Policies & Procedures

18.2 Foreign Nationals

This policy does not reflect changes due to the Tax Cuts and Jobs Act of 2017.

Note: This policy informs University of Illinois System employees and other system-related individuals about relevant tax issues. This policy does not constitute legal or tax advice. Individuals should consult with their attorneys or tax professionals for advice on personal issues.

Overview

U. S. Citizenship and Immigration Services (USCIS) within the Department of Homeland Security, and Internal Revenue Service (IRS) regulations govern system payments to foreign nationals including but not limited to foreign national employees, independent contractors, and students. This policy provides guidance to unit personnel regarding the special documentation and processing requirements that govern employment and other payments to foreign nationals. These special requirements are in addition to the standard system document and processing requirements for employment and payments to United States (U.S.) citizens.

Foreign nationals, also referred to as aliens, are persons who are not United States citizens. The IRS distinguishes between two types of aliens for federal income tax purposes: resident and nonresident aliens. The taxability of payments to nonresident aliens (and some resident aliens) is subject to special rules.

Definitions

Resident Alien - A resident alien is a non-United States citizen who satisfies either the "green card test" (see "Green Card Test" in this section) or the "substantial presence test" (see "Substantial Presence Test" in this section) during the calendar year as described in IRS Publication 519, U.S. Tax Guide for Aliens. Resident aliens who pass either of these tests are treated as U.S. residents for tax purposes. The tax status of an individual who is a resident alien by substantial presence may change from year to year. Therefore, University Payroll and Benefits (UPB) must confirm the United States tax status of all resident aliens on payroll at the beginning of each calendar year or before the individual's first payment during the current calendar year.

Green Card Test - Generally, foreign nationals that have been issued an alien registration receipt card, also known as a "green card," by the USCIS are permanent residents and should be considered resident aliens for federal income tax purposes. Foreign nationals continue to have permanent resident status unless it is taken away from them or it is administratively or judicially determined to have been abandoned.

Substantial Presence Test - A foreign national is a resident alien if the individual is physically present in the United States for at least 31 days in the current calendar year and present 183 days or more based on counting: all days present during the current year, plus 1/3 of the days present in the preceding year, plus 1/6 of the days present in the second preceding year. Certain days of presence are disregarded such as: (1) days spent in the United States for a medical condition that developed while the foreign national was present in the United States and unable to leave, (2) days regular commuters spend traveling to or from Canada or Mexico, (3) a day of less than 24 hours spent while in transit between two locations outside the United States, and (4) days when the foreign national was an exempt individual. The individual is considered a resident alien for federal income and employment tax purposes from the first day of physical presence in the United States in the year that the test is satisfied.

Exemptions - Special exemptions to the substantial presence test may apply to certain foreign nationals. Two such classes of foreign nationals are: (1) students on F, J, M, or Q visas, and (2) teachers and trainees on J or Q visas. Students do not count their days of physical presence for five calendar years. A student may be exempt from counting days of United States physical presence beyond five calendar years if he or she proves to the IRS that he or she does not intend to reside permanently in the United States. A determination that the exemption may be extended beyond five years must be obtained from a District Director of the IRS for the extension to apply. Teachers, trainees, or any other J or Q non-students do not count days of United States physical presence in a calendar year provided that the individual has not been in the United States as a F, J, M, or Q student or a J or Q non-student for any two of the six prior calendar years. Partial calendar years are considered full calendar years for these limitation purposes.

Nonresident Alien - A nonresident alien is a non-United States citizen who does not satisfy either the "green card test" (see "Green Card Test" in this section), or the "substantial presence test" (see "Substantial Presence Test" in this section) during the calendar year. A nonresident alien's United States tax status may change from year to year. Therefore, UPB must confirm the United States tax status of all nonresident aliens prior to the individual's first payment during the calendar year.

Taxpayer Identification Numbers

Foreign nationals performing services for and receiving payments from the system must obtain and furnish the system with either (1) a Social Security number (SSN) issued by the Social Security Administration (SSA), or (2) an Individual Taxpayer Identification Number (ITIN) issued by the IRS.

Social Security Number

Every foreign national must either have an SSN or be in the process of obtaining one for system employment. If an individual does not already have an SSN, he or she must file Form SS-5, Application for a Social Security Card (see Form SS-5 under "Foreign National Forms and Publications" at the end of this section), along with (1) proof of identity (for example, a valid passport or birth certificate), and (2) work authorization or proof of eligibility to be in the United States (for example, Form I-94, Arrival-Departure Record and Form DS-2019 (formerly known as Form IAP-66), Certificate of Eligibility for Exchange Visitor (J-1) Status) with the local SSA Office. Call 1-800-SSA-1213 to determine the nearest location.

An individual's visa status may permit certain types of employment, and holders of such visas are required to obtain an SSN, (for example, F-1, J-1, J-2, and H-1B). Generally, individuals who are not eligible to obtain an SSN may not be employed by the system. A copy of the card or proof of application for an SSN should be retained in the individual's file, and a copy should be sent to UPB.

