Payments to Foreign Nationals - International Center - University of ...

Payments to Foreign Nationals
Information about Tax Treaties,
Taxpayer Identification Numbers and IRS Forms
Compiled By:
University Payroll Office
Revised June, 2011
nra-brochure2011.doc
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OVERVIEW
Generally, every person born or naturalized in the U.S. and subject to its jurisdiction
is a citizen. All other individuals are aliens. 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 “non-resident aliens.” Payments made to non-resident
aliens are subject to different tax withholding, reporting and liability requirements.
The general rule is that 30 percent must be withheld on all fixed and determinable
payments of U.S. source income to non-resident aliens unless the income is excluded
under a specific provision in the Internal Revenue Code. Income includes: wages or
salary payments made to faculty and staff; payments made to independent
contractors; fellowship/scholarship payments made to students, scholars and trainees;
and payments made for royalties.
ALIEN CERTIFICATE
An “Alien Certificate” is a University of Michigan form that is used by the University
Payroll Office to collect information about foreign nationals. The “Alien Certificate”
should be completed and sent to the University Payroll Office by all foreign nationals
when they first enter the United States and arrive at UofM. The information that is
collected is as follows:
• Name
• Social Security Number or Individual Taxpayer ID Number
• Country of Residence
• Visa Type
• Original date of Entry into the U.S.
Please make sure this information is accurate. This information is used to determine
appropriate tax withholding and Substantial Presence Test applicability. They must
include their original date of entry into the United States, not only University of
Michigan visits but all visits to the United States.
It does not need to be completed annually; however, if any information changes, such as
a change in visa type or the person is out of the United States more than one year, an
updated “Alien Certificate” should be sent to the University Payroll Office.
A copy of the “Alien Certificate” and Instructions can be found on the University Payroll
Office web site at: http://www.finops.umich.edu/system/files/Alien_Certificate.pdf
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TAXPAYER IDENTIFICATION NUMBERS
Social Security Number or Individual Taxpayer Identification Number
The University of Michigan is responsible for reporting, to the Internal Revenue
Service (IRS), fellowship/scholarship payments, payments made to independent
contractors, royalties and wages/salary paid to all non-resident aliens. IRS reporting
procedure mandates that the University supply a Social Security Number (SSN) or an
Individual Taxpayer Identification Number (ITIN) as part of the reporting that is done
at the end of a calendar year.
Who is eligible for a Social Security Number?
In general, non-immigrant visaholders are only eligible for a SSN IF they
have permission to work from the Department of Homeland Security (DHS).
They will need to show documents demonstrating their immigration status and
DHS permission to work in the United States in addition to proof of age and
identity. For more information about this procedure, please see
http://www.ssa.gov/pubs/10096.html .
F-1 students and J-1 students and scholars must follow special rules.
F-1 students are only eligible for a SSN if they:
• are currently employed on campus, or
• have evidence that they have been offered on-campus
employment, or
• if they have one of the following forms of employment
authorization:
Curricular Practical Training (CPT),
Optional Practical Training (OPT), or
Employment authorization due to severe economic hardship.
F-1 students must provide proof that they meet these requirements when
they apply for a SSN. Detailed instructions and procedures are at
http://internationalcenter.umich.edu/taxes/taxssnapply.html
J-1 students and scholars: In addition to the Social Security application
and originals and copies of identity and immigration documents, J-1
students and scholars whose Form DS-2019 was issued by the U-M will
need a letter from the International Center (usually provided at the
Mandatory Check-In). J-1 students and scholars whose Form DS-2019
was not issued by U-M must request the letter from the organization that
issued their Form DS-2019. Detailed instructions are at
http://internationalcenter.umich.edu/taxes/taxssnapply.html
Note: For non-student J-1 Exchange Visitors, the Social Security
Administration will sometimes accept proof of employment by U-M
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instead of the letter from the International Center, but the International
Center advises using the letter to avoid possible delays.)
Applications for Social Security Numbers (SSNs) are submitted to the Social Security
Administration Office located at 3971 S. Research Drive, Ann Arbor MI 48108. You
can get there by AATA bus #6 to the stop at W. Ellsworth and S. Research Park Drive.
If an individual is eligible to apply for a SSN, he/she should do so as soon as possible.
Social Security Cards will be mailed one or two weeks after application. Those
scheduled to begin employment soon are advised to request a receipt from the Social
Security Administration Office. Also, it is sometimes possible to obtain the number,
although not of course the card itself, from the Social Security Administration by
calling 1-800-772-1213 and providing identifying details.
Who is eligible for an Individual Taxpayer ID Number?
