Payroll Tax Guideline 104: Non-Resident Alien Employees

Reviewed 10/1/2014

Scope

This guideline covers federal tax reporting and withholding requirements related to wage payments made by the University for services rendered by nonresident alien employees.

Background

Payments to nonresident alien employees are subject to unique tax withholding and reporting requirements. Payments to nonresident alien employees must be reported to the employees and the I.R.S. as follows:

  • on Form W-2 (if no tax treaty applies),
  • on Form 1042-S (if a tax treaty applies to all wages), or
  • on both forms (if a tax treaty applies to some, but not all wages).

The nonresident alien must receive copies of these forms from the University to file a U.S. nonresident alien income tax return.

Tax withholding is generally required on wages paid to nonresident aliens unless a U.S./foreign tax treaty applies. It is the responsibility of the nonresident alien to determine whether a tax treaty applies and to submit the appropriate tax forms to the University when claiming that a treaty applies . If the nonresident alien does not provide properly completed tax forms, the University is required to withhold federal and state income taxes.

A nonresident alien employee without a visa or with an improper visa classification is not authorized to work and should not be hired by the University. For example, “B-2″ visa holders are in the U.S. for pleasure and are not authorized to work.

Nonresident Aliens Defined

For federal tax purposes, individuals are generally taxed as nonresident aliens if they do not fall into any of the following categories:

  • United States Citizen,
  • Individual with a Green Card, or
  • Individual without a Green Card who meets the substantial presence test. The “substantial presence test” is generally satisfied if the individual was in the U.S. for at least 31 days in the current calendar year and if the individual was present in the U.S. for a total of 183 days (days counted towards the 183 day total include all days in the U.S. in the current year, 33.3% of the days in the U.S. in the 1st preceding year, and 16.7% of the days in the U.S. in the second preceding year).

Note – Students temporarily present in the U.S. on an F, J, M, or Q visa (for up to five calendar years) and teachers temporarily present on a J or Q visa (for up to two calendar years) are generally exempt from the substantial presence test and appear to constitute the vast majority of the University’s nonresident aliens. A “calendar” year is the period from January 1 through December 31, not twelve consecutive months. If the individual is in the U.S. as an exempt individual for any part of a calendar year (e.g. as few as one day or as many as 365 days), that year will count as a full calendar year when determining the individual’s exempt individual years.

U.S. Source Wages vs. Foreign Source Wages

The IRS tax reporting and withholding requirements only apply to U.S. source wages. Foreign source wages are not subject to U.S. tax law. In general, wages are sourced by reference to where the services are performed. U.S. source wages result from compensation earned with respect to services performed within the United States and foreign source wages result from services performed outside the United States.

References and Technical Resources

More information about the U.S. taxation of nonresident aliens is available at the IRS webpage:  https://www.irs.gov/individuals/international-taxpayers

IRS Publication 513 – Tax Information for Visitors to the United States
IRS Publication 515 – Withholding of Tax on Nonresident Aliens and Foreign Entities
IRS Publication 519 – U.S. Tax Guide for Aliens
IRS Publication 520 – Scholarships and Fellowships
IRS Publication 901 – U.S. Tax Treaties