Individual Taxpayer Identification Numbers

Effective July 1, 1996, the following individuals, if ineligible to obtain an SSN, are required to obtain an ITIN:

United States resident aliens required to file a United States tax return;
Aliens who are claimed as a spouse or dependent on a United States tax return;
Nonresident aliens who choose to file a joint return with a United States citizen or resident alien spouse; and
Nonresident aliens required to file a United States tax return to claim a refund.

Form W-7, Application for IRS Individual Taxpayer Identification Number (see Form W-7 under "Foreign National Forms and Publications" at the end of this section), must be completed and submitted to the IRS or to a Certified Acceptance Agent accompanied by the required documentation to substantiate the individual's foreign status and identity.

It may take several weeks or months before an ITIN is issued. Therefore, unit personnel should encourage foreign nationals to apply as soon as they know that the system will be making payments to them, because the system is required to report and withhold on their behalf. An ITIN may be applied for and obtained prior to entry into the United States. The name and location of the closest IRS or United States Consular office abroad should be provided to a foreign national in need of an ITIN to avoid delay or denial of payment.

If an ITIN is not available before the first payment is due, the following procedures must be adhered to:

The foreign national must sign a Statement of Certification confirming that an ITIN has been applied for or will be applied for at the time the foreign national's tax return is filed;
The foreign national must provide a copy of his or her ITIN application; and
The foreign national must provide the system with his or her ITIN once received.

In such circumstances, the system is required to withhold all applicable federal (at a rate of 30%) and state (at a rate of 4.95%) income withholding taxes and Federal Insurance Contributions Act (FICA) tax. The system does not grant tax treaty exemption benefits to a foreign national without an ITIN. If the system has not received proof of the ITIN, the system follows up with the unit and the foreign national 60 days after the payment date.

ITIN notification letters should be carefully inspected to avoid confusion with foreign identification numbers. A copy should be retained in the foreign national's file and a copy sent to UPB. Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), should be completed by the foreign national to avoid backup withholding. (See Form W-8BEN at the end of this section under "Foreign National Forms and Publications.")

Tax Reporting When a Foreign National Does Not Have an ITIN

Situations exist where payments are made to foreign nationals prior to receipt of an ITIN. Under these circumstances, the SSN/ITIN field on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, are left blank. Also, the system attaches an affidavit to Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. This affidavit states that the system has performed its due diligence in requesting ITIN information. As soon as the system receives an ITIN from a foreign national, the system prepares and submits a corrected Form 1042-S.

Penalty Fees for Payments to a Foreign National Who Does Not Have an ITIN

The IRS may assess a $100.00 penalty on the system for each individual Form 1042-S submitted without an ITIN. UPB tracks the penalties assessed by the IRS for each university on an annual basis. Each year, the total amount of penalties for each university that the system is required to pay is charged to the Office of the Provost of each university.

Foreign Source Income

Note: This Section only applies to nonresident aliens and foreign entities

Foreign source income (FSI) for nonresident aliens refers to income earned by a nonresident alien, in the capacity of an employee or an independent contractor, for services performed outside the United States. The source of compensation is determined by the location where the activity is performed.

FSI is not subject to U.S. tax withholding and reporting requirements for nonresident aliens.

The system requires one of the Forms W-8 or other documentation to substantiate foreign status and/or location of activity to be completed before making a FSI payment. UPB reviews payments to nonresident aliens to determine if the income is foreign sourced. University Payables then processes FSI payments.

See FSI Chart and IRS Publication 519, U.S. Tax Guide for Aliens , for additional information.

Payments to Students

In situations where a nonresident alien receives a scholarship, fellowship, grant, or an achievement award for activities performed or to be performed outside of the United States, such amount is considered foreign source income (FSI).

Scholarships, fellowships, and grants funded by foreign sources to nonresident aliens for activities (excluding employment and independent contractor related services) performed within the United States are also considered FSI. The source of scholarships/fellowships/grants is determined by a combination of location of activity and location of "payor" (that is, the entity which has discretion over actual distribution of funds).

For example, the Ministry of Education Republic of China (Taiwan) selects five students, who have been admitted to a UIUC graduate program, to receive annual fellowships for attending UIUC. The foreign government provides the funds to UIUC to disburse the fellowship funds to the students on a monthly basis. The grantor of the fellowships is the foreign government. As a result, these payments are FSI. See FSI Chart. However, if a university determines the recipients of the funds, the fellowships are not considered FSI.

Processing financial assistance for nonresident alien students depends on whether the payments are qualified or nonqualified. Qualified payments are restricted to tuition and mandatory fees; non-qualified payments are unrestricted. Nonresident alien student aid is processed as follows:

Qualified Scholarships/Fellowships/Grants:

UIC and UIS

Process nonrecurring payments (i.e. payments to less than 10 students that are tied to a C-FOAP that is valid for only one academic year) on a Student Account Payment Request (SARS) Form
Process non-recurring payments to 10 or more students through the Office of Student Financial Aid
Process recurring payments (i.e. payments tied to a C-FOAP that will remain the same year after year) through the Office of Student Financial Aid

UIUC

Process all scholarship and grant payments for the current academic year through the DAWS system. Information on how to access the DAWS application is available on the DAWS Resource Page
Process all scholarship and grant payments for award periods prior to the current academic year on a Student Account Payment Request (SARS) Form

Nonqualified Scholarships/Fellowships/Grants/Achievement Awards:

Departments need to:

Use the FSI earn code when the student’s record of recurring payments is created and
Indicate that the funding is controlled by a foreign entity.

