Fiscal Operations Manual
Section 1402: Expenditures
Effective: 03/30/2009
Revised: 1/10/2013

• Background
• Introduction
• Overview
• Non-Resident Alien Status
• Supplemental Information
• Payroll – On Campus Employment
• Student Accounts - Scholarships
• Reference

Background

OSU must comply with Internal Revenue Service Regulations in connection with withholding and reporting of tax on nonresident aliens.  The reporting and taxation requirements of nonresident aliens are very complex.  These guidelines for individuals and departments serve to enable all parties to meet their reporting and taxation requirements.

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Introduction

Any payment being made to a nonresident alien requires special attention and handling.  Below is a summary of the requirements for paying a nonresident alien. In order to make a payment to a nonresident alien working in the U.S., the individual must have a US social security number or a US ITIN (the only exception to this is for payments being made that are determined to be part of a "qualified scholarship").

Because of the complicated tax laws and regulations for these payments, we strongly request that you review this policy and contact Business Affairs well in advance of making a payment request.  Having the correct documentation will make the process much easier and faster.

All payments made to or on behalf of a nonresident alien must be reported to the Internal Revenue Service (IRS).   In addition, all payments are subject to federal income tax withholding unless they are specifically exempted by either U.S. tax law, or by an income tax treaty. (Note:  there are tax treaties with over 40 countries, each of which is unique and different and can change frequently.)

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Overview

• Examples of payments made to nonresident aliens include, but are not limited to:
  • Wages/Compensation
  • Stipends
  • Travel & Expense Reimbursements
  • Scholarships/Fellowships (Note: Payments do not have to be paid in cash; credits to a student's account qualify under these requirements.)
  • Independent Contractor Payments
  • Royalties/Commissions
  • Honoraria Prizes/Awards
• Each payment requires the review of certain key factors:
  • Visa Type
  • U.S. Residency Status (U.S. citizen, substantial presence alien, resident alien, nonresident alien)
  • Substantial Presence Test
• If a nonresident alien is exempt from federal income tax withholding because of either U.S. tax law or a tax treaty, that individual must file the appropriate form:
  • Form 8233 - Compensation (independent contractors and employees) and related payments
  • Form W-8BEN – Scholarship, fellowship (no service), royalties and other payments
• Payments requiring federal income tax withholding are taxed at 14 percent, 30 percent, or graduated withholding rates depending on the type of payment.
• The 1042S is the annual tax form that is used to report payments and tax withholding to nonresident aliens.

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Non-Resident Alien Status

A nonresident alien is a person who is not a citizen or permanent resident of the United States and who has been admitted for a temporary stay that will end when the purpose of that stay has been met.  A resident alien, for immigration purposes, is the same as an immigrant, or a "green card" holder. A resident alien can be defined as a non-U.S. citizen who has been authorized to live and work in the United States indefinitely.
A nonresident alien for tax purposes is a non-U.S. citizen who, during his or her stay in the United States, either pays U.S. tax only on income from sources inside the U.S. or else is exempt from paying U.S. income tax because of a treaty between the United States and the government of his or her country of residence for tax purposes. Most nonresident aliens receive no tax exemption for dependents. A nonresident alien for tax purposes must file an income tax return on IRS Form 1040NR U.S. Nonresident Alien Income Tax Return on or before April 15th.

Categories established for immigration purposes do not necessarily coincide with those set up for tax purposes. Under certain circumstances, a nonresident alien for immigration purposes may be a resident for tax purposes. Thus, students and scholars who are not citizens of the United States must take care to determine whether they are resident or nonresident aliens for tax purposes. Only then will they know how their income will be taxed and which income tax return form to file. For current information on tax laws regarding resident and nonresident aliens, IRS Publications 513, 515, 519, and 901 should be consulted.

Pay for Personal Services Performed - Generally, a nonresident alien who performs personal services within the United States during the tax year is engaged in a U.S. trade or business.  Personal services performed by an independent nonresident alien contractor as contrasted with those performed by an employee are subject to the flat withholding rate, unless that pay is specifically exempted from withholding or subject to graduated withholding. This category of pay includes payments for professional services made directly to the person performing the service.

