Overview of Payments to Foreign Nationals
Comparison of U.S. Citizens/Resident Aliens vs. Nonresident Aliens for Tax Purposes
Residency Tests for Tax Purposes
Tax Identification Number (SSN or ITIN)
Withholding Rates for Resident Aliens vs. Nonresident Aliens for Tax Purposes
Income Tax Treaties
Independent Contractor Payments
Scholarship and Fellowship Awards
Possible Sources of Income by Visa Type
Penalties and Sanctions
Certain types of payments to a foreign national may be taxable, while other payments to the same person are not taxable. Also, certain payments that are taxable to one foreign national may not be taxable to another because of an exemption in a tax treaty. Accordingly, it is important for the university to determine the taxability (or non-taxability) of each type of payment made to each foreign national in order to know whether withholding is required and, if so, the amount required to be withheld from such payments.
No one from any University of Washington (UW) department (while in an official role at the UW) can act as a tax consultant; give personal, legal, or tax advice; or, represent an individual in dealings with the Internal Revenue Service (IRS).
Foreign students, faculty, and staff with tax questions or problems are advised to seek assistance from the IRS, a CPA or an attorney. In the U.S., the individual taxpayer is responsible for filing an appropriate and accurate tax return and negotiating all tax matters with the IRS. Taxpayer assistance is available from the local IRS office or by calling the IRS's toll free taxpayer assistance number, 1-800-829-1040.
The table, Comparison of U.S. Citizens/Resident Aliens vs. Nonresident Aliens for Tax Purposes, summarizes some of the significant differences between U.S. citizens/resident aliens and nonresident aliens for tax purposes.
Resident aliens in the U.S. are under a different tax structure than nonresident aliens. A foreign national must be correctly classified as a resident or nonresident alien for tax purposes in order to avoid potentially serious problems which can include:
- An unexpected tax bill for unpaid taxes at the time the individual ends his/her stay in the U.S.
- Penalty and interest charges for both the foreign national and the sponsoring department for incorrectly paid taxes.
- Negative impact on a future application to become a permanent resident for failing to correctly pay taxes.
Definition of Residency for Tax Purposes
A foreign national becomes a resident alien for tax purposes by passing either the "green card" or "substantial presence" test.
See the chart below, Definition of Nonresident & Resident Alien for Tax Purposes, for definitions.
|Visa Type||Nonresident Alien (NRA)||Resident Alien|
|F & J students||
• During first 5 calendar years in U.S.
• Doesn't have a green card
Beginning in 6th calendar year in U.S.
|J non-students (e.g., researchers, scholars, teachers)||
• During first 2 calendar years in U.S.
• Doesn't have a green card
Beginning in 3rd calendar year in U.S.
|H, TN, O or E3||
• Will be a NRA until they've been in U.S. long enough to pass "substantial presence test"
• Doesn't have a green card
Once they've passed the "substantial presence test"
There are two tests to determine residency for tax purposes: the green card test and the substantial presence test.
Green Card Test
If a foreign national has been issued a Permanent Resident Card, also known as a green card (I-551), and the card is still valid, the person is said to have passed the green card test.
The right to lawful permanent residence is granted at the time of the final interview with the U.S. Citizenship and Immigration Services (USCIS) or the U.S. Department of State (DOS) officials and can be evidenced not only by the "green card" but also by a stamp in the applicant's passport which states "temporary evidence of lawful permanent status." The "green card" may not be manufactured or mailed for several months after the final interview, and this stamp provides immediate proof of permanent status.
Substantial Presence Test
The rules for the substantial presence test (SPT) are complex. Essentially, the test determines whether the foreign national has been in the U.S. a substantial amount of time over the current and preceding two years. Once a national has been in the U.S. a substantial amount of time, the tax status shifts to resident alien and the withholding of taxes changes.
How to Count Days for the SPT
A person is a resident for tax purposes if he/she meets the substantial presence test for the calendar year. To meet this test, the person must be physically present in the U.S. on at least:
(a) 31 days during the current year, and
(b) 183 days during the three year period that includes the current year and the two (2) years immediately before that, counting:
- all the days the person was present in the current year, and
- 1/3 of the days the person was present in the first year before the current year, and
- 1/6 of the days the person was present in the second year before the current year.