Also, nonresident alien students need to complete Form W-8BEN and submit to UPB.

Payments to System Employees

Every employee hired after November 6, 1986 must complete Form I-9, Employment Eligibility Verification, to verify employment eligibility and identity pursuant to immigration law. For additional information regarding I-9s and the I-9 process at the system, please see the System Form I-9 page .

Every employee must complete a Form I-9, Employment Eligibility Verification as part of the system's Employment Eligibility Process to verify an employee's citizenship status and employment eligibility pursuant to immigration law. The employing unit must initiate and assure completion of the Tax Reporting and Withholding Checklist for Foreign National Reimbursements to determine an employee's United States tax status and assure proper withholding and reporting compliance measures.

Required Foreign National Information

The Foreign National Information System (FNIS) is a web portal that captures passport and visa information for each foreign national to assist in determining tax status and treaty benefit analysis. UPB provides the applicable web portal link, when necessary, to the foreign national in order to access FNIS. If a foreign national does not provide the appropriate and required information using FNIS, then the Foreign National Tax Information Form is required.

The Foreign National Tax Information Form is a system document used to gather the background information needed to comply with the special federal income and employment tax rules that pertain to payments made to foreign nationals. The Foreign National Tax Information Form must be completed, reviewed, and submitted to the designated units prior to making any payment to a foreign national. Payments may be delayed or denied altogether if information is inaccurate or not provided, and the sponsoring unit may be responsible for any related taxes, interest, and penalties.

Payment sponsoring units are encouraged to send each foreign national they employ a copy of this form as soon as it is determined that he or she will receive payments of any sort, to avoid delay or denial in processing payments. The form must be signed by the foreign national payee. Copies of all required documents must be maintained in the payee's file, and a copy along with the attached documents must be sent to UPB. Because a foreign national's U.S. tax status may change from year to year, each foreign national should complete a new Foreign National Tax Information Form prior to any payments being made in a new calendar year or sooner if a change in status occurs. This form is available at the end of this section under "Foreign National Forms and Publications."

Royalties

Generally, United States source royalty payments are subject to federal income tax withholding at a rate of 30% or lower if a U.S. tax treaty applies. Nonresident aliens claiming exemption from federal income tax withholding based on a tax treaty must provide UPB with an accurate and complete Form W-8BEN. (See "Scholarship, Fellowship and Grant Recipients" in this section for an explanation of the requirements for filing a Form W-8BEN.)

Third Party Payments

Payments made by the system to a third party on a nonresident alien's behalf are considered payments to that nonresident alien. Therefore, the system must withhold the appropriate federal income tax, which depends on the type of payment, and report this payment to the IRS as if it had been made directly to the nonresident alien. However, expenses that qualify under either the Accountable Plan (e.g. fees for required employer filed State 30, Department of Health and Human Services waivers, and nonimmigrant and immigrant petitions) or Fringe Benefit (e.g. working condition fringe benefits) rules may be excluded from a nonresident alien's gross income. See Tax Reporting and Withholding Checklist for Foreign National Reimbursements .

Employee Federal Tax Withholding - Federal Income Tax

Generally, the taxability of payments to resident aliens is similar to that of U.S. citizens (see also 4 Payroll). Salaries, wages, or any other payments for personal services paid to nonresident alien employees are subject to income tax withholding unless the amount is exempt under a U.S. tax treaty. However, special withholding rules apply. The special withholding rules limit a nonresident alien's withholding allowances by:

Requiring nonresident aliens to write "nonresident alien" or "NRA" on the dotted line on line six (6) of Form W-4;
Permitting only one personal exemption and single status even if married; and
Not permitting a nonresident alien to claim to be exempt from income or payroll tax withholding.

These limitations must be reflected on the Form W-4, Employee's Withholding Allowance Certificate (see Form W-4 under "Foreign National Forms and Publications" at the end of this section), to be completed upon hire by the nonresident alien employee. Nonresident alien employees are not allowed to change their Form W-4 without submitting the proper documentation to UPB to substantiate a requested change. If the appropriate documentation is provided to UPB, a revised Form W-4 and a copy of the documentation must be maintained in the employee's file and a copy must be sent to the UPB. Individuals who do not submit an accurate and complete Form W-4 are subject to withholding at single rates with no exemptions. UPB is responsible for monitoring federal income and employment tax withholding on payments to foreign nationals to facilitate compliance with these special rules. Generally, payments made directly to nonresident aliens have the withholding deducted before the individual is paid. However, IRS regulations contain two exceptions to the withholding requirement. The first exception applies when:

The nonresident alien is employed by either: (1) A United States employer's office in a foreign country or United States Possession, or (2) A foreign employer not engaged in a United States trade or business; and
The nonresident alien is in the United States for no more than a total of 90 days during the taxable year; and
The income totals no more than $3,000 for the taxable year.

