UNC CH Payroll

The purpose of this Policy is to provide information about the rules, the procedures, and the use of forms to authorize and process payments to nonresident aliens. Payments made by the University to nonresident aliens are subject to special tax withholding and reporting regulations. Payments may be for:

All non-immigrants who expect to receive payments from the University, including salary, wages, scholarships, stipends, and other financial aid, should register with the International Center upon arrival to campus.The International Center will collect the personal and immigration information required to classify non-immigrants as resident aliens or nonresident aliens for tax purposes.The International Center will also document and maintain copies of all required forms, passport and visa information to substantiate these classifications.Payroll Services will review and process all payments to nonresident aliens to monitor compliance with tax regulations, to ensure proper tax withholding, and to provide appropriate tax reporting. All required forms must be submitted to Payroll Services in order to process payments.

This Policy provides general information about tax issues for nonresident aliens. Although every effort has been made to provide accurate information in this Policy and related Procedure, a guarantee of accuracy and completeness cannot be provided due to the complexity of the tax regulations and the tax regulations capacity to change. This Policy does not purport to give legal advice. For complex situations, it would be advisable for individuals to consult a tax attorney or other reputable tax advisor who is familiar with nonresident taxation.

Additional information can be obtained by reading Internal Revenue Service Publication 513 - Tax Information for Visitors to the United States, Publication 515 - Withholding of Tax on Nonresident Aliens and Foreign Corporations, Publication 519 - U.S. Tax Guide for Aliens, Publication 520 - Scholarships and Fellowships; Publication 901 - U.S. Tax Treaties, the instructions for Form 1040 NR - U.S. Nonresident Alien Income Tax Return, the instructions for Forms 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) and 1042S (Foreign Person's U.S. Source Income Subject to Withholding), and other publications and instructions provided by the Internal Revenue Service.

Nonresident aliens may work at the University as employees. The I-9 Employment Eligibility Verification process verifies whether employees are United States citizens or permanent residents. Non-immigrants must complete the Non-Immigrant Information Form (PR-100) at the International Center to determine tax status as a resident or nonresident alien.Reference: PAY Procedure 12 pg. 1 General Information To Complete Form

Resident aliens are treated as United States citizens for tax purposes. Nonresident aliens may claim exemption from or reduction of income tax withholding if their country of residence has a tax treaty with the U.S. authorizing a tax exemption or reduction.

Reference:(Appendix 35H), U.S. Tax Treaties Covering Compensation to Teachers/Researchers

(Appendix 35I), U.S. Tax Treaties Covering Compensation to Students During Training

The followingchart shows the federal and state tax forms required of Non-immigrants who are University employees:

Form PR-100 is completed by Non- immigrantsto determine if they are resident or nonresident aliens for tax purposes.This form also provides information to ensure proper tax withholding and reporting. Reference:PAY Procedure 12, pg.1, General Information for Completing Form PR-100.

Form 8233 - Exemption from Withholding on Compensation for a Nonresident Alien, (Appendix 35B)

Form 8233 is used by a nonresident alien to claim exemption from withholding based on a U.S. tax treaty with the alien's country of residence. Reference:PAY Procedure 12, pg. 4, Nonresident Alien Employees from Tax Treaty Countries

Form W-4 is used as basis to calculate federal income tax withholding from pay. Reference:PAY Procedure 12, pg. 6, Nonresident Alien Employees Not From Tax Treaty Countries

Form NC-4 is used as basis to calculate state income tax withholding from pay. Reference:PAY Procedure 12, pg. 6, Nonresident Alien Employees Not From Tax Treaty Countries

Nonresident aliens may perform independent personal services as independent contractors, but may be subject to special federal income tax withholding requirements. Independent contractors who are resident aliens are not subject to a 30% federal income tax withholding. Nonresident aliens are subject to a 30% federal income tax withholding rate unless a tax exemption is claimed based on a U.S. tax treaty with the nonresident alien's country of residence. Non-immigrants must complete the Non-Immigrant Information Form (PR-100) to determine tax status as a resident or nonresident alien. Reference: Pay Procedure 12, pg. 1, General Information On Form Completion.

