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Tax Procedures for Nonresident Alien(Foreign) Student Employees

Background
Under U.S. tax laws, all non-U.S. citizens are considered to be either permanent resident aliens, resident aliens for tax purposes or nonresident aliens. Permanent resident aliens and resident aliens for tax purposes are taxed the same as U.S. citizens but nonresident aliens are taxed under special laws.

Objective
To provide MnSCU institutions with procedures to identify nonresident aliens and to comply with federal and state tax laws as they apply to nonresident alien students.

Scope
These procedures apply to payments made to nonresident alien students through the Student Payroll system and to tuition reductions for nonresident alien graduate assistants. These procedures do not apply to scholarship payments to students, payments made to faculty and staff through SEMA4 or to vendor payments. Certain immigration documents will need to be reviewed to make residency determinations, but in general immigration rules and regulations are beyond the scope of this document.

Definitions

Duration of Status (D/S):
The time during which a student is pursuing a full course of studies at an educational institution approved by U.S. immigration for attendance by foreign students. The student is considered to be maintaining status if he or she is making normal progress toward completing a course of studies and is in compliance with specific visa regulations.

Form I-94/ I-94W:
The U.S. Immigration Arrival/Departure card (the small white or green card stapled in the front of the passport). This card indicates the passport holder's place and date of entry to the U.S., their nonimmigrant status and the length of time they may remain (the "until') in the U.S., i.e.: An I-94 for an F-1 student would indicate admitted F-1 and until D/S.

Institution:
A term for the MnSCU department/individual responsible for performing the necessary procedures.

Nonresident Alien:
The U.S. tax residency status of a non-U.S. citizen who is temporarily present in the U.S. Nonresident aliens are required to pay taxes only on their income from U.S. sources.

Permanent Resident Alien:
An individual granted lawful U.S. permanent residence status. Permanent resident aliens (often referred to as green-card holders) are taxed in the same manner as U.S. citizens.

Resident Alien for Tax Purposes:
The U.S. tax residency status of an individual who has been present in the U.S. for a period of time long enough to meet the substantial presence test (defined below) and are not otherwise exempt. Resident aliens are taxed on their worldwide income and in the same manner as U.S. citizens.

Residency Status Change Date:
Earliest possible date that an exempt individual's tax status will change, calculated by the withholding agent. Ex: An F-1 student visa holder who arrived in the U.S. for the first time on 1/1/2003 would have a residency status change date of 7/2/08. As an F-1 visa holder, the student is exempt from counting days of presence towards the substantial presence test for a period of 5 calendar years - 2003, 2004, 2005, 2006 and 2007. On 1/1/2008, the F-1 visa holder must begin counting days towards the substantial presence test. The Residency Status Change Date would be 7/2/2008, 183 days from 1/1/2008.

Residency Starting Date or Residency Start Year:
First day of presence in the U.S. during the calendar year in which the individual met the substantial presence test. This is the day the employer begins to tax the individual as a resident alien. Using the example above, 1/1/2008 is the Residency Starting Date for the F-1 visa holder who arrived in the U.S. in 2003. On 1/1/2008 the employee is considered a resident alien for tax purposes. On MnSCU's Tax Residency Information Form the Tax Residency Start Year would be recorded as 2008.

Substantial Presence Test (SPT):
A test used to determine an individual's U.S. residency status for tax purposes. You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:

1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
   1. All the days you were present in the current year, and
   2. 1/3 of the days you were present in the first year before the current year, and
   3. 1/6 of the days you were present in the second year before the current year.

Any day is excluded as a day of presence if the alien individual is physically present in the United States on that day and is an individual who is (1) exempt, (2) physically unable to leave the United States because of a medical condition, (3) in transit between two points outside the United States, or (4) commuting from Mexico or Canada to work for a U.S. employer.

Tax Treaty:
The U.S. maintains income tax treaties or agreements with over 48 countries in an effort to reduce or eliminate double taxation. Most of these treaties provide tax-free status (up to a specified amount and within a limited timeframe) on income earned in the United States. Approximately half of these treaties extend benefits to students.