The second exception is when a tax treaty between the United States and the nonresident alien's home country exists. A nonresident alien claiming exemption from taxation because of a tax treaty between the United States and the nonresident alien's home country must file Form 8233, Exemption From Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual, with UPB. This form is available in UPB and at the end of this section under "Foreign National Forms and Publications."

Before accepting Form 8233, the system must review the form for accuracy. Once a form is accepted, the system mails it to the IRS. The exemption from withholding becomes effective for payments made at least ten days after the form was mailed to the IRS. This form must be re-filed each calendar year to claim the tax treaty exemption.

Federal Insurance Contributions Act (FICA) Tax

Foreign national employees who meet the requirements to be resident aliens for tax purposes must pay FICA tax on U.S. sourced salaries and wages.

Nonresident alien students holding F-1, J-1, M-1, or Q-1 visas are exempt from becoming a resident alien for the first five years in the United States; therefore, these nonresident alien students are not subject to FICA tax if the services performed are consistent with the purpose of their visa.
Nonresident alien scholars holding F-1, J-1, M-1, or Q-1 visas are exempt from becoming a resident alien for the first two years in the United States; therefore, these nonresident alien scholars are not subject to FICA tax if the services performed are consistent with the purpose of their visa. In addition, their compensation is exempt from federal unemployment taxes; although, the system is exempt from unemployment taxes on all payments.

However, both of these exemptions do not pertain to individuals employed in violation of USCIS regulations applying to his or her particular immigration status. FICA taxes must be withheld from payments to nonresident alien employees who satisfy the substantial presence test from their first day of physical presence in the United States in the year they satisfy the test.

Compensation excluded from federal income tax by a United States tax treaty may still be subject to FICA taxes. Such compensation must be reported on Form W-2, Wage and Tax Statement, as wages subject to FICA taxes unless otherwise exempt, even if it is not reportable as wages for federal income tax purposes. Foreign national students working on campus may be exempt from FICA taxes under the same rules that apply to United States citizen students.

Foreign National Student Work Hour Requirement

Foreign national students are limited to a 20-hour work week. For additional information, contact the university International Offices at:

UIC Office of International Services at (312) 996-3121;
UIS Office of International Affairs at (217) 206-6678;
UIUC Office of International Student Affairs for students at (217) 333-1303; and
UIUC Office of International Faculty and Staff Affairs for faculty and staff at (217) 333-8225.

Also, information can be obtained at the following sites:

UIS: International Student Services
UIC: Office of International Services (Students)
UIUC: F1 Employment and J-1 Employment .

Travel Expense Reimbursement

Nonresident alien employees may be eligible for reimbursement under the Accountable Plan or Fringe Benefit rules provided the employee complies with system reimbursement requirements. Expenses qualifying under the Accountable Plan or Fringe Benefit rules are not subject to federal income and employment tax. Furthermore, qualifying expenses are not required to be reported on Form W-2 nor Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding. See Tax Reporting and Withholding Checklist for Foreign National Reimbursements .

Federal Tax Reporting

Taxable portions of salaries, wages, or other payments for personal services paid to nonresident alien employees are reported on Form W-2. Compensation paid to nonresident alien employees for personal services that is excluded from federal income tax pursuant to a U.S. tax treaty is reported on Form 1042-S. (See "United States Tax Treaty Exemptions" in this section.) In addition, the system is required to file a transmittal Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, by March 15 of the succeeding calendar year. UPB is responsible for monitoring payments to nonresident alien employees for compliance with the reporting requirements of Form W-2 and Form 1042-S.

Payments to Nonemployees - Independent Contractors and Guests

This section provides guidance to unit personnel arranging for visiting nonresident alien consultants, scholars, and dignitaries to receive a system payment. This includes system payments made directly to or on behalf of a nonresident alien for services and/or qualified travel expenses. Services as defined here include lecturing, consulting, or other activities performed by a nonresident alien for payment under terms and conditions specified in a contract or an honorarium. The process for contracting for these services or making such payments as honoraria are detailed in 17.1 Consultants and Other Contractors for Services.

Qualified travel expenses as defined here include reimbursable expenses incurred by the nonresident alien for hotel, meals, and transportation, the payment of which can only be made in accordance with the documentation requirements of the system's travel policies.

Travel Expense Reimbursement

A nonresident alien non-employee may be eligible for travel expense reimbursements under the Accountable Plan rules provided the non-employee complies with system reimbursement requirements and, if applicable, the system is indicated as one of the nonresident alien's program sponsors. Expenses qualifying under the Accountable Plan rules are not subject to federal tax reporting or withholding. For additional information on the required documentation, reference the Foreign National Payment Eligibility Grid and Tax Reporting and Withholding Checklist for Foreign National Reimbursements . This form must be completed and submitted to UPB, if it appears there is no tax withholding or reporting required.

Tax Withholding and Exemptions

The IRS requires tax withholding and/or reporting for payments made either directly to or on behalf of a nonresident alien for services performed in the United States. The IRS does not require tax withholding and/or reporting for reimbursements to nonresident aliens for qualified travel expenses or other bona fide business expenses, such as fees for required employer filed State 30, Department of Health and Human Services waivers, and nonimmigrant and immigrant petitions, provided the expenses qualify under either the Accountable Plan or the Fringe Benefit rules and the nonemployee satisfies the reimbursement requirements. See Tax Reporting and Withholding Checklist for Foreign National Reimbursements .