The following chart shows the federal and state tax forms required of Non-immigrantswho are independent contractors:

Form PR-100 is completed by Non-immigrantsto determine if they are resident or nonresident aliens for tax purposes. Form also provides information to ensure proper tax withholding and reporting. Reference:Pay Procedure 12, pg. 1, General Information For Form Completion

Form 8233 - Exemption from Withholding on Compensation for a Nonresident Alien (Appendix 35B)

Form 8233 is used by a nonresident alien to claim exemption from withholding based on a U.S. tax treaty with the alien's country of residence.Reference:PAY Procedure 12, pg. 5, Nonresident Alien Employees From Tax Treaty Countries

Form AP-1a is used to document, authorize, and provide payment to independent contractors for services provided to the University.

Form W-7 - Application for IRS Individual Taxpayer Identification Number (Appendix 35E)

Form W-7 is used to apply for an individual taxpayer identification number (ITIN).An ITIN is a nine-digit number issued by the U. S. Internal Revenue Service (IRS) to individuals who are required to have a U. S. taxpayer identification number but who do not have, and are not eligible to obtain a social security number (SSN).The ITIN is for tax purposes only, and any individual who is not eligible to obtain an SSN but who must furnish a taxpayer identification number to the IRS must apply for an ITIN on Form W-7.

Form W-8 BEN - Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding (Appendix 35C).

Form W-8 BEN documents that the nonresident alien is not subject to backup withholding rules. Form does not exempt the payee from the 30% (or lower treaty) nonresident withholding rates. Reference:PAY Proced.12, pg. 7:Form W-8 BEN -Certificate Of Foreign Status of Beneficial Owner for United States Tax Withholding.

Form W-9 - Request for Taxpayer Identification Number and Certification (Appendix 35F)

Form W-9 provides the University with the correct taxpayer identification number of the resident alien payee and certifies backup withholding rules do not apply.

Financial aid awarded to nonresident alien students may be subject to federal income tax withholding based on the student's visa type, the degree path of the student, and the existence of a U.S. tax treaty with the student's country of residence. The federal income tax withholding rate may be 0%, 14%, or 30% depending on the circumstances, and the tax rate may apply to only a portion of the total financial aid awarded.

Federal withholding may also be based on whether the scholarship/ fellowship grant payment constitutes U.S. source income. Generally speaking, if the income is classified as "foreign source," it will not be subject to U.S. tax and their federal income tax withholding. The source is determined by a "residence of the payer" test. Under this "residence of the payer" test, if an international grantee studies or performs research in the United States but receives a grant from a non-U.S. person or entity, the payments will be "foreign source" income and not subject to U.S. tax. Conversely, if the student receives the award from a U.S. person or entity, the payment is treated as "U.S. source" income, regardless of where the educational activities take place.

In determining the "residence of the payer," the sourcing conclusion is not affected if payments are made by an "intermediary agency" acting on behalf of the payer. A "genuine agency relationship" must exist, however, between the payer and the intermediary. Thus, for example, if the government of Spain funds scholarships for Spanish students to study in the United States and contracts with a U.S. organization to administer these grants, the payments would be treated as "foreign source" income because the "true" payer is a foreign entity, with the U.S. organization acting simply as an agent.

The tax regulations apply regardless of the payment method used. Financial aid is paid using several methods:

-The Office of Scholarship and Student Aid processes undergraduate awards through the Student Information System as credits to student accounts in the Cashiers Office.

-Check Requests (form AP-1) for graduate awards are initiated by Departments. Check Requests should not be used for undergraduate awards.

-Student account credits are processed by Cashier’s Office for tuition remissions and payments by external organizations.

All undergraduate scholarships must be disbursed through the Office of Scholarships and Student Aid. Scholarships to nonresident aliens will be credited to the student’s account in the Cashier’s Office if there is no tax withholding requirement. Awards requiring tax withholding will be identified by the Office of Scholarships and Student Aid and processed by Payroll Services.

The following chart shows the federal tax forms required of nonresident aliens receiving financial aid awards:

The taxable portion for students not seeking a degree is the total amount of the financial aid award. The taxable portion for students seeking a degree is the total amount of the financial aid award less qualified (that is, required) educational expenses which are:

Form PR-100 is completed at the International Center by Non-immigrantsto determine if they are resident or nonresident aliens for tax purposes. Form also provides information to ensure proper tax withholding and reporting.Reference:PAY Procedure 12, pg.1, General Information Form Completion of Form

IRS tax regulations require that certain payments be reported to the nonresident alien recipients after each calendar year on Form 1042S - Foreign Person's U.S. Source Income Subject to Withholding. The Form 1042S is issued to the following nonresident aliens:

Form 1042 is used to report the income tax withheld on scholarship/ fellowship payments and is also used as a transmittal form for 1042S.

