Western Illinois University: Macomb Campus
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File code: ADM.TAXINT.POL
Approval Date: 12/21/00
Approved By: President
Policy on Taxation of International Persons
To comply with Internal Revenue Service Regulations in connection with withholding and reporting of tax on nonresident aliens and foreign corporations as set forth in the policy.
The United States taxes worldwide income of U.S. citizens and resident aliens regardless of whether the income arose from activity originating outside its geographical borders. Nonresident alien individuals, however, are only taxed on income that is from sources within the United States.
A resident alien is taxed in the same manner as a U.S. citizen. An alien is considered to be a U.S. resident for income tax purposes if he (1) is a lawful permanent resident of the U.S. at any time during the calendar year and meets the "green-card" test, or (2) meets the requirements of the "substantial presence" test. An alien who does not qualify under either of these tests will be treated as a nonresident alien for purposes of the income tax.
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.
Trade or Business
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.
Pay Subject to Graduated Withholding
Wages paid to nonresident alien employees are subject to graduated withholding in the same way as for U.S. citizens and residents if the wages are effectively connected with the conduct of a U.S. trade or business. Any wages paid to a nonresident alien individual for personal services performed as an employee for an employer are generally exempt from the flat rate of withholding.
Pay for Personal Services Performed
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, such as fees of an attorney, physician, or accountant 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.
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.
Withholding on Income Other Wages
The IRS has issued new regulations to govern the withholding of tax on certain U.S. source income paid to international persons, effective January 1, 2001. Under the regulations, the duty to withhold rests on the withholding agent.
Rate of Withholding
The withholding rate for a nonresident alien is at the currently established rate of 30% (14% for certain scholarship income on nonresident aliens who have non-immigrant status), except for employee compensation, and except where modified by treaty.
Generally, individuals who receive compensation as employees in the U.S. are subject to FICA tax. International persons who meet all of the following three criteria at the same time will be except from FICA tax. The individual must be (i) a nonresident alien for tax purposes, (ii) present in the U.S. under an F, J, M, or Q immigration status, and (iii) the primary holder of the visa.
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 and file it with the Internal Revenue Service Center in Philadelphia, PA, on or before March15 of the following year. 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.
Form W-8Ben (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding) should be provided to the University by a beneficial owner to claim foreign status, claim beneficial ownership of income and, if applicable, claim a reduced rate of, or exemption from, withholding in connection with non-service payments, including scholarship, fellowship, and royalty payments.
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-8ECI (Certificate of Foreign Person's Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States) should be used to establish foreign status, claim beneficial ownership and claim that income is effectively connected with the conduct of a trade or business in the United States.
Form W-9 (Request for Taxpayer Identification Number and Certification) may be used to determine whether to treat a payee or beneficial owner as a U.S. person.