Foreign Student or Exchange Visitor - A nonresident alien individual temporarily present in the U.S. under an "F", "J," "M," or "Q" immigration status for five calendar years (relating to visiting students, teachers, trainees, etc.) is considered to be engaged in a U.S. business. This means that any taxable portion of a scholarship or fellowship grant and expenses incidental thereto, to the extent derived from U.S. sources, are taxable at the same rates (but subject only to the flat withholding rate) applicable to a U.S. citizen.

Method of Taxation - A nonresident alien individual is taxed in the same manner as a U.S. citizen and on all income which is effectively connected with their conduct of a trade or business in the U.S. They are also taxed at a flat rate set by the Internal Revenue Service on U.S. source income that is not effectively connected with the conduct of a U.S. trade or business.

Tax Treaties - A nonresident alien individual is taxed on fixed or determinable, annual or periodic income received from U.S. sources at a flat rate unless a lower rate is set under an income tax treaty ratified by the United States. The United States has negotiated a network of treaties with other countries to avoid international double taxation and to prevent tax evasion.  Nonresident Alien students, from countries with which the United States has an active tax treaty, may be exempt from Federal income tax on wages that would otherwise be considered taxable.  In order for Nonresident Alien students to claim benefit under the appropriate tax treaty, they must complete IRS Form 8233 “Exemption from Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual.”  A new Form 8233 must be filed at the beginning of every calendar year in order to continue the exempt status under the tax treaty.

Rate of Withholding is based upon current IRS regulations.

Returns on Withholding - The University is required to withhold and pay a tax on income paid to a nonresident alien individual and must make an annual return on Form 1042. Annual information returns on payments to nonresident alien individuals, foreign corporations and foreign partnerships are required on Form 1042S. There is never a situation in which Form 1099 is the appropriate form to use in reporting a payment to a nonresident alien.

Documentation Requirements

Form 8233 (Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual) is used to claim a tax treaty exemption for compensation payments, regardless of whether the individual is an employee or independent contractor. The form requires a ten-day waiting period, such that the withholding agent must wait for ten days after mailing the form to the IRS before making a payment to the individual for which no tax is withheld.

Form W-8  (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding)

CO-NRA Form – A new CO-NRA form must be filed for every year a non-resident alien is employed.  Central Payroll and the OUS Controllers Division use the CO-NRA to determine an non-resident alien's employee tax status.  Non-resident employees who do not submit a CO-NRA form may be subject to Social Security and Medicare withholding.

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Supplemental Information

Accounts Payable – Reimbursements and Honoraria

General Information - The American Competitiveness and Workforce Improvement Act of 1998  provided the ability to pay reimbursements for expenses and honoraria to international visitors engaged in academic activities. In addition to work authorized visa types we can now pay visitors in a "B" status.  Honoraria payments are considered taxable income to a foreign national and will be subject to federal income tax unless your visitor is eligible for tax treaty benefits.  In order to file a reduced rate of withholding certificate they must have a federal tax reporting identification number.  Honoraria payments must be processed as Personal Professional Service Contracts (PPSC), regardless of amount.  Warn the visitors that honoraria payments may be subject to tax withholding.  
 
Honorarium and Travel & Per Diem less than 10 days and visitor has not been reimbursed by more than five (5) institutions in the last six (6) months.

• Visitors enter our country in a Visa Status of B1 or B2, and must submit International Visitors Declaration form.
• Visitor will need to apply for an Individual Tax Identification Number (ITIN), or must have an offer of employment to apply for an SSN, and cannot be employed in B1/B2 status.
• Your visitor may apply for an ITIN by mail using Form W-7 .  Start the process early as it can take up to six weeks before an ITIN card will be issued.
• Submit PPSC to Procurement & Contracting Services (PaCS) , attach copy of passport and I-94 Visa. Payment will be subject to 30% withholding.
• If your visitor is already in the United States in a J or H status, teaching at another institution or working for another entity:
• • If visitor has H type visa, OSU cannot pay honorarium, can only reimburse travel expenses.  H type visa is tied to the visitor’s sponsored institution.
  • If visitor has J type visa, and the service provided to OSU is in line with service provided to visitor’s institution, visitor must provide a letter of authorization from sponsor’s International Program office, allowing him/her to perform this service for OSU.
• After contract is approved, submit Substitute W-9 & Direct Deposit Authorization Form to Business Affairs.
• Submitted copy of I-94 with travel reimbursement request via the (Travel Reimbursement Entry System (TRES) .
• Send contract as the payment request to the appropriate Business Center when services are rendered.