For scholarship and fellowship payments, Form 1042S is used to report total scholarship/fellowship payments made, income tax withheld, and other information relating to the grant payments. The Form 1042S, in addition to being transmitted to the IRS together with the Form 1042, must also be provided by the withholding agent (the University) to the foreign grantee.Beginning in 2001, nontaxable scholarships/fellowships will not have to be reported on form 1042.

Virtually all scholarship/fellowship payments made to international grantees must be reported on Form 1042S, whether or not the payment constitutes U.S. taxable income to the grantee. Specifically, the applicable regulations state that reporting on Form 1042S is required not only with respect to amounts upon which U.S. income tax must be withheld but also on amounts that are excludable from gross income under a tax treaty, the Internal Revenue Code, any Treasury regulation or IRS ruling. The only types of scholarship/fellowship payments that are not required to be reported on Form 1042S are those payments that are treated as "foreign source" under the sourcing rules.

The purpose of this Policy is to provide information for nonresident alien employees for the completion of tax withholding forms. The procedure pertains to nonresident alien employees who are visiting Teachers/Researchers (visiting scholars) and those who are Students (graduate student research and teaching assistants as well as other student employees).

A nonresident alien is a person who is not a citizen or a permanent resident of the United States and has been admitted for a temporary stay which 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 Non-United States citizen who has been authorized to live and work in the United States indefinitely.

Non-immigrants must notify the International Center immediately upon any change in immigration or tax status by completing a revised Form PR-100.Any non-immigrant who has been approved for a green card must notify the International Center immediately by completing a revised Form PR-100.

A nonresident alien for tax purposes is a non-immigrantwho, during a stay in the United States, either pays United States tax only on income from sources inside the United States, or else is exempt from paying United States income tax because of a treaty between the United States and the government of the employee's country of residence.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 or 1040NR-EZ (Income Tax Return for Nonresident Aliens) accompanied by IRS Form 8843.

A resident alien, for tax purposes, must pay tax to the United States government on income from all sources and cannot take advantage of tax treaties between the United States and other countries.Individuals who are resident aliens for tax purposes can claim exemptions for dependents. A resident alien for tax purposes files a return on IRS Form 1040, 1040A, or 1040EZ.

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 alien for tax purposes. Thus, individuals who are not citizens or permanent residents of the United States must 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 purposes of the tax law, individuals may qualify as resident aliens by satisfying either the "green card test," the "substantial presence test," or by electing to be treated as a resident alien during the first year in which they are present in the United States.

To satisfy the substantial presence test, one must be present in the United States on at least:

(2) 183 days during the three year period that includes the current year and the two years immediatelybefore that, counting:

For purposes of the substantial presence test, do not count the days present as an "exempt

Included in the definition of "exempt individual" are (1) students, temporarily present in the U.S. under an "F", "J", "M" or “Q” visa, and (2) teachers or trainees temporarily present in the U.S. under a "J"or “Q” non-student visa.Students are not "exempt individuals" if they have been exempt as a teacher, trainee or student for any part of more than five calendar years unless they can establish to the satisfaction of the IRS that they do not intend to permanently reside in the U.S. Teachers and trainees are not "exempt individuals" if they were exempt as a teacher, trainee or student for any part of two of the preceding six calendar years unless all of the following four requirements are met:

(1) they were exempt as a teacher, trainee or student for any part of three (or fewer) of the six preceding calendar years;

(3) they were present in the U.S. as a teacher or trainee in any of the preceding six years; and

(4) a foreign employer paid all of their compensation during each of the preceding six years present in theU.S. as a teacher or trainee.

"Exempt individuals" are required to file a statement with the IRS if they wish to avoid resident alien classification by excluding days of presence under the substantial presence test.This statement should be filed with the nonresident alien's Form 1040NR (or separately if no Form 1040NR is filed, with the Internal Revenue Service Center, Philadelphia, PA 19255).This filing requirement can be satisfied by completing Form 8843 (Statement for Exempt Individuals and Individuals with a Medical Condition) or by submitting a statement that includes the following:

(1) The nonresident alien's name, address, U.S. taxpayer identification number (if any) and U.S. visanumber (if any),

(4) The number of days of presence in the United States during the present year and the prior two years(name the years specifically),

(5) Whether the nonresident alien has applied for, or taken other steps to apply for, permanent residentstatus during the current year or whether an application is pending for adjustment of status to that of apermanent resident during the current year,

(6) The name, address, and telephone number of the academic institution attended during the present year,

(7) The name, address, and telephone number of the director of the academic or other specialized programparticipated in during the present year,

(9) If a teacher or trainee and present in the United States as a teacher or trainee during any of the prior sixyears, sufficient facts to verify that all the compensation received during those years while present in theUnited States was paid by a foreign employer, and

(10) If the nonresident alien is a student and was exempt as a teacher, trainee or student for any part of more than five calendar years, sufficient facts to determine that the nonresident alien filed tax returns and was subject to tax as a resident under the laws of a foreign country for the present year.