IRS regulations require that each nonresident alien provide documentary evidence of USCIS status (see Foreign National Payment Eligibility Grid for requirements).

Generally, the tax withholding rate is 30% for Federal and 4.95% for State of Illinois, unless a tax treaty between the United States and the nonresident alien's home country exists that exempts the individual or lowers the tax rate. The individual must apply for tax treaty benefits at UPB. Payments made directly to a nonresident alien have the withholding deducted before payment is made to the individual. Payments made on behalf of the nonresident alien are grossed up to cover applicable taxes.

IRS regulations contain two exceptions to the withholding requirement. The first exception applies when:

The nonresident alien is employed by either: (1) a U.S. employer's office in a foreign country or United States Possession, or (2) a foreign employer not engaged in a United States trade or business;
The nonresident alien is in the United States for no more than a total of 90 days during the taxable year; and
The income totals no more than $3,000 for the taxable year.

The second exception is when there is a tax treaty between the United States and the nonresident alien's home country. A nonresident alien claiming exemption from taxation because of a tax treaty between the United States and the nonresident alien's home country must complete, sign, and submit Form 8233 at the UPB Service Center.

UPB must review the Form 8233 for accuracy. Once the form is accepted, UPB mails it to the IRS. The exemption from withholding becomes effective for payments made at least ten days after the form is mailed to the IRS.

If a nonresident alien qualifies for an SSN they should apply for one. The nonresident alien must be eligible for employment in order to qualify for an SSN. If the nonresident alien does not qualify for an SSN, he or she must apply for an ITIN. Payments to or on behalf of the nonresident alien are not made until an ITIN has been received. Treaty benefits cannot be extended until an ITIN or SSN has been received by UPB.

IRS regulations require the system to report payments directly to or on behalf of the nonresident alien. UPB issues Form 1042-S to the nonresident alien for tax reporting.

Passport and Form I-94, Arrival/Departure Card Requirements

In order for an individual from another country to enter the United States, they must possess a valid passport, unless they are passport exempt, for example, Canadians. During the journey to the United States, the transportation carrier distributes Form I-94 to non-United States citizens and permanent residents. The documents for these individuals are inspected by a USCIS official at the Port of Entry. USCIS "stamps" Form I-94 with the appropriate status. The "stamp" indicates the status granted, such as B-1, F-1, and so on. This entry stamp also indicates the length of authorized stay. The foreign national should assure the status indicated by the "stamp" matches the foreign national visa status.

Scholarship, Fellowship, Grant, and Miscellaneous Payments

Scholarships, fellowships, tuition waivers, and grants awarded to nonresident alien students may be subject to federal income tax withholding based on the student's visa type, the degree path, and the existence of a U.S. tax treaty with the recipient's country of residence. The federal income tax withholding rate may be 0%, 14%, or 30% depending on circumstances, and the tax rate may apply to only a portion of a payment. Generally, those portions of a scholarship, fellowship, tuition waiver, or grant that are used to pay tuition, fees, books, supplies, or equipment are not taxable under Internal Revenue Code §117 where the recipient is a candidate for a degree. Any portion of a scholarship, fellowship, tuition waiver, or grant over and above the five items mentioned above may be taxable. For non-degree candidates the entire payment may be taxable. (See "United States Tax Treaty Exemptions" in this section for discussion relating to U.S. tax treaties and scholarships, fellowships, and grants.)

Associated Services - Miscellaneous Payments

Stipends - Payments for services performed by nonresident aliens (such as Graduate Assistants) are taxable as wages and reportable on Form W-2. See "Employee Federal Tax Withholding - Federal Income Tax" for a discussion regarding the withholding and reporting requirements for the payment of wages.

Stipends, tuition waivers, or any other grants bestowed upon resident or nonresident aliens that require the recipient to perform services in exchange for the payment (such as assistantships) are taxable as wages and are reportable to the IRS on Form 941, Employer's Quarterly Federal Tax Return and Form W-2. See "Employee Federal Tax Withholding - Federal Income Tax" in this section for a discussion regarding payments to system employees for the withholding rules that pertain to wages paid to nonresident aliens.

Third Party Payments - Payments made by the system to a third party on a nonresident alien's behalf are considered payments to that nonresident alien. Therefore, the system must withhold the appropriate federal income tax, which depends on the type of payment, and report the payment to the IRS as if it had been made directly to the nonresident alien. However, expenses that qualify under either the Accountable Plan or Fringe Benefit rules may be excluded from the nonresident alien's gross income. See Tax Reporting and Withholding Checklist for Foreign National Reimbursements .

Federal Tax Withholding

Federal Income Tax Withholding - The system is required to withhold federal income taxes at the rate of 30% on any scholarship, fellowship, or grant to nonresident aliens used for educational expenses other than tuition, fees, books, supplies, equipment, or items not specifically excluded from federal income tax under a United States tax treaty. Moreover, the system withholds federal income tax at the rate of 14% on any scholarship, fellowship, or grant payment if the recipient has F or J visa status.