Honorarium, in addition to Travel & Per Diem more than nine (9) days and/or visitor has been reimbursed by more than five (5) institutions in the last six (6) months.

• Visitor must obtain a work authorized Visa Status. Contact the International Student & Faculty Services (ISFS) office at least two months before the scheduled visit.  They will help you obtain the appropriate paperwork (DS-2019) to send to your visitor.
  - or -
• Visitor must enter the country as a visitor for business with a status of B1. Contact International Student & Faculty Services (ISFS) office before scheduled visit for help to obtain the correct visa for your visitor.   The most common J-1 Visa enables the visitor to work and receive proper payment.  Your visitor will need to enter the country in a “visitor for business” status B-1 for travel expense reimbursement.  Submit copy of I-94 with travel reimbursement request (TRES)
• Visitor will need to apply for an Individual Tax Identification Number (ITIN), or must have an offer of employment to apply for an SSN, and cannot be employed in B1/B2 status.
• Your visitor may apply for an ITIN by mail using W-7 form.  Start the process early; it can take up to six weeks before an ITIN card will be issued.
• Submit PPSC to PaCS attach copy of the I-94 Inform visitor that payment will be subject to withholding.
  If your visitor does have a U.S. tax reporting identification number, contact Business Affairs to determine whether your visitor will be eligible for tax treaty benefits.
• If your visitor is already in the United States in a J or H status, teaching at another institution, or working for another entity, there are additional steps that must be followed which may allow us to pay your visitor.
• If visitor has H type visa, OSU cannot pay honorarium, can only reimburse travel expenses.  H type visa is tied to the visitor’s sponsored institution.
• If visitor has J type visa, and the service provided to OSU in line with service provided to visitor’s institution, visitor must provide a letter of authorization from sponsor’s International Program office, allowing him/her to perform this service for OSU.
• Submit PPSC to PaCS attach a copy of the I-94.  Inform visitor that payment may be subjected to tax withholding.

Processing Information

• Payment made to IRS as soon as possible by Chancellor’s Office for all OUS universities.
• Gross up is required if contractor was not informed of tax implication, department will be charged with the liability in addition to the honorarium.
• Annual report is required on amount paid to visitors, and amount of tax withheld.
• Chancellor’s Office issues the earning statements, 1042S.

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Payroll – University Employment

General Information - An international student’s employment eligibility is based on the visa type he or she holds.  Employment is any type of work performed or services provided in exchange for money, tuition, fees, books, supplies, room or other benefit.  A non-immigrant who is permitted to engage in employment may engage only in such employment as has been authorized.  Any unauthorized employment by a NRA constitutes a failure to maintain status, see 8 C.F.R. 214.1(e).  If a student is unsure whether a particular on-campus job is permissible he/she should speak with an international student advisor in International Student & Faculty Services before beginning employment.

University Employment

Federal regulations allow an international student holding a J-1 or F-1 visa to work for the university a maximum of 20 hours per week during the academic year and full-time during university vacations (8 C.F.R. 214.2(f)(9)(i)).  If a student has more than one university job, total hours cannot exceed 20 hours in any given week during the academic year, unless it is the student’s annual vacation term.  During the vacation term, the student is eligible to work full-time. 

If it meets one of the following conditions, it is considered university employment:

• It is related to a scholarship, assistantship or fellowship; or
• It occurs on the premises of the university the student is authorized to attend and it provides a service to OSU students (this includes the OSU Bookstore and fast food restaurants on campus); or
• It occurs at an off-campus site that is educationally affiliated with Oregon State University’s established curriculum (e.g. Hatfield Marine Science Center and OSU Seafood Laboratory in Astoria).

F-1 and J-1 students must meet these conditions to be eligible for on-campus employment:

• They must be in good academic standing and in lawful immigration status;
• They must continue to engage in a full course of study, except for official school breaks and annual vacations; and
• J-1 students must obtain written approval from the Program Sponsor (listed in Block #2 on the DS-2019) prior to beginning employment.
• Undergraduate Enrollment Criteria: To be eligible for university employment, international undergraduate students must register for and complete a minimum of 12 credit hours each term during the academic year (8 C.F.R. 214.2(f)(6)(i)(B)).  If a student is registered for less than 12 credits, an approved Reduced Course Load Form must be on file with International Student & Faculty Services.