A non-resident alien who is from a tax treaty country is eligible to apply
for an Individual Taxpayer ID Number (ITIN) through the Payroll
Office ONLY if he/she will be receiving scholarship/fellowship funds or
will be an independent contractor.
The list of tax treaty countries for scholarship/fellowship payments can be
found at: http://www.finops.umich.edu/system/files/Scholarship-
Fellowship+Treaty+Countries.pdf
The list of tax treaty countries for independent contractors can be found at:
http://www.finops.umich.edu/system/files/Independent+Personal+Service+
Treaty+Countries.pdf
If a non-resident alien is not from a tax treaty country they can not apply for
an ITIN through the payroll office but can apply with the IRS at the time
they file a U.S. federal income tax return.
A non-resident alien is not eligible to apply for an ITIN solely to use for
opening a bank account or applying for a credit card.
Non-resident alien receiving scholarship/fellowship income, the following
steps and information are necessary to apply for an ITIN:
1. Even though the individual is not eligible for a SSN, he/she must apply
for a SSN using the process above and be denied a SSN.
2. The non-resident alien should then contact the University Payroll Office
to apply for an ITIN. An appointment should be made with the Tax
Supervisor in the Payroll Office. The following original documents are
required and should be brought to the appointment:
• alien certificate
• passport
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• visa information
• DS-2019 or I-20
• denial letter from the Social Security Administration (issued when
application for SSN was denied)
• completed Form W-7 (can be found on the Payroll Office web site:
http://www.irs.gov/pub/irs-pdf/fw7.pdf
A Form W-8BEN will also be completed at this time and when the ITIN is
received the payroll office will complete the Form W-8BEN with the ITIN
to begin taking tax treaty benefits on the scholarship/fellowship payments.
If an individual who has only an ITIN is eventually employed at the
University or elsewhere, he/she should then apply for a SSN and begin using
the SSN in place of the ITIN.
Non-resident alien who are being paid as independent contractors through a
People Pay form, the following steps and information are necessary to apply
for an ITIN:
1. The department should then contact the Tax Supervisor in the Payroll
Office to set up an appointment to have the nonresident alien apply for
an ITIN. The following original documents are required and should be
brought to the appointment:
• alien certificate
• passport
• visa information
• invitation letter from department
• completed Form W-7 (can be found on the Payroll Office web site:
http://www.irs.gov/pub/irs-pdf/fw7.pdf
If possible when applying for an ITIN for a People Pay form payment
bring the People Pay form and completed Form 8233 to the appointment
to keep all the paperwork together.
If an individual who has only an ITIN is eventually issued a SSN they
should begin using the SSN in place of the ITIN.
DETERMINATION OF TAX STATUS
Foreign nationals authorized to work in the U.S. are classified as either resident aliens
or non-resident aliens for U.S. tax purposes. The distinction between these two
classifications is important since resident aliens, like U.S. citizens, are taxed on their
worldwide income, while non-resident aliens are taxed only on their U.S. source
income. The individual will be considered a non-resident unless it can be established
that he or she is a resident alien as evidenced by the following:
1. Lawful Permanent Residency Test (also called the “Green Card” test): If you
have been given the privilege according to the immigration laws of residing
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permanently in the U.S. as an immigrant, and this status has not been revoked or
abandoned, then you are a lawful permanent resident of the U.S.
2. Substantial Presence Test: (Resident Alien Status)
To qualify for the Substantial Presence Test:
a. A student, temporarily present in the U.S. under an F-1 or J-1 visa must be in
the U.S. for 5 calendar years (counting all or part of a year as a full year) plus
183 days in the current year.
b. A teacher or trainee, temporarily present in the U.S. under a J-1 visa must be
in the U.S. for at least 2 years plus 183 days in the current year.
c. Aliens on all other visas must be present in the U.S. for 183 days or more
during the calendar year to claim resident alien status for U.S. tax purposes.
To determine resident alien status, all international faculty and staff must complete
and return an Alien Certificate to the University Payroll Office (G395 Wolverine
Tower, 1279) for processing. Alien Certificates can be found in the “Forms/Tables”
option on the Payroll Web site:
http://www.finops.umich.edu/system/files/Alien_Certificate.pdf
FICA (Social Security and Medicare Tax)
Information on the “Alien Certificate” is used to determine whether an individual is
exempt from FICA tax. To be exempt from FICA tax withholding an individual must
be:
1. A non-resident alien;
2. Present in the U.S. under an F-1, J-1, M-1, or Q-1 visa; and
3. Performing services in accordance with the primary purpose of the visa’s
issuance.