The system is required to withhold federal income taxes at the rate of 30% on any payment classified as a prize or award. Basically, prizes and awards are payments for past activities or accomplishments whereas scholarships, fellowships, or grants are payments that aid an individual in pursuing his or her studies.

FICA Tax Withholding - The system is not required to withhold FICA taxes from compensation for personal services paid to nonresident aliens that do not constitute wages.

Reduced Withholding Procedures - The system is allowed to take a nonresident alien's personal withholding allowance into account when withholding federal income tax on scholarships, fellowships, or grant payments. The system must follow the procedures outlined in Revenue Procedure 88-24 when allowing a nonresident alien to reduce his or her federal income tax withholding on payments. Moreover, UPB must coordinate the use of the personal withholding allowance between the amount used for wages and the amount used for scholarships, fellowships, or grants so that the total yearly personal allowance is not exceeded.

Federal Tax Reporting - Generally, all U.S.-sourced taxable and tax-exempt amounts paid to nonresident aliens as scholarships, fellowships, grants, and financial aid must be reported to the IRS on Forms 1042 and 1042-S. UPB and the Office of Financial Aid are responsible for monitoring scholarships, fellowships, and grants to nonresident aliens for compliance with the reporting requirements of Forms W-2, 1042, and 1042-S.

Grossing-Up Payments

A grossed-up payment is a net amount plus taxes or any other withholdings.

When payments are subject to tax withholding and the department chooses to provide additional funds to cover the applicable taxes so that the individual receives a specified net amount, the department must note on the voucher to gross-up the payment.

The percentage of tax withheld in a gross-up calculation varies depending on the type of payment. The gross up calculator helps departments determine the amount needed to fund a grossed-up payment in different situations. The grossed-up amount is reported to the IRS for the individual recipient.

For additional information on gross-up calculations, please email the UPB Service Center or call Chicago 312-996-7200, Urbana 217-265-6363, Springfield 217-206-7144.

United States Tax Treaty Exemptions

Nonresident aliens may claim exemption from federal income tax withholding under a United States tax treaty. An income tax treaty is an arrangement between two governments under which each government agrees to limit or modify the application of its domestic tax laws in an attempt to avoid having the same income taxed by both governments. Tax treaties pertain to federal income taxes. In most cases, they do not apply to FICA and state income taxes. For nonresident aliens to obtain a tax treaty exemption, they must complete Form 8233 and an affidavit stating their country of residence. Effective January 1, 2001, resident aliens requesting a treaty exemption must complete Form W-9, Request for Taxpayer Identification Number and Certification. The primary difference is that resident aliens are extremely limited in the treaty benefits available to them.

In order to claim exemption from federal income tax withholding based on a United States tax treaty, a foreign national payee must claim exemption by filing a form or statement with the system. The required form and procedure depends on the type of payment and the payee’s relationship to the system. The system is not required to provide a U.S. tax treaty exemption from federal income tax withholding where the payee has not complied with IRS requirements, where the payee's facts or assertions are known to be false, or where the eligibility of the payee is not readily determinable. Denial of tax treaty exemption does not prevent a payee from making an exemption claim on his or her federal income tax return. Summaries of the United States tax treaties currently in effect are contained in IRS Publication 901, U.S. Tax Treaties. A more detailed explanation of treaty provisions may be found in the Treasury Department's technical explanations of United States tax treaty provisions. These two sources of information should not replace a review of the actual treaty provision applicable in each case.

Students, Teachers, Researchers, and Non-employees

Nonresident alien students, teachers, researchers, and nonemployees claiming exemption from federal income tax withholding on payments for personal services based on a United States tax treaty must complete, sign, and submit a Form 8233, along with an appropriate certifying statement, if required, at the UPB Service Center. The payee must complete, sign, and submit at the UPB Service Center a separate Form 8233 for each type of payment from which he or she requests federal income tax exemption. Both employees and non-employees must complete, sign, and submit their Forms 8233 at the UPB Service Center. A certifying statement is an affirmation made by the payee concerning residency status, date of entry, article criteria, treaty dollar limitations, and facts supporting a benefit claim, in the form required by IRS guidelines. Treaty exemption benefits cannot be claimed unless an SSN or an ITIN has been obtained. See Revenue Procedures 87-8, 87-9, 93-22, and 93-22A located at the IRS's web site for guidance on when to include a certifying statement.

The system must file an accurate and complete Form 8233 and the certifying statement with the IRS before excluding any income from withholding each calendar year. If the IRS has not notified the system within ten days from the date a form was filed, it may be considered accepted. UPB is required to file all Forms 8233 via certified mail, in order to obtain a proof-of-filing date. Forms 8233 may be "batch" mailed for cost-control purposes, but UPB is required to create a log to verify when each Form 8233 was filed.

UPB is responsible for reviewing payee eligibility for treaty benefits and Form 8233 for accuracy, completeness, and compliance with IRS filing instructions. The system does not exclude any income from federal income tax withholding based on a U.S. tax treaty until after the ten day filing requirement has expired. UPB monitors the application of treaty benefits and withholds tax at the applicable rate from payments that exceed treaty limits or payments made after a person’s treaty eligibility period has expired.

