Summary of Federal Laws
Tax Issues Related to Students
|Director of Accounts Payable|
Scholarships and Fellowships Paid to Foreign Students and Scholars
Foreign students and scholars do not have the same tax exemption as U.S. citizens. Most foreign student and scholar income is subject to withholding.
The I.R.C. requires a determination as to whether or not the foreign person is a nonresident alien or a resident alien. The test is not the same as for immigration purposes. Resident aliens are subject to the same withholding and filing requirements as U.S citizens. For tax purposes, a person is a resident alien if they are a lawful permanent resident of the U.S., i.e., they have a green card, or they meet the substantial presence test. This is met if the person has been present in the U.S. at least 31 days during the calendar year and 183 days in total during the current year and the two preceding calendar years. The number of days in the current year are counted in full, while the number of days in the first and second preceding years are counted one-third and one-sixth respectively. Students on an F, J, M or Q visa are able to exclude days or presence in the U.S. for the substantial presence test for a period of five calendar years. Teachers or trainees on a J or Q visa may exclude days of presence in the U.S. for two calendar years.
Any relevant tax treaty between the alien's country and the U.S. may override the U.S. income tax rules.
Income from services is sourced in the country where services are performed, and nonservice payments (e.g., scholarship payments) are sourced in the country of the residence of the payor. This is important as nonresident aliens are subject to U.S. tax only on income from sources within the U.S.
Money received as a qualified scholarship is not subject to tax. This is scholarship money that is used for qualified tuition and expenses, i.e., books, supplies, other fees and equipment required for courses.
The withholding agent (the university) is required to withhold U.S. tax and report to the IRS payments made to nonresident aliens. See 26 C.F.R. § 1.1441-1 et seq. for the rules on deduction and withholding of tax on payments to foreign persons.
The general rule that withholding agents are required to deduct and withhold a tax equal to 30% of the amount paid is set forth at 26 C.F.R. § 1.1441-1(b). There are, of course, exceptions to this rule. Note that this rate applies for services rendered as an independent contractor. If the person working is an employee, then 26 C.F.R. § 1441(c)(4) requires the withholding at graduated rates that would otherwise apply to U.S. citizens and residents. The rate on qualified scholarships is 14% on any portion includable in gross income if the nonresident individual is temporarily present in the U.S. as a non-immigrant under an F, J, M or Q visa.
Failure by the withholding agent to withhold, pay and report can result in liability for the amounts required to be withheld, as well as penalties and interest for nonpayment and deposit, and penalties for failure to file. In certain instances a procedure may be used so that the withholding approximates the actual tax liability by completing IRS Form W-4. See Rev. Proc. 88-24, 1988-1 C.B. 800.
Make sure to file Forms 1042 and 1042S to report all scholarships, fellowships, and grants paid to nonresident aliens. See 26 C.F.R. § 1.1461-2(b) and (c). These forms must also be filed for all miscellaneous amounts paid to nonresident aliens who temporarily visit the campus for the purpose of giving lectures, doing research, etc.. Before allowing exemptions from withholding under tax treaties, obtain Form 8233 for compensation payments or Form W-8BEN for non-compensation payments such as room, board, and travel.
IRS Notice 2009-91 Withholding Wages of Non-Resident Aliens Performing Services within the US (November 2009)
This notice modifies IRS Notice 2005-76 and applies to wages paid on or after Jan. 1, 2010. The new rule requires employees to add an amount to wages before determining withholding in order to offset the standard deduction. Second, employees need to determine an additional amount of withholding from a separate tax table applicable only to NRAs. Further directions will be set forth in IRS Publication 15.
IRS Notice 2005-77 Elimination of Filing Requirement for Non-Resident Alien Individuals with U.S Source Effectively Connected Wages Below the Personal Exemption Amount
This IRS Notice amends Treasury Reg 1. 6012-1(b)(2) to eliminate the filing requirement for many nonresident aliens who are required to file solely because they earn wages in connection with a U.S. trade or business. The wages earned, to be excepted, must be less than the amount of one personal exemption under IRS 151. Also effective Jan. 1, 2006, and until the regulation effecting this is promulgated the notice may be relied upon.
The following information appeared in tax lawyer Bert Harding's Sept. 2001 newsletter, quoting Lowell Hancock, a leading specialist on non-resident alien tax issues.
When filing a Form 8233 with the IRS without the foreign national's SSN, the regulations say that the Form 8233 will be valid if a copy of the SSN application (Form SS-5) is attached to show the IRS that the person has applied for the SSN. If the Form SS-5 is not available, it is permissible to file a copy of the letter issued by the Social Security Administration indicating the application has been filed. While a foreign independent contractor can technically use either Form 8233 or Form W-8BEN to advise the payor of his foreign status, where the person is not claiming tax treaty benefits, the Form W-8BEN be used to avoid confusion with the IRS Service Center. Nonresident alien tax assistance from the IRS by calling the IRS at 215-516-2000; or sending a letter to Internal Revenue Service, P.O. Box 920 Bensalem, PA 19020.
Publication 901 U.S. Tax Treaties (Rev. April 2010)
Technical Advice Memo on Compensation Paid to Nonresident Aliens: TAM 201014051 (4-9-10)
The detailed discussion and analysis of the rules in this area of the law -- compensation payments made to nonresident aliens for services rendered in the US -- does have relevance to payments made by colleges and universities to nonresident alien student, staff, and faculty employees.
IRS Publication 15-T New wage Withholding and Advance Earned Income Credit Payment Tables (revised March 2009): Includes updated tables on Non-Resident Aliens
Publication 1187 Specifications for Filing Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, Magnetically or Electronically
IRS Publication 515 (revised 4-08): Withholding of Tax on Nonresident Aliens and Foreign Corporations.
Bert Harding reports in his January 2003 College and University Tax Report that the IRS is likely to be stepping up audits in this area. See Tax Officials Speak at NACUBO Tax Forum for more. See also Nonresident Alien Withholding, Reporting and Status Certifcation in Higher Education by Bertrand M. Harding Jr. (2002). Copies of these documents can be obtained by calling the law office of Bert Harding at 703-683-8036.
CCR updated CFR links 7/7/15