Visa Type:(Also known as Immigration Status)
"Visa Type" refers to the category of visa that a non-U.S. citizen holds. The "visa type" is marked on the visa stamp or sticker in the individual's passport, I-94 and/or I-20 or DS-2019 form. Student visa types are listed below.

Student Visa Types
The following visa types are issued to students and their spouses and dependents. Authorization to work on campus is indicated by visa type. F-1 and J-1 are the most common visa types seen at MnSCU institutions.

F-1: Students. Work authorized for host institution under limited conditions.

F-2: Spouse and dependents of F-1 visa holders. No work authorization.

J-1: Exchange visitors including students, scholars, teachers and researchers. Work authorized under certain conditions.

J-2: Spouse and dependents of J-1 visa holders. Work authorized under certain conditions.

M-1: Vocational student. Work authorized under extremely limited conditions. Contact the Office of the Chancellor before allowing employment.

M-2: Dependents. No work authorization.

Q-1: International Cultural Exchange. Work authorized for sponsoring employer.

Payments Made to Nonresident Aliens through the Student Payroll System

The steps in this section are necessary to ensure that MnSCU complies with U.S. Immigration and Internal Revenue Service (IRS) rules as they apply to employment.

All new employees are required to complete a Form I-9 Employment Eligibility Form at the time of hire. It is the responsibility of the institution to review Form I-9 to determine the new employee's tax status by following the steps listed below.

The institution must review the information on the form to determine whether the new employee is a U.S. citizen or permanent resident alien. This information is on the upper right hand side of the Form I-9. All new employees are required to complete this question and provide information about their U.S. citizenship/permanent residency status on this form, regardless of whether there is a reason to believe that the individual may or may not be a U.S. citizen.

1. If the new student employee indicates on Form I-9 that he or she is a "citizen or national of the United States" or "lawful permanent resident alien", there is no change to current procedures; the employee is taxed as a U.S. resident.
2. If the new student employee indicates on Form I-9 that he or she is an "other alien authorized to work until xx/xx/xxxx", the institution must ask the student to provide copies of their I-20 Form, visa and Form I-94. Immigration Form I-94 shows how long the individual may stay in the U.S. For a student, this is generally indicated as D/S, for duration of status, with no specific end date. Note: Visa types F-1, J-1 (Student) and M-1 are student visas which provide authorization (with the endorsement of the institution) for the student to work on campus for the sponsoring institution. The sponsoring institution is the institution listed on the student visa holders I-20 Form. Q-1 visa types must be approved by U.S. immigration to work on campus.
3. In addition to reviewing the student employee's immigration documents, the institution must ask the student to fill out the Student Payroll Tax Residency Information Form. The Tax Residency Information Form will help the institution in determining the tax residency status of the employee by applying the substantial presence test. Generally, a new alien student employee would be exempt from counting days towards the substantial presence test for a period of 5 calendar years, however if the student has been in the U.S. prior to the date of arrival on their current student visa, the substantial presence test might be applicable sooner. In order for the institution to determine the correct residency start year for employees, it is important for all alien employees to fill out the Tax Residency Information Form.
4. MnSCU requires employees to have a social security number to be compensated. Tech Ids and "999" number are not acceptable. The student payroll system will be programmed to flag any numbers beginning in 999. If the student does not have a social security number, one must be applied for immediately. Form SS-5, Application for a Social Security Card can be downloaded at the Social Security Administration's website. Procedures for paying employees who have applied for social security numbers can be found in Section 9 of this handbook.
5. The institution will determine whether the student qualifies for a U.S. tax exemption under any income tax treaty by reviewing the treaty chart in Section 5 of this handbook, and assist the student with the completion of Form W-4 and Form 8233 (and the accompanying statement) as discussed below. Please note, per the procedures in Section 9 of this handbook, that tax treaty benefits may not be applied until the employee has a social security number.
   You can obtain additional information regarding U. S. Tax treaties on the IRS website.