It is important to note that the counting rules are based on a calendar year, not a 12 month period. For example, a J-1 non-student enters the U.S. on December 15, 1996. For purposes of the SPT, 1996 is the "1st calendar year," even though the foreign national was present for only 16 days of that calendar year. 1997 is the "2nd calendar year." This individual's exemption from counting days would end effective December 31, 1997.
Days not counted:
A J-1 non-student (professor, researcher, etc.) who is substantially complying with the requirements of that status, does not count days for the first two (2) calendar years.
An F-1or J-1 student who substantially complies with the requirements of that status does not count days for the first five (5) calendar years.
Circumstances That Disqualify One from the SPT:
A person will not meet the SPT if (1) he/she is present in the U.S. fewer than 183 days during the current year, and (2) it is established for the current year that the person has a tax home in a foreign country that has a "closer connection" to that country than to the U.S. The "closer connection" exception is discussed in detail in IRS Publication 519, U.S. Tax Guide for Aliens.
To retain nonresident tax status after five years, F-1 students must be present in the U.S. fewer than 183 days and must establish that they have a tax home in a foreign country and that they have a closer connection to that country than to the U.S.
See the example below.
A J-1 scholar arrived in the U.S. in 2002. The person would not count any days present in 2002 and 2003. The foreign national was physically present for 120 days in each year of 2004, 2005 and 2006. Because the total for the 3-year period is 180 days, the foreign national is not considered a resident alien under the SPT for 2006 (183 days are needed to pass the test for the three years).
|YEAR||NUMBER OF DAYS in U.S.||CALCULATION|
|Current Year||2006||120||X 1 = 120|
|1st Preceding Year||2005||120||X 1 /3 = 40|
|2nd Preceding Year||2004||120||X 1/6 = 20|
|TOTAL 180 days|
For more information about the SPT:
- Contact the UW Payroll Office at email@example.com.
- See the IRS site http://www.irs.gov
- Read IRS Publication 519, U.S. Tax Guide for Aliens.
Source rules are important to nonresident aliens because they are subject to U.S. tax only on U.S. source income. Source rules vary depending on the type of payment.
- Wages and independent contractor payments are sourced to where the work was performed (e.g., income earned at the Seattle campus of the UW is considered "sourced" in the U.S) whereas work performed in a foreign country, for example Kenya, is foreign source income.
- Scholarship and fellowships are sourced according to the residence of the entity that made the award (e.g., a scholarship from the Gates Foundation is "sourced" in the U.S.).
The Canadian government gives money to the UW to hire a researcher. The researcher attempts to claim his salary is sourced to Canada. This would not be correct. Because the UW is paying the researcher and the work is performed in Seattle, his income is sourced to the U.S.
Payments that are made by the UW to nonresident aliens for services performed in a country outside of the U.S. are not subject to federal income tax withholding. Similarly, a scholarship from a foreign country paid to a nonresident alien is not subject to federal income tax withholding.
A nonresident alien must obtain a Social Security Number (SSN) to be paid as a UW employee. A foreign national is eligible for a SSN only if his/her visa status authorizes employment. If the foreign national is required to file a tax return with the IRS or wants to claim tax treaty benefits but is not eligible for a SSN, the person must have an individual tax identification number (ITIN).
See the chart, Tax Identification Numbers for Nonresident Aliens, for more details about applying for either a SSN or an ITIN.
There are two offices for the Social Security Administration near the university that are experienced in dealing with foreign nationals.
Social Security Office (downtown Seattle)
Seattle, WA 98121
Social Security Office
13510 Aurora Ave N.
Seattle, WA 98133
Taxes are withheld at different rates depending on what the payment is and whether the foreign national is a resident or nonresident alien. See the chart, Withholding Rates for Nonresident & Resident Aliens for Tax Purposes.
