Processing Non-payroll Payments to Nonresident Aliens
U.S. Citizenship and Immigration Services (USCIS) and the Internal Revenue Service (IRS) impose complex regulations for payments to foreign nationals. (The USCIS refers to foreign nationals as nonresident aliens). Since 9/11/01, enforcement of these laws has been vigorous. Failure to follow these regulations can result in penalties, including the revocation of SDSU Research Foundation's privilege to sponsor foreign national visitors. We need to ensure that the following procedures are used consistently.
First, it must be determined if the recipient is a U.S. citizen, permanent resident alien (green card holder) or a foreign national. Permanent resident aliens have been granted permanent residency in the U.S. and have a green card. They are taxed on their worldwide income, exactly like U.S. citizens. They should already have a social security card. Their social security number should be entered on the payment document and our normal payment procedures apply.
Everyone that is not a U.S. citizen or permanent resident alien is considered a nonresident alien. Nonresident aliens are taxed only on their U.S. source income, but generally at a higher rate of tax than U.S. citizens and permanent resident aliens.
Second, it must be determined if the payment to the foreign national is for a travel payment or for a non-payroll payment (such as for services, prizes and awards, or a scholarship/fellowship).
Third, if the payment is a travel payment, it must be determined if it is paid to the foreign national acting in a compensatory or non-compensatory capacity. A compensatory capacity would relate to services such as an independent contractor or an honorarium recipient (whether paid or not). A non-compensatory capacity would relate to a scholarship or fellowship that requires no service (other than for the recipient's training such as with an NIH grant).
To assist projects with determining residency and tax status, flowcharts outlining SDSURF policies and procedures are included in the Accounts Payable Processing Flowcharts section.
Travel payments paid to foreign national independent contractors and honorarium recipients (or others who would normally be compensated) are not subject to withholding taxes if paid according to normal travel payment procedures. An SDSURF Foreign National Information Form (Excel Format, 38KB) is required if a payment is also for services. If only travel payments are paid, a Foreign National Travel Reimbursement Supplement (Excel Format, 24KB) may be substituted.
- A WB or B-1 visa holder can be reimbursed for travel expenses even if they do not meet the "9, 5, 6" rule. The "9, 5, 6" rule is: the recipient must not be at the University for longer than 9 days and hasn't received any payments from more than 5 universities in the last 6 months.
- A WT or B-2 visa holder cannot be reimbursed for travel expenses if they do not meet the "9, 5, 6" rule.
- Generally, all other foreign recipients must be sponsored by SDSU in order to receive travel payments.
- Many visa types do not allow a foreign recipient to receive compensation or travel payments.
Note: Due to IRS and USCIS regulations, SDSU Research Foundation is required to reimburse the foreign national directly for travel expenses. As such, project personnel should not incur travel costs on behalf of the visiting foreign national.
Travel payments paid to foreign nationals in lieu of or for scholarship or fellowship recipients are subject to the foreign national scholarship and fellowship payment rules (reportable by SDSURF with 14% or 30% federal withholding required). Payments directly to third parties (such as hotels, agents or airlines) on behalf of such a scholarship or fellowship recipient are also subject to withholding. Therefore, in addition to SDSURF's procedures required for foreign national scholarship and fellowship payments, copies of all Check Request Forms- Standard (Excel Format, 27KB) or Check Request Forms - Expanded (Excel Format, 27KB) used for third party payments should be attached to the Non-Resident Alien Fellowship/Scholarship Payment Request (Excel Format, 25KB) form. Withholding for these direct payments (as well as the withholding required from reimbursements) is deducted from all subject travel reimbursements.
For other non-payroll payments paid to foreign nationals such as honoraria, independent contractor services, prizes and awards, scholarships/fellowships, etc., an SDSURF Foreign National Information Form (Excel Format, 38KB) must be maintained in SDSURF's files. This also applies to most nonresident scholarship/fellowship recipients. This form must be filed with the first payment request and every January thereafter.
Whenever an SDSURF Foreign National Information Form (Excel Format, 38KB) is used, an IRS Form W-8BEN Certification of Foreign Status of Beneficial Owner for United States Tax Withholding must also be completed. Most nonresident payees complete an IRS Form W-8BEN. This form is used to establish that the payee is not a U.S. citizen or permanent resident alien, that the payee is the rightful recipient of the income and if applicable, that the payee may be eligible for tax treaty benefits.
If the payee does not have a social security number or an Individual Taxpayer Identification Number (ITIN), a completed and signed IRS Form W-7, Application for IRS Individual Taxpayer Identification Number must be provided.
If the payee claims to be a U. S. citizen or permanent resident alien but has a foreign address, has an ID number that begins with "999" or if you believe the payee may not be a U.S. citizen or permanent resident alien, refer them to the accounts payable nonresident tax coordinator for review.
Please note that payments to nonresident aliens for work performed outside of the United States are neither reportable nor taxable. If this is the case, projects/departments should indicate this on the face of the payment document or attach a detailed memorandum to the payment document explaining that the work is being performed outside of the U.S. If the payee is a nonresident alien, an IRS Form 1099Misc or 1042S is not issued, and no tax is withheld. The payee must provide a completed and signed form W-8BEN. Attach this form to the SDSURF payment document and forward to accounts payable for processing.
What documents should be obtained to process a nonresident alien payment?
In addition to the normal documents required for payments to U.S. citizens or resident aliens, please attach the following items to the payment document.
- If the payee does not have a taxpayer identification number, a completed and signed IRS Form W-7.
- Completed and signed SDSURF Foreign National Information Form (Excel Format, 38KB) (or in situations when only travel payments are paid - a Foreign National Travel Reimbursement Supplement (Excel Format, 24KB)).
- Completed and signed IRS Form W-8BEN.
- Completed draft copy of IRS Form 8233 Exception from Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual, (if providing independent personal services and are requesting tax treaty benefits).
- Copy of passport.
- Copy of visa (or border crossing card). Residents of Canada or a visa waiver country do not have a visa page.
- Copy of USCIS Form I-94 or I-94W.
- For J-1 visa holders, copy of USCIS Form DS-2019.
- For F-1 visa holders, copy of USCIS Form I-20.
What does the accounts payable nonresident tax coordinator do with this information?
- Reviews the information packet.
- Mails IRS Form W-7 to the IRS (under the current rules the IRS will probably reject it until the recipient files an actual tax return with an original Form W-7 attached).
- Helps the payee complete an IRS Form 8233 to determine if they are eligible for tax treaty benefits. To claim tax treaty benefits, the IRS requires that the nonresident alien have either a social security number or ITIN and generally, complete Form 8233. The completed Form 8233 is faxed to the IRS, who has ten days to reject the 8233. If SDSURF does not receive a response, the treaty benefit is granted. Please note that this may cause delays in payment to the individual.
- Uses the Windstar Tax Navigator software program, analyze information for applicable tax treaty benefits, if any. There are tax treaties with over 60 countries and each treaty is unique.
- Reviews California non-resident withholding requirements and complete information for annual Franchise Tax Board Form 592.
- Helps the payee complete California withholding waiver Forms FTB587, FTB588 or FTB590, if applicable.
- Sets up new payee in Banner, including applicable withholding rates.
- Verifies that the payee is not a current year employee.
- Completes information required for annual IRS Form 1042-S processing. (Nonresident aliens that receive even 1¢ of income or tax treaty benefits are required by the IRS to receive an IRS Form 1042-S and to file an income tax return).
- Makes federal and California withholding deposits using EFTPS.
Checks to foreign nationals are processed only after a complete packet of documentation is received and reviewed for compliance with IRS and USCIS regulations.