Procedure03.01.020.f Hiring Process for Foreign Nationals
The College will report and withhold taxes as associated with payments made to non-U.S. citizens (employees, contractors, vendors and students) in accordance with the laws and regulations of the U.S. Citizenship and Immigration Services (USCIS) and the Internal Revenue Service Code of Regulations 1441, 1461, NC Office of State Controller, NCCCS and the Foreign National Information System (FNIS).
Foreign national – a person who was born outside the jurisdiction of the United States, is a citizen of a foreign country, and has not become a naturalized United States citizen under United States law. This includes legal permanent residents; also known as permanent resident aliens.” A foreign national owes allegiance to or is under the protection of a country other than the United States.
It is important to understand that the definition of Nonresident Alien (NRA) for tax purposes is different from that for immigration purposes.
Aliens are classified as either “Nonresident Aliens” or “Resident Aliens”. Section 1441 of the Internal Revenue Code provides a separate tax system with a different set of tax rules and regulations for individuals deemed to be Nonresident Aliens. Colleges making payments to NRAs are subject to different tax withholding, reporting and liability requirements.
A Resident Alien’s income is subject to tax in the same manner as a U.S. citizen. RAs are generally taxed in the same way as U.S. citizens. This means that their worldwide income is subject to U.S. tax and must be reported on their U.S. tax return. Income of RAs is subject to the graduated tax rates that apply to U.S. citizens.
A Nonresident Alien’s income is subject to federal income tax only on income which is derived from sources within the United States and/or income that is effectively connected with a U.S. trade or business. NRAs are taxed according to special rules contained in certain parts of the Internal Revenue Code.
It is the responsibility and collaborative effort gathering data from the following:
- Business Office
b. Accounts Payable
- Student Services
b. Financial Aid
c. Records and Registration
- Human Resources
a. Director of Human Resources
b. Division Assistants
Individuals or vendors who must be tracked through the Windstar (Tax Navigator) software, and forwarded to the NC Community College System (NCCCS).
The Foreign National Information Systems (FNIS) Data Gathering Form for individuals or the Foreign National Information Systems Data Gathering Form for Vendors, is used to gather the data. Penalties and taxes may be imposed for failure to withhold or deposit amounts subject to withholding.
STEPS FOR PAYING OR COMPENSATING AN ALIEN
STEP 1: Payment Eligibility and Tax Residency Status
Employees – Human Resources is responsible for identifying Foreign National Employees, collecting, and maintaining documentations.
Copies of the completed FNIS form and backup documentations should be sent to the Systems Office.
Students – The Director of Enrollment Management of Student Services is responsible for identifying Foreign National Students. This position is responsible for:|
Collecting and copying documents to identify status
Maintaining documents in a secure location
Submitting documentations to the Systems Office
He/she is also responsible for entering the data into Colleague and communicating the status to Financial Aid and the Business Office. Communication must be done following Add/Drop but before Financial Aid Refund Checks are issued.
A student enrolled, who is a Foreign National, must complete the FNIS form and provide documentations.
Copies of documentations and FNIS form must be sent to the Systems Office for all foreign national students receiving income, scholarships/fellowships, stipends, etc.
Vendors and Contractors – Each department, either contracting directly with a foreign individual or foreign contractor, or submitting a requisition to the Business Office, must include the IRS tax withholding form W-8BEN, W-8BEN-E, W-8ECI, W-8IMY or W-8EXP, as well as a FNIS Vendor Data Gathering Form, before a purchase order or contract for services is issued. No agreement can be made (Purchase Order, Contract) until the College end user has the documentation for appropriate tax withholding. These forms must be submitted to the Business Office for appropriate withholding and reporting. The foreign vendor/contractor must submit a tax form to claim tax treaty exemption.
The Business Office must submit copies of tax withholding forms, invoices, and FNIS Gathering Form to the Systems Office.
Important items to note:
a. The NC E-Procurement registration process does not include gathering information on foreign vendors/contractors status. The Business Office (Purchasing) must obtain the proper tax withholding forms along with the FNIS Vendor Data Gathering Form from foreign vendors/contractors paid through E-Procurement.
b. Each applicable division must confirm the status of its foreign vendors/contractors, and maintain required documentation, before entering into a contract.
c. The IRS tax withholding forms must be completed to include:
• A US taxpayer identification number (TIN) or a Foreign TIN (FTIN)
• Claim of treaty benefits- e.g. W-8BEN-E (Part 111 #14 and #15) must be completed
• Certification- certify that information is true, correct, and complete
d. Colleges submit copies of documentations (detailed invoices, FNIS Data Gathering Form, and W-8s) to the Systems Office.