Income tax treaties currently exist with 56 countries (as of 2007). Treaties are negotiated by the U.S. Treasury Department and the benefits in each one are unique to that country. The primary purpose of a tax treaty is to avoid double taxation. The treaty benefit typically eliminates or reduces the tax owed by the nonresident alien to the U.S. government. IRS paperwork must be completed and the individual must have a tax identification number in order to claim any benefit that applies.
A foreign national can claim a tax treaty benefit if he or she is a resident for tax purposes of that country. A foreign national cannot claim tax treaty benefits of the country of birth if he or she is not also a resident for tax purposes. For example, a citizen of Germany who is a resident for tax purposes in Italy can't claim tax treaty benefits from the German treaty.
NOTE: Citizens of Hong Kong and Macao are not covered by the People's Republic of China tax treaty.
Check the list of current income tax treaties for the specific activity below to see if a tax treaty benefit is available.
- Scholarship and fellowship grant
- Independent contractor services
- Employee wages
- Teaching or research
- Studying and Training
- Awards and prizes
- Royalty payments
See the section, Forms Needed to Process Payments, for information about how to apply for a tax treaty benefit.
Independent contractors are not employees of the university. In order for an individual to be compensated as an independent contractor at the UW, all of the following criteria must be met:
- The university does not control or direct the performance of the task.
- The task or service being performed is outside the regular expertise, duties, and/or consulting independence of existing university employees.
- The individual is conducting, in an independent manner, a business, trade, occupation, or profession and is responsible for:
- (a) tools and materials required to perform the task, and
- (b) hiring/managing/terminating any subcontractors or assistants that are required to complete the task.
- The task is of short duration and is not indicative of an ongoing relationship. (Contractual relationships that are longer than thirty days generally indicate that an employee/employer relationship, rather than an independent contractor relationship, exists).
- A written agreement exists with the university which spells out the task or service(s) to be performed. The agreement or related documents must contain:
- (a) Contractor name, address, telephone number,
- (b) U.S. citizenship status (non-U.S. citizens must include visa type, work authorization status, and number of days present in the U.S.),
- (c) Corporate status (corporation, partnership, sole proprietor, not-for-profit),
- (d) Nature and location of services to be performed,
- (e) Performance schedule (starting and ending dates), and
- (f) Department contact person and address.
If the relationship between the university and the provider of the service or product does not clearly meet all of the criteria above, the individual cannot be hired as an independent contractor.
Independent contractor payments can only be received by foreign nationals whose visa status allows the receipt of such payments, as a matter of law. If the independent contractor is known to be a foreign national, special care should be taken to make certain that the individual is truly functioning as an independent contractor.
See the section, Forms Needed to Process Payments, for more information.
Scholarship and fellowship awards are made to assist a student in pursuing a course of study or research. The IRS allows these payments to students to be untaxed if the scholarship or fellowship meets certain specifications. These untaxed payments are referred to as "qualified" scholarships and fellowships and to be untaxed, the following specifications must be met:
- The scholarship or fellowship is awarded to a candidate for a degree
- The scholarship or fellowship is used to pay for:
- Tuition and fees required for enrollment or attendance at the UW, and/or
- Other mandatory fees, books, supplies, and equipment required to be used by all students in a particular course of study.
Scholarship and fellowship payments made to foreign nationals may include a combination of the following. Note that this list is a mixture of taxable and nontaxable payments.
- Tuition, fees, books, and course-related materials (nontaxable)
- Stipends for living expenses including meals, lodging, and other personal items (taxable)
- Airfare purchases from airline companies or travel service providers (nontaxable)
Scholarship and fellowship payments can only be made to foreign nationals who have been granted the appropriate USCIS authorization and visa status.
There are two options for paying a scholarship/fellowship to a student: through Student Fiscal Services (SFS) or through the Payroll System.
- Awards are paid on a one-time basis.
- No tax is withheld at the time of payment.
- If tax is owed on the award, the amount is added to the student's account at the end of the calendar year.
- The transcript will not be released until all taxes have been paid by the student.
- Awards are paid on an on-going basis.
- Any tax that is owed is withheld on an on-going basis.
See the section, Forms Needed to Process Payments, for more information.