How to Complete Form W-4
With the assistance of the institution, all nonresident alien student employees must fill out two W-4 forms at the time of hire, one for Federal withholding and one for State withholding. If the nonresident alien is eligible for treaty benefits, the W-4's will become effective at the time the treaty limits are reached. No tax should be withheld during the time the employee is covered by a treaty.

In the first year, the student must attach a statement to the Form W-4 saying that a timely U.S. tax return will be filed. In the subsequent year, the student must attach a statement indicating that the individual has filed a U.S. income tax return for the previous year.

Nonresident aliens who receive employee compensation not covered by treaty are subject to graduated rates of withholding and are required to complete Form W-4 as follows, regardless of their actual marital status:

• "Single" marital status
• One withholding allowance
• Write "Nonresident Alien" or "NRA" above the dotted line after the words "Additional amount, if any, you want withheld from each paycheck" and before the box on line 6 of Form W-4.
• May not claim exemption from withholding

Nonresident aliens from Canada, Mexico, the Northern Mariana Islands, American Samoa, South Korea and nonresident alien students from India may claim more withholding allowances. For details, please see the information provided for Box 5 below.

Note: If the Form W-4 is not properly filled out, the withholding must default to S-0 (single marital status with zero allowances.)

W-4 Instructions
Box 1 Name and Address: Enter name and local U.S. mailing address.

Box 2 Social Security Number: Enter social security number. If the new employee does not have a social security number, he or she must apply for one immediately. The SSN should be forwarded to Tax Services when it has been obtained.

Box 3 Marital Status: Mark "Single" for marital status, regardless of actual marital status.

Box 4 Name Difference: Fill out only when last name differs from that on social security card.

Box 5: Number of Allowances: Claim one (or less) withholding allowance by entering "1" on line 5, regardless of the number of actual withholding allowances except as follows:

• Residents of Canada, Mexico, American Samoa, the Northern Mariana Islands are entitled to one withholding allowance plus additional withholding allowances for non-working spouse and dependents.
• Residents of South Korea are entitled to one withholding allowance plus additional withholding allowances for non-working spouse and dependents who are present with them in the U.S.
• Residents of India who are in the U.S. as students or business apprentices may claim an additional withholding allowance for a nonworking spouse, and personal withholding allowances for any dependents present in the U.S. who are also resident aliens of the U.S.

Box 6 Additional Withholding: All nonresident alien employees must write "Nonresident Alien" or "NRA" above the dotted line after the words "Additional amount, if any, you want withheld from each paycheck" and before the box on line 6. If the employee wishes to claim additional withholding, enter the additional amount to be deducted each pay period in the box on line 6.

Box 7 Exemption: A nonresident alien is not permitted to claim "Exempt" on this line. In the case of an exemption under an income tax treaty, Form 8233 (discussed below) should be completed, in addition to Form W-4. Form W-4 should be completed in the manner outlined above and will apply at the time any treaty-based exemption no longer applies.

Signature: The employee must sign and date the form.

State Withholding Requirements
A separate W-4 will be required for state purposes. Minnesota requires nonresident aliens to claim Single with no withholding allowances. Mark the W-4 "For State Use Only" and enter Marital Status as "Single" and Number of Allowances as 0. The state does not require the statement "Nonresident Alien" on line 6. There is no state reciprocity with North Dakota, Wisconsin or Michigan for nonresident aliens.

FICA Exception for F, J, M and Q Visa Holders
A nonresident alien student employee can be exempt from FICA tax withholding if he or she meets all of the following criteria:

• Is a nonresident alien for tax purposes (i.e.: has not met the Substantial Presence Test),
• Is temporarily present in the U.S. under F-1, J-1, M-1 or Q-1/Q-2 nonimmigrant status, and
• Is performing services in accordance with the primary purpose of the visa's issuance (i.e., the primary holder of the visa, the "-1" visa holder).