Step 2 – The Type of Payments
The type of payment made to the alien falls into four primary categories:
1. Dependent personal services: wages, service related scholarship/fellowship/assistantship payments, travel reimbursements;
2. Independent personal services: consulting fees, guest speaker, honoraria;
a. Qualified components for degree candidates: educational expenses, tuition, fees, books, etc.,
b. Nonqualified component: including living expenses, stipend, housing allowances
4. Miscellaneous income types: prizes and awards, royalties, etc.
Step 3 – The “Source” of the Income
As important as the recipient’s tax status, the payer of the income and their residence also has bearing for determining U.S. federal reporting and taxation.
1. A Resident Alien’s income is generally subject to tax in the same manner as a U.S. citizen. Therefore, worldwide income is reported.
2. A Nonresident Alien is usually subject to U.S. income tax only on U.S. source income. WPCC as the U.S. source payer is responsible for reporting income it paid to the NRA.
a. A determination is made as to the source of income in the following manner:
• For compensation paid to employees, and independent contractors, income is sourced to the country where services are performed.
• For non-compensation payment such as scholarships/fellowships, grants, prizes, and awards, the source of income is the residence of the payer regardless of who actually disburses the funds. If the activity is performed outside the United States, it is not considered U.S. sourced income.
Step 4 – Is the Payment Subject to Income Tax Withholding?
Income paid to a Resident Alien (RA) follows the same withholding tax rules as U.S. citizens. The federal withholding rates for RAs are the same as rates for U.S. citizens.
All U.S. sourced income paid to a Nonresident Alien (NRA) is taxable with the exception of interest income and qualified scholarships/fellowships. The federal withholding rates for nonresident aliens are:
|Compensation (employees)||Standard graduated rates|
|Nonqualified Scholarships/Fellowships (F-1, J-1, M-1, Q-1 or Q-2 visa holders)|
|Travel Grants (Expense)|
|Nonqualified Scholarships/Fellowships (all other visa holders)|
|Independent personal services (e.g. consulting fees, guest speaker fees, honoraria, awards, travel reimbursement and prizes)|
|Prizes and awards|
|All other payments|
NRA payments of taxable scholarships, fellowships, financial aid, and grants not excludible from gross income as a “qualified scholarship” are reportable to the IRS and are subject to withholding of federal income tax. Income must be reported on forms 1042 and 1042-S unless the grant is from sources outside the US.
Tax Treaties – If an alien is a resident of a country that has an income tax treaty with the United States AND the treaty contains an article covering the primary activity the alien is being compensated for, the alien may exempt part or all of the income from U.S. federal withholding taxes as specified in the article.
The alien must submit a Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual and statement with the college to claim treaty benefits. The 8233 must be filed with the IRS.
Step 5 – Is the Payment Subject to Social Security and Medicare Taxes (FICA)?
Most all aliens, regardless of resident or nonresident tax status are subject to the same Social Security and Medicare taxes for wages as U.S. citizens. Wages earned in the employment groups as defined used to calculate the Federal Insurance Contribution Act or FICA withholding is the income subject to these taxes.
As a general rule, the only aliens exempt from social security and Medicare taxes are F-1, J-1, M-1, and Q-1 visa holders while they are in Nonresident tax status.
Note: If one of these designated visa holder changes to resident tax status during a year, he/she is subject to social security and Medicare taxes for the entire year on his subject wages.
Step 6 – Determining if a Payment is Reportable and How to Report It.
1. Resident Alien (RA) payments are reported to the federal government in the same manner as U.S. citizens. Forms issued to the resident alien regarding reportable income are the Form W-2, Wage and Tax Statement for wages and the various Forms 1099 for non-wage compensation. Note: If the RA uses a tax treaty, he/she will receive a Form 1042-S for tax reporting purposes.
2. Nonresident Alien (NRA) payments subject to taxes are reported to the federal government. Forms issued to NRAs are W-2, Wage and Tax Statement for wages subject to income taxes and/or FICA taxes. In addition, Nonresident aliens will receive a Form 1042-S for compensation if they claimed a tax treaty that exempted tax for all or part of their wages.