This statement must be signed, dated, and include a declaration by the nonresident alien that it is "made under penalties of perjury."

TheNon-Immigrant Information Form (Form PR-100), provides information necessary for determination of residence status for tax withholding.This form must be completed by all non-immigrants before beginning work at the University.The form is to be completed at the International Center.

Nonresident alien employees on F-1, J-1, M-1 or Q-1 visas are not subject to social security tax withholding based on their length of stay. Students on F-1, J-1, M-1 or Q-1 visas are exempt for the first five years. Teachers or researchers on J-1 or Q-1 visas are exempt for the first two years. Nonresident alien employees holding J-2, H-1B, O or TN visas are subject to social security tax withholding unless they meet the criteria for the student employee exemption.Reference: PAY Procedure 12, pg. 5, Social Security Tax Withholding

The student employee exception is contained in Internal Revenue Code Section 312 (b) (10).Generally, wages earned by students who are enrolled and regularly attending classes at a "school, college or university" are exempt from FICA tax, presuming that these services are provided by the student to the "school, college or university" acting as employer. Further, Internal Revenue Code Section 3121(b) (19) exempts from FICA tax payment for "service which is performed by a nonresident alien student for the period he is temporarily present in the U.S." holding and "F," "J", "M" or “Q”visa.Internal Revenue Service Revenue Procedure 98-16 sets forth the criteria that an individual must satisfy in order to be eligible for the student FICA exemption, and the University will follow these guidelines as to whether a particular individual qualifies for the student FICA exemption.See Payroll Policy Statement 13 (Student FICA Tax Exemption Policy) for further explanation.

Nonresident holders of all other visa types are subject to FICA tax withholding unless the U.S. has entered into a "totalization" agreement with the alien's "home" country. The United States has entered into totalization agreements with several countries. Under the terms of these agreements, employees and employers who would otherwise have to pay social security taxes to both countries will only have to pay to one country.Employees and employers who are exempt under an agreement are exempt from both the social security(6.2%) portion and the Medicare (1.45%) portion. At this time, the United States has agreements with Austria, Belgium, Canada, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands,Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

It is possible to have a nonresident alien who is exempt from federal income tax withholding due to the existence of a tax treaty with the United States, for whom there would be no withholding and for whom a 1042S would be issued. However, the University may have to provide the same individual with a W-2 due to the absence of a totalization agreement or other exemption and the need to report FICA withholding.

Nonresident aliens generally are required to file a U.S. Nonresident Income Tax Return (Form 1040NR or Form 1040NR-EZ) with the Internal Revenue Service and a North Carolina Individual Income Tax Return (D-400) with the State Department of Revenue by April 15 of the following calendar year. Employees should be instructed to call the IRS or the N.C. Department of Revenue for assistance.

Payroll Services issues by January 31 of each year IRS Form W-2 to employees with taxable income and by March 15 IRS Form 1042S to employees with nontaxable income. These forms are to be used in completing the U.S. Nonresident Income Tax Return (Form 1040NR or Form 1040NR-EZ) and the N.C. Individual Income Tax Return (Form D-400).

Nonresident alien employees who are from countries with relevant tax treaties will use Form 8233 and an Official Attachment to claim exemption from federal and state income tax due to the tax treaty (in lieu of Forms W-4 and NC-4). See the listing of relevant tax treaty countries for employees in Attachments H and I.Instructions for completion of Form 8233 and the Official Attachment are referenced in Procedure 12, page 4, Nonresident Alien Employee From Tax Treaty Countries. The Form 8233 and official attachment are filled out at the Payroll Services Office.

The Official Attachments are specific for each country and provisions may vary for each category of payment. Since the Official Attachments may vary for each country, only one sample statement is included.Forms for specific countries for Teachers/Researchers and Students may be obtained from Payroll Services.