The student must meet all the above requirements as discussed above in order to qualify for FICA exemption.

Income Tax Treaty
An income tax treaty is a bilateral legal agreement between two countries to reduce or eliminate double taxation. The United States maintains bilateral income tax treaties with over 48 different countries in an effort to reduce or eliminate double taxation. It is important to note that each individual treaty is unique and may not contain the same provisions or exemptions as another tax treaty. From time to time, treaties with additional countries are signed and existing treaties revised.

About half the tax treaties contain a limited exemption for personal service income earned by students, trainees, teachers and researchers while in the U. S. There is typically an annual maximum dollar amount and/or a time limit of presence in the U.S. for which the exemption can be claimed.

Example: Article 21(1) of the U.S.-France income tax treaty allows an exemption of $5,000 per calendar year for personal services income earned by a student for a period of five calendar years from the date of the student's arrival in the U.S.

Section 5 of this handbook lists current tax treaties, maximum amounts allowed, maximum calendar years allowed and the article within the tax treaty that relates to student employment. The charts are from IRS Publication 901 which has not been updated since 2001. For the most comprehensive listing and the complete text of tax treaties, go to the IRS website. The institution must review this chart and determine if the student is eligible for a treaty exemption they wish to claim. If the student is eligible, the student, with the help of the institution, must fill out Form 8233 as discussed below.

Form 8233 Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual

Form 8233 is used to claim a tax treaty exemption for compensation payments. The most important things for the institution to remember about Form 8233 are:

• The form must be reviewed, signed and submitted to the IRS within 5 days of receipt by the institution. Note: the student must not, either separately or with an income tax return, submit this form directly to the IRS.
• The institution may allow treaty benefits immediately upon receiving Form 8233, subject to IRS approval or rejection or wait until 10 days after mailing the Form 8233. Either method is acceptable at the discretion of the institution.
• The form is valid for one calendar year and a new form must be completed, reviewed, signed and submitted each calendar year for which a treaty exemption will apply. All treaty beneficiaries should be notified in November or early December to fill out a new Form 8233 for the upcoming calendar year. No treaty benefits can be given in the new year until Form 8233 is on file.
• The student is required to submit an additional statement along with Form 8233. Section 7 of this handbook provides sample forms by country for the statement. The institution should select the appropriate country statement, fill in the blanks with information provided by the student and submit along with Form 8233. If there is no statement for a particular country, use the blank form provided in Section 7 of this handbook and change the language as needed.
  The attachment to Form 8233 must also:
  

  • Be dated
  • Identify the tax year to which it relates
  • Be signed by the employee, and
  • Contain a written declaration that it is made under the penalties of perjury
  • The statement becomes a part of the form itself, and everywhere the form is required to be retained, the statement must also be retained; and
  • The student can claim the tax treaty exemption either at the time of payment or when he/she files Form 1040NR, U.S. Nonresident Alien Income Tax Return.

How to Complete Form 8233
Calendar Year: Enter the tax year for which the form applies.

Part I:
Line 1 Name: Enter name.

Line 2 Taxpayer Identification Number: Enter social security number or individual taxpayer identification number. Do not enter a number assigned by the Canadian government.

Line 3 Foreign tax identifying number: If your country of residence for tax purposes has issued you a tax identifying number, enter it here. Otherwise, leave it blank.

Line 4 Permanent residence: Enter permanent address in home country.

Line 5 U.S. Address: U.S. Address

Line 6 U.S. Visa Type: Enter U.S. visa type.

Line 7a Country Issuing Passport: Enter country issuing passport

Line 7b Passport number: Enter passport number. The passport number is generally found on the "picture" page of the individual's passport.

Line 8 Date of Entry into the U.S.: Enter the date of the arrival shown on your current immigration form I-94, Arrival-Departure Record.

Line 9a Current nonimmigrant status: Enter current nonimmigrant status shown on your current immigration form I-94.