NCCCS WORKFLOW AND PROCEDURES FOR FOREIGN NATIONAL PAYMENT CERTIFICATION
The North Carolina Community College System Office requires the following work flow and reporting be followed for colleges managed through the System Office:
1. College identifies a foreign national or foreign vendor that will be compensated via payroll, accounts payable or student services. The appropriate department, (Human Resources, Student Services, Business Office etc.). must maintain a copy of evidentiary and supporting documentation, such as I-9, I-20, I-94, I-797, passport, Employment Authorization Document (EAD), visa, DS-2019, W-8BEN, W-8BEN-E, W-ECI, etc. The appropriate department will also keep the tax forms and forward a copy to the Business Office. The Business Office will withhold the applicable taxes from employee, student or vendor payments.
2. The applicable department completes the FNIS Data Gathering Form or FNIS Vendor Data Gathering Form and submits via email with supporting documentation to the System Office to the firstname.lastname@example.org. To do this, the involved department gives a copy of the data gathering form, preferably in electronic format, to the Controller who will forward the FNIS to the System Office.
3. System Office establishes the record containing demographic data in Tax Navigator, performs the Substantial Presence Test (SPT) and/or Treaty Analysis, if applicable, and notifies the college contact via email of the appropriate taxation rules.
4. The Business Office certifies payment and withholding information to the System Office on the Foreign National Payment Certification Form for each individual or company added to the system for tracking. This form will be submitted on a quarterly basis to update the information in the Tax Navigator. The Director of Human Resources will gather this information from the appropriate departments and submit required form to the System Office.
5. System Office will update all records quarterly from the payment information submitted by the college.
6. At the end of the calendar year, IRS Forms 1042, 1042-T and 1042-S will be created by the System Office and sent to the college to be submitted to the IRS by March 15 each year. Form 1042-S must also be distributed by the college to the foreign national individuals and companies by March 15 each year.
Foreign National Payment Certification is made to the NCCCS. A reminder email is sent with the due date and certification form attached.
The Director of Human Resources gathers the data, completes the form and submits it to the NCCCS. The steps for this are:
a. Send an email to the Benefit/Recruitment Specialist in Human Resources, and Director of Enrollment Management asking for a list of Foreign National employees and students, respectively.
b. Using the list of Foreign National Students determine if there were payments made to them. Using Colleague run, VENI, EERN, WAGS to find out if students received payments. Enter that information on the certification form.
c. Foreign vendor payments will be listed on the form.
d. Complete the form and email it to the NCCCS Systems Accountant
1. Nonresident Aliens (NRAs) are subject to wage withholding using special NRA wage withholding and reporting rules. Follow the directions to set up Federal and State withholding adjustments in Colleague.
TAX INFORMATION – CORPORATIONS/VENDORS
The Internal Revenue Service (IRS) requires that all payments made to foreign vendors be
made in accordance with IRS regulations. These regulations require that, when services are
provided inside the U.S., taxes be withheld from payments made to foreign vendors unless the
income is exempt under a provision of a tax treaty between the foreign vendor’s country and
To avoid withholding, foreign vendors that are business entities must have a U.S. Taxpayer
Identification Number (TIN) or Foreign Taxpayer Identification Number (FTIN). They need to
submit IRS Form W-8BEN-E, W-8ECI, W-8EXP, or W-8IMY.
Foreign individuals (owner) who want exemption from withholding must claim a tax treaty exemption. They must have a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) and submit IRS Form 8233 or W-8BEN.
Payments made to foreign vendors will be subject to U.S. Federal income tax withholding of 30% unless:
1. The appropriate IRS forms have been completed and accepted as valid, and
2. Payments made to foreign vendors are:
a. Exempt (or subject to a lower withholding rate) due to a tax treaty
b. Effectively connected with the conduct of a trade or business in the U.S. (i.e., the vendor files a U.S. income tax return. This applies to payments to foreign business entities only), or
c. Made to a foreign entity with U.S. tax-exempt status
|Federal Withholding Tax on Foreign Vendors/Corporations (with TIN/FTIN)|
|NC Withholding Tax|
1. The Business Office will need to send the tax payment electronically to the IRS via the Electronic Federal Tax Payment System Processing (EFTPS).
2. See OSC’s Foreign Nationals Tax Compliance training website: http://www.ncosc.net/Foreign_Nationals/Foreign_Nationals_Training.html
3. How to Pay Foreign Tax through EFTPS
1. FNIS Data Gathering and FNIS Vendor Data Gathering Forms
7. The North Carolina “Policy and Procedures Pertaining to Payments and Compensation of Foreign Nationals, Governments, and Corporations”