In most cases, they do not apply to FICA and state income taxes. For nonresident aliens to obtain a tax treaty exemption, they must complete Form 8233 and an affidavit stating their country of residence. Effective January 1, 2001, resident aliens requesting a treaty exemption must complete Form W-9, Request for Taxpayer Identification Number and Certification. The primary difference is that resident aliens are extremely limited in the treaty benefits available to them.
In order to claim exemption from federal income tax withholding based on a United States tax treaty, the foreign national payee must claim exemption by filing a form or statement with the University. The required form and procedure depends on the combination of the type of payment and the relationship the payee has with the University. The University is not required to provide a United States tax treaty exemption from federal income tax withholding where the payee has not complied with the IRS requirements, where the payee's facts or assertions are known to be false, or where the eligibility of the payee is not readily determinable. Denial of tax treaty exemption does not prevent the payee from making the claim on his or her federal income tax return. Summaries of the United States tax treaties currently in effect are contained in IRS Publication 901, U.S. Tax Treaties. A more detailed explanation of treaty provisions may be found in the Treasury Department's technical explanations of United States tax treaty provisions. These two sources of information should not replace a review of the actual treaty provision applicable in each case.
Students, Teachers, Researchers, and Non-employees
Nonresident alien students, teachers, researchers, and non-employees claiming exemption from federal income tax withholding on payments for personal services based on a United States tax treaty must complete, sign, and submit a Form 8233, along with an appropriate certifying statement, if required, at the OBFS, University Payroll Service Center. The payee must complete, sign, and submit at the OBFS, University Payroll Service Center a separate Form 8233 for each type of payment from which he or she requests federal income tax exemption. Both employees and non-employees must complete, sign, and submit their Forms 8233 at the OBFS, University Payroll Service Center. A certifying statement is an affirmation made by the payee concerning residency status, date of entry, article criteria, treaty dollar limitations, and facts supporting the benefit claim, in the form required by IRS guidelines. Treaty exemption benefits cannot be claimed unless an SSN or an ITIN has been obtained. See Revenue Procedures 87-8, 87-9, 93-22, and 93-22A located at the IRS's web site for guidance on when to include a certifying statement.
The University must file an accurate and complete Form 8233 and the certifying statement with the IRS prior to excluding any income from withholding each calendar year. If the IRS has not notified the University within ten days from the date the form was filed, it may be considered accepted. The OBFS, University Payroll is required to file all Forms 8233 via certified mail in order to obtain proof of filing date. Forms 8233 may be "batch" mailed for cost control purposes, but the OBFS, University Payroll is required to create a log to verify when each Form 8233 was filed.
The OBFS, University Payroll is responsible for reviewing payee eligibility for treaty benefits and Form 8233 for accuracy, completeness, and compliance with the filing instructions. The University will not exclude any income from federal income tax withholding based on a United States tax treaty until after the expiration of the ten day filing requirement. The OBFS, University Payroll will monitor the application of treaty benefits and withhold tax at the applicable rate from payments that exceed treaty limits or when the treaty eligibility period has expired.
Employees - Nonresident alien employees who are not students, teachers, or researchers, and are claiming exemption from federal income tax withholding on payments from personal services based on a United Stated tax treaty must complete a dated, signed, and sworn statement, in duplicate, at the OBFS, University Payroll Service Center for the tax year in which the exemption is claimed. The treaty statements must identify the tax year involved, the applicable wages, the countries of residence, the treaty provision under which the exemption from federal income tax withholding is claimed, and the facts relied upon as proof that treaty requirements are satisfied. The statement must contain the nonresident alien's: (1) name and ITIN or SSN; (2) country of residence; (3) certification that he or she is not a United States citizen or resident; (4) statement that wages are exempt from United States tax; and (5) reason why wages are exempt. Treaty exemption benefits cannot be claimed unless an SSN or ITIN has been obtained.
The OBFS, University Payroll will review the payee's eligibility for treaty benefits and review the payee statement for completeness, accuracy, and compliance with filing instructions. The OBFS, University Payroll will monitor the application of treaty benefits and withhold tax at the applicable rate from payments that exceed treaty limits or when the treaty eligibility period has expired.