Graduate Student Enrollment Criteria: To be eligible for university employment, international graduate students must register for and complete a minimum of nine(9) credit hours each term during the academic year (8 C.F.R. 214.2(f)(6)(i)(B)).  If a student is registered for less than nine(9) credits, an approved Reduced Enrollment Form must be on file with International Student and Faculty Services.

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Student Accounts – Scholarships

General Information - Scholarship and fellowship payments are made to assist a person in pursuing a course of study or research.

Taxable income is any money paid to a foreign visitor on which taxes are required to be paid to the U.S. government. The agency that pays the scholarship (OSU) is required to deduct a certain amount from each student’s scholarship or student account to cover the student's estimated tax liability.

Withholding means that the taxes a foreign visitor is obligated to pay to the U.S. government will be taken out of the scholarship check or charged to the student if the full scholarship payment is made to the student.  OSU collects the withholding taxes by placing a charge ‘NRA Withholding’ on the student’s account, and sends the taxes to the IRS as required by law.  The University reports the amount of any scholarship or fellowship monies received by Nonresident Alien students, as well as any Federal taxes withheld, annually on IRS Form 1042S “Foreign Person’s U.S. Source Income Subject to Withholding” by the annual March 15th deadline. 

The IRS allows a portion of scholarships and fellowships to be excluded from taxable income.  Scholarship and fellowship payments made to foreign visitors may include a combination of the following:

• Tuition, fees, books, and course-related materials. (Nontaxable)
• Room and board for scholar athletes. (Taxable)
• Stipends for living expenses including meals, lodging, and other personal items. (Taxable)
• Medical insurance premiums paid to insurance companies. (Taxable)

Portions of scholarship and fellowship payments that are used for meals, lodging, non-mandatory medical insurance, travel, personal living expenses, or stipends are taxable income, unless a specific tax treaty exclusion applies. 

Non-taxable Payments - A qualified tuition reduction (such as GRA/GTA) will not be taxable for those graduate students at an educational institution who perform teaching or research activities for that institution.  In order for the teaching or research activities to lead to a non-taxable tuition reduction, the activities performed must be incidental to the student’s educational endeavors. For undergraduates, a qualified tuition reduction is not taxable, if the reduction is not representative of a payment for services. 

• A student loan is not considered to be a scholarship because the loan is expected to be repaid, so it is generally not taxable.
• Cash and cash equivalent payments made by a student’s family member or a third party with the intent of settling the student’s debt to OSU are not scholarships, so are not taxable.

Responsibilities

• Students are responsible for completing the proper tax forms and providing them to the University, as well as, notifying the University of any change in their tax status.  Changes in tax status include moving between states, changes in deductions, etc.  Students should also be aware of the various forms they must file with the IRS and their State and local governments each year.  Students should make every effort to keep detailed records of all IRS, INS, State, and local government forms and any other important documentation submitted to the University or to the various governmental authorities.  Students should also keep photocopies of all their important forms/documents in a safe place to avoid future disputes over lost documents. 
• If the total sum of your U.S. source income was less than the personal exemption you are not required to file IRS Form 1040NR-EZ or Form 1040NR. However, if you had any taxes withheld, you should file IRS Form 1040NR-EZ or Form 1040NR to get a refund of these taxes and you must still file Form 8843.  If you owe taxes and don't file, the IRS can assess penalty and interest and seize U.S. bank assets for repayment. Fines and penalties can often amount to more than the original tax debt.
• No one from the University can act as a representative for an individual when dealing with the IRS.  However, in the event of a tax question or problem, the University can assist in supplying appropriate supporting documentation for payments made to individuals. 
• The tax responsibilities of the University arise from its status as a state, non-profit educational institution, as an employer, and as a provider of student financial assistance.  The University is responsible for withholding taxes from paychecks and other taxable payments made by the University to students, and for the reporting of information to the IRS and to the various state and local tax authorities in accordance with statutes and regulations. 

References:

Student Employment Policy & Procedures Manual 
Oregon University System Foreign National Data Request Form
OUS Financial Administration Standard Operating Manual (FASOM), Section 10.6: Nonresident Aliens
http://www.ous.edu/cont-div/bpp/1006.php