Line 9b Date your current nonimmigrant status expires: Enter the date of the expiration shown on your current immigration form I-94. Enter D/S if the date of expiration is based on "duration of status".

Line 10 Check box: Place in "X" in the box if you are a foreign student, trainee, professor/teacher, or researcher. When this box is checked, please attach the required additional statement. See Section 7 of this handbook.

Part II
Line 11a Compensation: Describe the services provided. The description may be general in nature, for example, "student worker".

Line 11b Total Compensation Paid: Enter the approximate total dollar amount expected to be paid for these services during this calendar year.

Line 12a Tax Treaty and Treaty Article: Indicate the income tax treaty and article number under which the exemption from federal tax withholding is claimed, for example, an individual from France who is claiming an exemption for student work would write "U.S. - France income tax treaty, Article 21(1)."

Line 12b Tax Treaty Exemption Amount: Enter the approximate dollar amount of line 11b that will be claimed as an exemption under the tax treaty. If all income received is exempt, write "ALL".

Line 12c Country of Residence: Enter the country of permanent residence for tax purposes.

Line 13a Noncompensatory Scholarship or Fellowship income: Enter the approximate dollar amount expected to receive from scholarship or fellowship income that you do not have to exchange services to receive.

Line 13b Tax Treaty and Treaty Article: Indicate the income tax treaty and article number under which the exemption from federal tax withholding is claimed, for example, an individual from France who is claiming an exemption for student work would write "U.S. - France income tax treaty, Article 21(1)."

Line 13c Tax Treaty Exemption Amount: Enter the approximate dollar amount of line 13b that will be claimed as an exemption under the tax treaty.

Line 14 Additional Facts: Generally, leave blank. If the student is a dual resident or his passport was issued by a country other than that for which he claims an income tax treaty exemption, he or she should describe why the exemption is applicable.

Line 15 Personal Exemptions: This section is for independent personal services and does not apply to Student Employees.

Line 16 Days of Service: This section is for independent personal services and does not apply to Student Employees.

Line 17 Daily personal exemption amount claimed: This section is for independent personal services and does not apply to Student Employees.

Line 18 Total personal exemption amount claimed: This section is for independent personal services and does not apply to Student Employees.

Part III
Certification: The student must review the form for completeness and accuracy. The student must sign & date the form.

Part IV
Withholding Agent Certification: The institution must review the form for completeness, accuracy and eligibility for the exemption, fill in your institution name and address, MnSCU Id # 41-1687554, telephone number, sign, date and mail the form to:

Internal Revenue Service
International Section
P.O. Box 920
Bensalem, PA 19020-8518

Or FAX to: 1-215-516-1507 ( note: a single transmission should not exceed 15 pages)

Give one copy of the completed Form 8233 and tax treaty statement to the student, keep one for your records and submit one to the Office of the Chancellor:

Minnesota State Colleges & Universities
Attn: Tax Services, Ann Page
30  7th Street East, Suite 350
St. Paul, MN 55101

651-632-5007
Fax: 651-297-7024

Each copy of Form 8233 must include all attachments.

Graduate Assistant Tuition Reductions (For State Universities Only)
If a tuition reduction granted to a nonresident alien graduate assistant is determined to be taxable in accordance with MnSCU Procedures for Taxation of Graduate Student Tuition Reductions, contact the Office of the Chancellor at 651-632-5007 or 651-632-5016 for further instructions.

Quarterly and Year End Reporting
The Office of the Chancellor will prepare either Form W-2 or Form 1042S or a combination of both to report payments made to nonresident aliens. Form W-2 will be used to report payments subject to tax and Form 1042S will be used to report payments exempt from tax based on a treaty. These forms will be sent to the student by January 31 of the year following payment and to the IRS by the required deadlines. Form 8233 must be on file for wages reported on IRS Form 1042S.

The Office of the Chancellor will do all quarterly and annual reporting to the IRS and Minnesota Department of Revenue.