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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 System System Residency Status • US Tax System US Citizens Lawful Permanent Residents Resident Alien for Tax Purposes • Nonresident Alien Tax System Nonresident Alien for Tax 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 Taxes Apply 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 – Travel Reimbursement / Payment • Independent – Ind Per Services / Consulting Fees – Honorarium / Guest Speaker Fees – Travel Reimbursement / Payment Taxable / Treaty Exempt “Accountable Plan” Taxable / Treaty Exempt Taxable / Treaty Exempt “Accountable Plan” Scholarships/Fellowships – Tuition / Fees – Room / Board – Stipend – Book Allowances – Travel Reimbursement / Payment Excluded under Section 117 Taxable / Treaty Exempt Taxable / Treaty Exempt Excluded under Section 117 Taxable / Treaty Exempt Prizes and Awards Royalties Taxable 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 nationals who were or are tax residents (not citizens) of a treaty country and meet specific criteria as defined by 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 Boyd Tax Manager (704) 687-5819 [email protected] Rebecca Urquhart Tax Accountant (704) 687-5742 [email protected]