Employees - Nonresident alien employees who are not students, teachers, or researchers, and who are claiming exemption from federal income tax withholding on payments from personal services based on a U.S. tax treaty must complete a dated, signed, and sworn statement, in duplicate, at the UPB Service Center for each tax year in which this exemption is claimed. Treaty statements must identify the tax year involved, the applicable wages, the countries of residence, the treaty provision under which the exemption is claimed, and the facts relied upon as proof that treaty requirements are satisfied. Each statement must contain the nonresident alien's: (1) name and ITIN or SSN; (2) country of residence; (3) certification that he or she is not a U.S. citizen or resident; (4) statement that wages are exempt from U.S. tax; and (5) reason why wages are exempt. Treaty exemption benefits cannot be claimed unless an SSN or ITIN has been obtained.

UPB reviews the payee's eligibility for treaty benefits and reviews the payee statement for completeness, accuracy, and compliance with filing instructions. UPB monitors the application of treaty benefits and withholds tax at the applicable rate from payments that exceed treaty limits or payments made after a person’s treaty eligibility period has expired.

Scholarship, Fellowship, and Grant Recipients

Resident and nonresident aliens claiming exemption from federal income tax withholding on all or part of a scholarship, fellowship, or grant must complete, sign, and submit an accurate and complete Form W-8BEN at the UPB Service Center. A recipient must submit a separate Form W-8BEN for each separate type of income. Treaty exemption benefits cannot be claimed unless the receiver has an SSN or an ITIN.

Because the amounts excluded on Form W-8BEN must be reported on Forms 1042 and 1042-S, accuracy and completeness are important. UPB reviews a payee's eligibility for treaty benefits and reviews the form for accuracy, completeness, and compliance with filing instructions. UPB monitors the application of treaty benefits and withholds tax at the applicable 14% or 30% rate on the taxable portions of a scholarship that exceed treaty limits or when a treaty eligibility period expires. Form W-8BEN is valid for three calendar years unless the treaty exemption expires before the end of this period. The system is not required to file Form W-8BEN with the IRS.

Payments to Foreign Entities

As the Withholding Agent, the system is required to request a Form W-8 from any entity to whom it is making a payment that it presumes or otherwise has reason to believe is a foreign entity. IRS Form W-8 is used to establish an entity's status for withholding purposes or to claim treaty benefits.

An entity is considered foreign if it is created or organized outside the United States. All foreign entities receiving payment are required to complete one of the following forms:

The system withholds tax if a Form W-8 is not submitted.

Form W-8BEN-E is used by most foreign entities to certify that the entity is foreign and not connected to the United States.

Form W-8BEN-E also certifies that an entity should be treated as a foreign entity for withholding purposes.

Form W-8ECI is used if a foreign entity has a trade or business in the United States.

Form W-8EXP is used primarily when a foreign entity is a foreign government or international organization.

Form W-8IMY is used primarily by an intermediary, withholding foreign partnership, withholding foreign trust, or flow through entity. Additional documentation is required, such as copies of other Forms W-8/W-9, documentary evidence, and withholding statements.

If the system receives any of these four forms, it may not be required to withhold. However, the system is required to report such payments on Form 1042-S unless the payments are for:

(1) tangible property and the payee has no substantial presence in the United States,

(2) services performed outside the United States, such as foreign source income.

Although not required by the IRS, the system requires foreign entities to complete a Form W-8 for all foreign transactions.

Federal income tax withholding is required when a foreign entity receives items of fixed or determinable annual or periodic U.S.-source income that is effectively connected with the conduct of a trade or business in the United States, unless a Form W-8ECI is completed and provided to the system for exemption from withholding. However, such payments are subject to Form 1042-S reporting. When withholding is required, federal income tax is withheld on payments made to foreign entities at a rate of 30% or a lower rate if prescribed in a treaty between the United States and the country in which the foreign entity resides or has a permanent establishment.

Period of Validity for IRS Forms

Form 8233 is valid beginning on the date the form is signed through December 31 of the same calendar year.

Forms W-8BEN, W-8BEN-E, and W-8EXP submitted without a U.S. TIN are valid beginning on the date the form is signed and ending through December 31 of the third succeeding calendar year, unless a change in circumstances makes any information on this form incorrect. For example, a Form W-8BEN, Form W-8BEN-E, or Form W-8EXP signed on September 30, 2015 remains valid through December 31, 2018.

Forms W-8BEN, W-8BEN-E, or W-8EXP submitted with a U.S. TIN are valid indefinitely until a change in circumstances makes any information incorrect, provided the system issues at least one payment to the individual, entity, foreign government, or organization per calendar year and is reported to the IRS on Form 1042-S.

Form W-8ECI is valid beginning on the date the form is signed and ending through December 31 of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8ECI signed on September 30, 2015 remains valid through December 31, 2018. Upon expiration of the three year period, a new Form W-8ECI must be obtained.

