Foreign National Payments & Tax

Definitions
Identifying Nonresident Alien (for Tax Purposes)-Why it Matters
Nonresident Alien (for tax purposes)-How to Tell
Limitations on Payments to Foreign Nationals
Paying an Honorarium to a Foreign National
Tax Identification Number Requirements
Paying Taxes
Importance of Tax Treaties
Types of Payments
   Employee Wages
   Travel Reimbursement
   Royalties

Definitions

  • Foreign national—A person who is not a citizen of the United States or a permanent resident alien, also called an "alien."
     
  • Nonresident alien (NRA) for tax purposes—Generally, any F-1 or J-1 full time student who has been in the U.S. for less than five calendar years or any J-1 teacher/researcher who has been in the U.S. for two calendar years or less, out of the last six calendar years. Generally, any other visa holder (e.g. H1-B) who is in the U.S. for less than 183 days during his/her first visit here, would be a nonresident alien for tax purposes in that year.
     
  • Nonresident alien corporation—A legal business entity incorporated in a country outside of the U.S.
     
  • Nonresident alien for immigration purposes—A person who is not a citizen or permanent resident of the U.S. who has been admitted on a visa for a temporary stay that will end when the purpose of that stay has been met.

Identifying Nonresident Alien (for Tax Purposes)-Why it Matters

Foreign nationals must pay the correct tax to the U.S. government. Failure to pay the correct tax can result in an unexpected tax obligation when the individual leaves the U.S. or may jeopardize a future application for residency.

There is a different tax structure for a nonresident alien compared to a resident alien. A nonresident alien (for tax purposes) may qualify for some tax relief through a tax treaty benefit, if one exists with the person's home country. Generally, a resident alien can't qualify for a tax treaty benefit. Resident aliens for tax purposes are taxed on their worldwide income.

Additionally, the UW is liable for any tax not withheld and associated fines and penalties. Any tax amount, fines and penalties determined to be owed by the IRS will be charged to the department responsible for the foreign national.

Nonresident Alien (for tax purposes)-How to Tell

If foreign national has never lived in the U.S., generally:

  • F & J students are NRAs for five calendar years
  • J nonstudents are NRAs for two calendar years

If a foreign national has lived in the U.S. in the past, the individual must complete the substantial presence test. This test determines if the person has been in the U.S. enough time over the previous three years to be considered "substantially present" in the states. If the foreign national has been in the U.S. for 183 days or more in the past three years, the individual is considered a resident alien for tax purposes.

Limitations on Payments to Foreign Nationals

Federal law limits what payments can be made to a foreign national. See the chart, Payments That Can Be Issued to Foreign Nationals, which defines what wages, honoraria, scholarships and/or awards can be paid to a foreign national, by type of visa that person has.

Paying an Honorarium to a Foreign National

The process for paying an honorarium to a foreign national is complex because three separate government departments and the UW are involved.

  1. The Department of State issues the visa that allows a foreign national to apply for entry into the U.S.
  2. The Department of Homeland Security issues the form that permits a foreign national to enter the country.
  3. The Internal Revenue Service issues forms necessary for collecting taxes and applying for a tax identification number.
  4. The University of Washington collects forms.

Use the checklist, Inviting & Paying on Honorarium to a Foreign National for Academic Activities at the UW, to ensure all steps have been covered.

Tax Identification Number Requirements

There are two different types of tax identification numbers that could be relevant for a foreign national. One or the other is required when applying for a tax treaty benefit.

  1. Social Security Number (SSN) - Requirement to be paid wages in UW payroll system.
  2. Individual Tax Identification Number - Alternative to SSN when foreign national isn't eligible.

See the chart, Tax Identification Numbers for Nonresident Aliens, for more information about applying for a tax identification number.

Paying Taxes

A nonresident alien (for tax purposes) must pay taxes on any income earned in the U.S. to the Internal Revenue Service, unless the person can claim a tax treaty benefit. This applies to students, as well.

Importance of Tax Treaties

A tax treaty is negotiated between the U.S. Department of Treasury and an individual country. The purpose is to reduce double taxation on residents of the particular country. Each treaty is different and each includes different exemptions. If a foreign national qualifies for an exemption because of a tax treaty benefit, little or no withholding will be taken from a payment. The foreign national must have a U.S.  tax identification number in order to claim the benefit. See the IRS Publication 515   (see page 44) for more information about which countries have treaties with the U.S.

Types of Payment

Employee wages. Hiring a foreign national as a UW employee must adhere to multiple governmental and university procedures. For more information, see the section, Overview of Payments to Foreign Nationals

Travel reimbursement. Travel reimbursements are made to compensate an employee or visitor for expenses incurred while traveling on university business. Travel reimbursements are not considered taxable income. For more information, see the section, Overview of Payments to Foreign Nationals.

Royalties. Royalties are payment for the use of some type of intangible property (e.g., patent or copyright). For more information, see the section, Overview of Payments to Foreign Nationals.

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