Scholarship, Fellowship, and Grant Recipients
Resident and nonresident aliens claiming exemption from federal income tax withholding on all or part of a scholarship, fellowship, or grant must complete, sign, and submit an accurate and complete Form W-8BEN at the OBFS, University Payroll Service Center. The recipient must submit a separate Form W-8BEN for each separate type of income. Treaty exemption benefits cannot be claimed unless an SSN or an ITIN has been obtained.
Since the amounts excluded on Form W-8BEN must be reported on Forms 1042 and 1042-S, accuracy and completeness are important. The OBFS, University Payroll will review the payee's eligibility for treaty benefits and review the form for accuracy, completeness, and compliance with filing instructions. The OBFS, University Payroll will monitor the application of treaty benefits and withhold tax at the applicable 14% or 30% rate on the taxable portions of the scholarship that exceed treaty limits or when the treaty eligibility period expires. Form W-8BEN is valid for three calendar years unless the treaty exemption expires before the end of this period. The University is not required to file Form W-8BEN with the IRS.
Payments to Foreign Entities
The Withholding Agent (University) is required to request a Form W-8 from any entity to whom it is making a payment that it presumes or otherwise has reason to believe is a foreign entity. The Form W-8 is used to establish the entity's status for withholding purposes.
An entity is considered foreign if it is created or organized outside the United States. All foreign entities are required to complete a Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, Form W-8ECI, Certificate of Foreign Person's Claim for Exemption from Withholding on Income Effectively Connected with the Conduct of a Trade or Business in the United States, or Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding.
Form W-8BEN is the form used by most foreign entities. Form W-8BEN is used to certify that the entity is foreign and not connected to the United States. Form W-8BEN also certifies that the entity should be treated as a foreign entity for withholding purposes.
Form W-8ECI is used if the foreign entity has a trade or business in the United States.
Form W-8EXP is used primarily when the foreign entity is a foreign government or international organization.
If the University receives either one of these three forms, the University may not be required to withhold; however, the University is required to report such payments on Form 1042-S unless the payments are for (1) tangible property and the payee has no substantial presence in the United States, or (2) services performed outside the United States (i.e., foreign source income).
Federal income tax withholding is required when a foreign entity receives items of fixed or determinable annual or periodic United States source income that is effectively connected with the conduct of a trade or business in the United States unless a Form W-8ECI is completed and provided to the University for exemption from withholding. However, such payments are subject to Form 1042-S reporting. When withholding is required, federal income tax is withheld on payments made to foreign entities at a rate of 30% or a lower rate if prescribed in a treaty between the United States and the country in which the foreign entity resides or has a permanent establishment.
VISA REQUIREMENTS AND TYPES
Visa Requirements
USCIS regulations permit payments to or on behalf of a foreign national only if the person has entered the United States for the current visit in a status that allows payment and/or reimbursement. The more commonly utilized statuses are B-1, B-2, WB, WT, F-1, J-1, H-1B, and TN. The information below details the allowability of service payments and reimbursement for qualified travel expenses for each visa status. Additional information can be found on the Foreign National Payment Eligibility Grid and the Tax Reporting and Withholding Checklist for Foreign National Reimbursements.
A person entering the United States for "business purposes" should first obtain a B-1 or for "pleasure purposes" (tourist) B-2 visa at a United States Embassy or consulate and request at the Port of Entry that he or she be granted B-1 or B-2 status, respectively. The status granted is indicated on the Arrival/Departure Card Form I-94. USCIS regulations allow payments to individuals on a B-1 or B-2 visa either directly to the foreign national or to a third party on behalf of the foreign national for services and associated travel expenses. The allowability of service payments for B-1 and B-2 visas changed. This change allows payments for honoraria related services and associated travel expenses provided that the foreign national does not receive payments from more than five institutions or organizations within six months, and the payment is for academic activities that last no longer than nine days. Travel reimbursements not associated with honoraria are excluded from the aforementioned restriction. The foreign national must sign the Foreign National Compliance Statement (Microsoft Word Version) to ensure that all service payments to B-1 and B-2 visa holders meet the USCIS stated criteria. This form is available at the end of this section under "Foreign National Forms and Publications."