A post-doctoral fellowship award is made to an individual for pursuit of a course of study or research beyond the doctoral level. The entire post-doctoral fellowship award is considered taxable income, unless a tax treaty benefit applies.
A stipend is a payment intended to support an individual engaged in academic activity at the UW. An example of a stipend would be additional money to support a graduate student who's not getting a scholarship or fellowship. There's no requirement that the stipend recipient be an enrolled UW student. A stipend may be paid to someone attending a summer workshop, for example. Stipends are never paid as compensation for services (i.e., wages). Stipend payments are taxable unless otherwise excluded by a tax treaty. Departments can award stipend payments through the Payroll Office or SFS.
How to Compute Tax to Include it in Total Stipend Payment
Stipends paid to a foreign national (e.g., payments to students for personal living expenses) are taxed as income at a rate of 14%, unless the student claims an exemption due to a tax treaty. The department may choose to include the tax in the total amount paid in the stipend; however, the amount paid in tax becomes taxable income for the recipient. Below is an example and the formula for calculating a total award that includes the tax. The process of paying for a person's tax responsibility is called a "gross up."
A department wants to award a $1,000 stipend after taxes have been withheld to a student on an F-1 visa who does not qualify for a tax treaty benefit. The stipend is taxed at 14%. Using the gross-up formula below, the total amount of the stipend should be $1,162.79.
The Payroll Office will issue a check for $1,000 to the student and send the tax ($162.79) to the IRS. On the 1042-S issued to the student by Payroll, the full amount, $1,162.79, will be reported.
Gross Up Formula
- Stipend amount / (1.0 - (tax rate)) = Total stipend payment
- 1.0 - .14 (the tax rate) = .86
- $1,000 / (.86) = $1,162.791
- Total stipend payment = $1,162.79
Foreign nationals are strictly limited in what sources of income they are authorized to accept.
- B-1, B-2, VWB and VWT are prohibited from being employed but may be paid under the Honorarium Rule conditions.
- F-1 and J-1 students may be employed on and off-campus under certain circumstances. Off-campus work requires specific work authorization from the UW International Students and Scholars (ISSO) Office prior to accepting employment. Optional practical training for F-1 students and academic training for J-1 students is allowed, sometimes before graduation. Optional practical training is possible for up to twelve (12) months for F-1 students with a possible 17 month extension. Academic training for undergraduate and pre-doctorate training is possible for up to eighteen (18) months for J-1 students. Post doctoral J-1 students may receive up to 36 months of academic training. Students should check with the UW ISSO to see if they are eligible for any of these types of employment.
- J-1 non-students may be employed on campus. Permission to work off campus is very restrictive and must be approved by the UW ISSO prior to accepting employment.
- H-1B, O and E-3 visas are restricted to temporary workers in specialty occupations.
- TN category is restricted to Mexicans and Canadians, as it is part of the North American Free Trade Agreement (NAFTA). TN is similar to the H-1B category, but employment will be in a pre-selected list of occupations which Canada, Mexico, and the U.S. agree are "specialty occupations. See the chart, Payments That Can Be Issued to Foreign Nationals, for more information.
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.
See the section Forms Needed to Process Payments for more information.
Living allowances are payments made to support a foreign national during a course of study or research. Living allowances can be issued to a foreign national not receiving an honorarium. The allowance is based on the temporary work destination's daily meal per diem rate and is issued for up to 30 days at a time. Additional requests (up to 30 days each) may be submitted. Living allowances must be paid in advance, otherwise expenses are reimbursed on an Expense Report (ER). Under most circumstances, living allowances are not considered taxable income.
See the section Forms Needed to Process Payments for more information.
The IRS has recently initiated a series of audits of colleges and universities that focuses on compliance with the nonresident alien area of the tax laws discussed in this guide. In cases where taxes have not been withheld, the IRS may assess the university the full amount of tax that should have been withheld, along with penalties and interest charges, even if the tax was ultimately paid by the foreign national on his/her U.S. tax return. In the event that such an assessment should occur, these amounts will be billed back to the department not adhering to the prescribed procedures relating to nonresident alien payments by the university.