2.18.1 Compliance on Identifying and Paying Foreign Nationals/Aliens
Created and Board of Trustees Approval: June 1, 2018
Compliance will follow a 6-Step Process:
The 6-step process below must be followed to ensure that aliens are paid according to prevailing tax and immigration rules/regulations with appropriate taxes withheld and payments properly reported.
The procedures are intended to provide guidance in the majority of situations facing Sandhills Community College. The procedures are not inclusive. Tax and immigration laws are voluminous. Situations not covered by these procedures should be handled on a case-by-case basis.
Procedures for Paying or Compensating an Alien
Step 1 – Payment Eligibility and Tax Residency Status
1. Employees – Human Resources is responsible for identifying Foreign National Employees, collecting, and maintaining documentation.
- Human Resources will have foreign national employees complete the FNIS form and submit appropriate documentation.
- The payroll department will be notified of the foreign national employee.
- Copies of the completed FNIS form and backup documentations are sent to the North Carolina Community College System Office for taxation determination.
- Each quarter, the Human Resources Director will submit a list of names to the designated Sandhills Community College representative who will report any payments to Foreign Nationals to the System Office.
2. Students Receiving Awards or Scholarships Administered by Student Services – For Student Services, each semester, the Director of Admissions is responsible for identifying Foreign National Students when they apply to Sandhills Community College. This position is responsible for:
- Collecting and copying documents to identify status
- Maintaining documents in a secure location.
- Entering the data into Colleague and communicating the status to Financial Aid and the Business Office. Communication must be done following Add/Drop but before Financial Aid Refund Checks are issued.
3. Vendors and Contractors
Sandhills Community College Accounts Payable Department will determine if vendor, contractor, individual, student, or employee is a Foreign National.• If payment is made to a third party, the vendor, contractor, or individual must still be determined to be a Foreign National (example: US agency located in California is representing an individual from the Netherlands – individual is a Foreign National – payment is made to agency but will still be considered a Foreign National Payment for tax purposes)If a Foreign National is recognized, the impacted office must gather the following information:
• Copy of Itinerary (applicable for performers only)
• W-8BEN, W-8BEN-E, 8233
• Information will be sent to the System Office to Jessica Balazsi (for determination of tax liabilities)
• System Office will then notify the College if taxes are to be withheld, and the percent to withhold, along with any Treaty notifications
• Decision to work with vendor, contractor, or individual can then be made by VP, Department Chair, or Supervisor.
• When payment to vendor, contractor, or individual is made … required tax withholdings are calculated and electronically submitted to NCDOR and IRS.
• Once tax payment(s) are made, the SCC Controller is notified to make the corresponding entries to the General Ledger.
• Quarterly reports are submitted to System Office.
• Year End 1042’s are processed by System Office.It is the responsibility of the colleges to collect the required information on the forms.
Step 2 – The Type of Payments
The type of payment made to the alien falls into four primary categories:
- Dependent personal services: wages, service related scholarship/fellowship/assistantship payments, travel reimbursements;
- Independent personal services: consulting fees, guest speaker, honoraria;
a. Qualified components for degree candidates: educational expenses, tuition, fees, books, etc.b. Nonqualified component: including living expenses, stipend, housing allowances.
- Miscellaneous income types: prizes and awards, royalties, etc.
Step 3 – The “Source” of the Income
As important as the recipient’s tax status, the payers of the income and their residence also has bearing for determining U.S. federal reporting and taxation.
- A Resident Alien’s income is generally subject to tax in the same manner as a U.S. citizen. Therefore, worldwide income is reported.
- A Nonresident Alien is usually subject to U.S. income tax only on U.S. source income. Sandhills Community College, as the U.S. source payer, is responsible for reporting income it paid to the NRA.a. A determination is made as to the source of income in the following manner:
• For compensation paid to employees, and independent contractors, income is sourced to the country where services are performed.
• For non-compensation payment such as scholarships/fellowships, grants, prizes, and awards, the source of income is the residence of the payer regardless of who actually disburses the funds. If the activity is performed outside the United States, it is not considered U.S. sourced income.
Step 4 – Is the Payment Subject to Income Tax Withholding?
Income paid to a Resident Alien (RA) follows the same withholding tax rules as U.S. citizens. The federal withholding rates for RAs are the same as rates for U.S. citizens.
All U.S. sourced income paid to a Nonresident Alien (NRA) is taxable with the exception of interest income and qualified scholarships/fellowships. The federal withholding rates for nonresident aliens are:
- Type of Income Federal Tax Rate
- Compensation (employees)
- Standard graduated rates
- Nonqualified Scholarships/Fellowships ((F-1, J-1, M-1, Q-1 or Q-2 visa holders) 14%
- Travel Grants (Expense) 14%
- Housing Allowances 14%
- Nonqualified Scholarships/ Fellowships (all other visa holders) 30%
- Independent personal services (e.g. consulting fees, guest speaker fees, honoraria, awards, travel reimbursement and prizes) 30%
- Royalties 30%
- Prizes and awards 30%
- All other payments 30%
NRA payments of taxable scholarships, fellowships, financial aid, and grants not excludible from gross income as a “qualified scholarship” are reportable to the IRS and are subject to withholding of federal income tax. Income must be reported on forms 1042 and 1042-S unless the grant is from sources outside the US.
Tax Treaties – If an alien is a resident of a country that has an income tax treaty with the United States AND the treaty contains an article covering the primary activity the alien is being compensated for, the alien may exempt part or all of the income from U.S. federal withholding taxes as specified in the article.
The alien must submit a Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual and statement with the college to claim treaty benefits. The 8233 must be filed with the IRS.
Step 5 – Is the Payment subject to Social Security and Medicare Taxes (FICA)?
Yes, all aliens, regardless of resident or nonresident tax status, are subject to the same Social Security and Medicare taxes for wages as U.S. citizens. Wages earned in the employment groups as defined used to calculate the Federal Insurance Contribution Act or FICA withholding is the income subject to these taxes.
As a general rule, the only aliens exempt from social security and Medicare taxes are F-1, J-1, M-1, and Q-1 visa holders while they are in Nonresident tax status. Note: If one of these designated visa holder changes to resident tax status during a year, he/she is subject to social security and Medicare taxes for the entire year on his subject wages.
Step 6 – Determining if a Payment is Reportable and How to Report It
- Resident Alien (RA) payments are reported to the federal government in the same manner as U.S. citizens. Forms issued to the resident alien regarding reportable income are the Form W-2, Wage and Tax Statement for wages and the various Forms 1099 for non-wage compensation. Note: If the RA uses a tax treaty, he/she will receive a Form 1042-S for tax reporting purposes.
- Nonresident Alien (NRA) payments subject to taxes are reported to the federal government. Forms issued to NRAs are W-2, Wage and Tax Statement for wages subject to income taxes and/or FICA taxes, and the form 1042-S- Foreign Person’s US Source Income Subject to Withholding for non-wage compensation. In addition, nonresident aliens will receive a Form 1042-S for compensation if they claimed a tax treaty that exempted tax for all or part of their wages. A form 1099 cannot be issued to NRAs.