The claim for exemption from federal income tax and North Carolina income tax must be renewed each calendar year by February 15. Teachers/Researchers have no tax treaty maximum on earnings as displayed in Appendix 35H. Students are subject to earnings limits based on the tax treaty as displayed in Appendix 35I.

Withholding automatically will begin after earnings exceed the tax treaty maximum as though the Student had filed Forms W-4 and NC-4 claiming single with one withholding allowance. When a new calendar year begins, the foreign student will once again be eligible for the tax exemption if both the earnings ceiling or the time limit stipulated in the tax treaty have not been exceeded.

Federal Tax Withholding: The Internal Revenue Service restricts the withholding status of nonresident aliens not covered by an income tax treaty. These employees will complete federal Form W-4.Reference: PAY Procedure 12, pg. 6, Nonresident Alien Employees Not From Tax Treaty Countries

State Tax Withholding: The North Carolina Department of Revenue follows federal tax guidelines fornonresident aliens. These employees will complete state Form NC - 4.Reference: PAY Procedure 12, pg. 6, Nonresident Alien Employees Not From Tax Treaty Countries

The purpose of this Policy is to provide information regarding tax withholding for nonresident alien independent contractors.

The Non-Immigrant Information Form (PR-100) is used by Non-immigrants to determine tax status as a resident or nonresident alien for tax purposes. There is no tax withholding requirement for payments to United States citizens or resident aliens.

Nonresident aliens may document an exemption to the 30% federal income tax withholding requirement bycompleting and submitting IRS Form 8233 at Payroll Services. Refer to Appendix 35 (J) for limitations on maximum presence and maximum amounts exempt.

Resident Aliens requesting payment as an independent contractor must attach the Form W-9 to the AP-1a Request for Payment of Independent Contractors. Nonresident aliens must attach the Non-Immigrant Information Form (PR-100) and Form W-8 BEN to the AP-1a.Additionally, nonresident aliens requesting a tax withholding exemption based on a U.S. tax treaty must attach Form 8233. Reference: PAY Procedure 12, Processing of Tax Forms for Nonresident Aliens

The purpose of this Policy is to provide information regarding tax withholding for nonresident alien students receiving scholarship and fellowship assistance.

The Non-Immigrant Information Form (PR-100) is used by Non-immigrants to determine the tax status as a resident or nonresident alien for tax purposes. There is no tax withholding requirement for United States citizens or resident aliens.

Nonresident alien students may be subject to federal income tax withholding. Nonresident alien students may claim exemption from withholding based on a U.S. tax treaty with the student's country of residence.

Reference: (Appendix 35K), U.S. Tax Treaties Covering Scholarships and Fellowships

Nonresident alien students not able to use a tax treaty for withholding exemption will have tax withheld on scholarships and fellowships. For students with F, J, or M. visas the withholding rate is 14%. The withholding rate is 30% for students with other visa types.Required educational expenses for tuition, fees, books, and equipment may be deducted from the award amount before applying the withholding rate for students who are degree candidates.

The tax withholding regulations apply to scholarships and fellowships provided to nonresident alien students regardless of the method of payment. Awards provided by University check, aid directly credited to thestudent's account as awarded by the Office of Scholarships and Financial Aid, tuition remissions credited to the student’s account, aid paid by external organizations and credited to student's accounts, and aid provided by other methods are subject to the tax withholding regulations. Postdoctoral trainees who receive financial aid by payroll check for tax withholding purposes and are nonresident aliens for tax purposes are also subject to these procedures.

Information on scholarships and fellowships which are directly credited to student accounts will be provided by the Cashiers Office to Payroll Services to ensure compliance with tax withholding and reporting regulations. If tax withholding is required, the credit transaction to the student's account will be reduced for the required withholding amount.

Nonresident alien students who want to claim a withholding exemption based on a U.S. tax treaty with the student's country of residence should submit Form W-8 BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding.

TheNon-Immigrant Information Form (PR-100) must be attached to Check Requests for scholarship or fellowship payments to Non-United States citizens. Nonresident alien students who want to claim a withholding exemption based on a U.S. tax treaty with the student's country of residence should attach Form W-8 BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding.The Check Request must indicate that the payment is for a graduate award.

The PD-7 form is used to authorize and process nonservice financial aid for postdoctoral trainees. Individuals who are not U.S. citizens must attach the Non-Immigrant Information Form to the PD-7. Also, Form W-8 BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding should be attached if tax treaty benefits are being claimed by a nonresident alien.

I. Nonresident Alien Students and Scholars