Citizens of certain countries can participate in the "visa waiver" program. Contact the Office of International Affairs/Services for a list of eligible countries. Citizens from these countries do not require a visa to enter the United States. However, they must request "WB" or "WT" status at the Port of Entry. The payment criteria for the WB and WT are the same as the B-1 and B-2 as stated above, respectively.
Visa Types
See the Tax Reporting and Withholding Checklist for Foreign National Reimbursements for common visa types.
Training and Education
The University will provide annual training and education classes to personnel involved in hiring, granting, processing, and reporting payments of wages, scholarships, fellowships, grants, and miscellaneous other types of payments to foreign nationals. In addition, supplemental training sessions may be provided throughout the calendar year in response to changes in the federal income tax laws governing payments to foreign nationals. The purpose of this education and training is to inform University personnel of the current tax laws governing income and employment tax withholding and reporting on payments to foreign nationals. The tax laws governing this area are highly complex.
Specifically, these classes will provide training in the determination of United States tax status, income and employment tax withholding and reporting procedures, and the collection and retention of necessary documentation related to payments made to foreign nationals. The University will also provide training in the use of forms related to payments to foreign nationals. The University personnel attending these training and education classes will be responsible for disseminating this information to the appropriate individuals within his or her unit. These policies and procedures must be applied consistently at each campus. These policies and procedures will be updated as necessary to remain in compliance with the current rules, regulations, and guidance governing income and employment tax withholding and reporting requirements related to payments to foreign nationals.
Contact the OBFS, University Payroll at Chicago (312) 996-7200, Urbana (217) 265-6363, Springfield (217) 206-7211 for information on training and education.
Assistance
Offices within the University are available to provide necessary forms, information about procedures and to assist in the processing of necessary documents when a foreign national arrives. Contact the following campus international faculty, staff, or student affairs/services representative early to ensure all appropriate procedures are followed and the requisite forms are properly completed:
- UIC Office of International Services at (312) 996-3121;
- UIS Office of International Affairs at (217) 206-6678;
- UIUC Office of International Student Affairs for students at (217) 333-1303; and
- UIUC Office of International Faculty and Staff Affairs for faculty and staff at (217) 333-8225.
Departmental Planning Guide
Independent Contractors and Guests
The following steps should be followed when a foreign national is invited to provide services or visit the University:
- Read and become familiar with this policy.
- Contact the foreign national to inquire about the following: (a) Do they have a valid passport? (b) Do they have an SSN or an ITIN? (c) Do they have a visa? If so, what is the designation?
The foreign national must enter the United States for the current visit under one of the visas listed above in order to receive payments or have expenses reimbursed.
- Contact the Office of International Affairs/Services to obtain any required forms and to inform them of plans regarding a foreign national. If the foreign national is being sponsored as a J-1 exchange visitor, Form DS-2019 (formerly known as Form IAP-66) must be requested and prepared for the individual. Requests for this form generally take approximately five business days to be processed. Plan as far in advance as possible. The prospective exchange visitor will need Form 2019 (formerly known as Form IAP-66) in order to apply for the J-1 visa.
What to do when the foreign national arrives:
- Determine what type of visa the foreign national used to enter the United States and if they have an SSN or an ITIN.
- Inform the foreign national entering the United States on a J-1 visa to consult with the Office of International Affairs/Services for review of their forms.
- If the foreign national does not have an SSN and is authorized to work as described above, inform the foreign national to consult with the Office of International Affairs/Services for instruction on applying for an SSN. If the foreign national is not authorized to work as described above inform the foreign national to consult with the OBFS, University Payroll to complete the appropriate forms for an ITIN.
- If the individual has an SSN, contact the OBFS, University Payroll to determine what documents are needed for payment.
Foreign National Forms and Publications
Please send questions regarding this policy manual to OBFSPolicies@uillinois.edu.
Last Updated: March 4, 2013