Generally, Form W-8IMY remains valid until the status of the name on the form is changed or unless a change in circumstances makes any information on the form incorrect. The indefinite validity period does not extend to other W-8/W-9 forms, documentary evidence, or withholding statements associated with the Form W-8IMY.

VISA REQUIREMENTS AND TYPES

Visa Requirements

USCIS regulations permit payments to or on behalf of a foreign national only if the person has entered the United States for the current visit in a status that allows payment and/or reimbursement. The more commonly utilized statuses are B-1, B-2, WB, WT, F-1, J-1, H-1B, and TN. The following information details the allowability of service payments and reimbursement for qualified travel expenses for each visa status. Additional information is on the Foreign National Payment Eligibility Grid and the Tax Reporting and Withholding Checklist for Foreign National Reimbursements .

A person entering the United States for "business purposes" should first obtain a B-1 or for "pleasure purposes" (tourist) B-2 visa at a United States Embassy or consulate and request at the Port of Entry that he or she be granted B-1 or B-2 status, respectively. The status granted is indicated on the Arrival/Departure Card Form I-94.

USCIS regulations allow payments to individuals on a B-1 or B-2 visa either directly to the foreign national or to a third party on behalf of the foreign national for services and associated travel expenses. Payments for honoraria-related services and associated travel expenses are allowed, provided that the foreign national does not receive payments from more than five institutions or organizations within six months, and each payment is for academic activities that last no longer than nine days. Travel reimbursements not associated with honoraria are excluded from the aforementioned restriction. A foreign national must sign the Foreign National Compliance Statement (Microsoft Word Version ) to ensure that all service payments to B-1 and B-2 visa holders meet the USCIS stated criteria. This form is available at the end of this section under "Foreign National Forms and Publications."

Citizens of certain countries can participate in the "visa waiver" program. Contact the Office of International Affairs/Services for a list of eligible countries. Citizens from these countries do not require a visa to enter the United States. However, they must request "WB" or "WT" status at the Port of Entry. The payment criteria for the WB and WT are the same as the B-1 and B-2 as stated above, respectively.

Visa Types

See the Tax Reporting and Withholding Checklist for Foreign National Reimbursements for common visa types.

Training and Education

The system provides annual training and education classes to personnel involved in hiring, granting, processing, and reporting payments of wages, scholarships, fellowships, grants, and miscellaneous other types of payments to foreign nationals. In addition, supplemental training sessions may be provided throughout the calendar year in response to changes in federal income tax laws governing foreign national payments. The purpose of this instruction is to inform system personnel of current tax laws governing income and employment tax withholding and reporting on payments to foreign nationals. The tax laws governing this area are highly complex.

Specifically, these classes provide training in the determination of United States tax status, income and employment tax withholding and reporting procedures, and the collection and retention of necessary documentation related to payments made to foreign nationals. The system also provides training in the use of forms related to payments to foreign nationals. Personnel attending these training classes are responsible for dispersing this information to appropriate individuals within their units.

These policies and procedures must be applied consistently at each unit, department, program, and location. These policies and procedures are updated as necessary to remain in compliance with the current rules, regulations, and guidance governing income and employment tax withholding and reporting requirements related to payments to foreign nationals.

For information on training and education, contact UPB at Chicago 312-996-7200, Urbana 217-265-6363, Springfield 217-206-7144.

Assistance

Offices within the system are available to provide necessary forms and information about procedures and to assist in processing documents when a foreign national arrives. Contact the following unit(s) to ensure all appropriate procedures are followed and requisite forms are properly completed:

UIC Office of International Services at 312-996-3121;
UIS Office of International Affairs at 217-206-6678;
UIUC Office of International Student Affairs for students at 217-333-1303; and
UIUC Office of International Faculty and Staff Affairs for faculty and staff at 217-333-8225.

Departmental Planning Guide

Independent Contractors and Guests

The following steps should be followed when a foreign national is invited to provide services or visit any department or unit within the system:

Read and become familiar with this policy.
Contact the foreign national to inquire: (a) Do they have a valid passport? (b) Do they have an SSN or an ITIN? (c) Do they have a visa? If so, what is the designation?
A foreign national must enter the United States for the current visit under one of the visas listed above in order to receive payments or have expenses reimbursed.
Contact the Office of International Affairs/Services to obtain any required forms and to inform them of plans regarding a foreign national. If the foreign national is being sponsored as a J-1 exchange visitor, Form DS-2019 (formerly known as Form IAP-66) must be requested and prepared for the individual. Requests for this form generally take approximately five business days to be processed. Plan as far in advance as possible. The prospective exchange visitor needs Form 2019 (formerly known as Form IAP-66) in order to apply for a J-1 visa.

What to do when the foreign national arrives:

Determine what type of visa the foreign national used to enter the United States and if they have an SSN or an ITIN.
Inform the foreign national entering the United States on a J-1 visa to consult with the Office of International Affairs/Services for review of their forms.
If the foreign national does not have an SSN and is authorized to work as described above, inform the foreign national to consult with the Office of International Affairs/Services for instruction on applying for an SSN. If the foreign national is not authorized to work as described above inform the foreign national to consult with UPB to complete the appropriate forms for an ITIN.
If the individual has an SSN, contact UPB to determine what documents are needed for payment.