Students holding an F-1, J-1, M-1 or Q-1 visa are exempt from FICA for the first 5
calendar years they are in the U.S. Once they become resident aliens under the
Substantial Presence Test, they are eligible for FICA tax withholding on January 1st
of the calendar year in which they become a resident alien.
For example, an F-1 student arrives for the first time in the United States August 2010
he will be exempt from FICA taxes through December 2014. On January 1 st 2015 he
must have FICA txes withheld from his payments.
Professors and researchers holding J-1 visas are exempt from FICA for either the first
2 calendar years they are in the U.S., or for 2 out of the last 6 calendar years in the
U.S. Once they become resident aliens under the Substantial Presence Test, they are
eligible for FICA withholding beginning on January 1st of the calendar year in which
they become a resident alien.
For example, a J-1 teacher/researcher arrives for the first time in the United States
August 2010 she will be exempt from FICA taxes through December 2011. On
January 1 st 2012 she must have FICA taxes withheld from her payments.
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NOTE: If an individual expects to stay in the U.S. less than 183 days in the
year in which his/her status changes to “resident alien”, the individual may
provide proof to the University Payroll Office that he/she will be leaving
within 183 days and FICA tax will not be withheld. A plane ticket to return
to the country of residence is considered proof.
FORM W-4 PROCESSING
Payments made to non-resident alien employees are subject to special withholding
rules. Generally, their filing status is restricted and the number of allowable
exemptions is limited. This is required because the non-resident alien cannot claim
the standard deduction. The federal Form W-4 for a non-resident alien must:
1. Indicate only “Single” marital status (regardless of actual marital status).
2. Claim only one withholding allowance, unless a resident of Canada, Mexico or
South Korea.
3. Have “NRA” written on Line 6.
4. Be blank on line 7. (Do not write the word “exempt”).
Even if the individual is married with two or more children the Form W-4 must be
completed as instructed above.
Federal and state Forms W-4 completed by nonresident aliens must be completed on
paper they cannot enter this information in Wolverine Access. These forms should be
submitted to the University Payroll Office when the individual first begins to receive
salary. These forms do not have to be updated annually. (All U.S. citizens must
complete their Federal and state Forms W-4 online in Wolverine Access).
Questions can be directed to a Payroll Tax Representative in the HR/Payroll Service
Center at 5-2000 (from campus); 615-2000 (from within the Ann Arbor area); or tollfree
1-866-647-7657 (outside of the Ann Arbor area).
INCOME TAX TREATIES
The University makes various types of payments to non-resident aliens who may be
non-taxable for United States and State of Michigan income tax purposes if:
• There is a tax treaty in effect with their country of permanent residence, and
• Specific articles under the tax treaty grant the exemption.
These various types of payments to non-resident aliens include:
• Fellowship/Scholarship payments
• Payments for independent personal services (People Pay Forms)
• Wages paid to students
• Wages paid to teachers/researchers
• Royalty Payments
If income cannot be exempt from tax based on a tax treaty, tax withholding for
salary/wages paid to non-resident aliens uses the graduated tax rates.
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Fellowship/Scholarship payments to non-resident aliens are taxed at a 14% rate and
People Pay Form payments at a 30% rate.
Countries With Relevant Tax Treaty Provisions
The “Foreign Students, Faculty & Staff” section of the Payroll web site, under the
“Tax Treaty Country List and Information” link, lists the country/tax treaty
provisions for the types of payments mentioned above. Please note that these
tables are updated in April of every calendar year. The web site is:
http://www.finops.umich.edu/payroll/forms/taxtreaties
Forms To Be Used To Claim Tax Treaty Exemption
If a payment can be considered non-taxable under a tax treaty, the recipient of the
payment may request that no taxes be withheld by completing and submitting the
proper form(s) to the University of Michigan Payroll Office, G395 Wolverine
Tower, 1279. The form(s) to use for each type of payment is indicated below.
The forms can be found in the “Forms/Tables” section of the Payroll web site
under Foreign Students, Faculty & Staff. The website is:
http://www.finops.umich.edu/payroll/forms
Payment Type
Teaching/Research Wages
Independent Personal Services (People Pay form)
Student Wages
Fellowship/Scholarships
Royalty Payments
Resident Alien for tax purposes
Documents
Alien Certificate & Form 8233 plus
Attachment* (SSN only)
Form 8233 plus Attachment* (SSN or ITIN)
Alien Certificate & Form 8233 plus
Attachment* (SSN only)
Alien Certificate & Form W-8BEN* (SSN or
ITIN)
Alien Certificate & Form W-8BEN* (SSN or
ITIN)
W-9 plus Attachment (SSN only)
*Please note that a SSN or an ITIN is a requirement for a non-resident to claim a
Tax Treaty benefit. Forms 8233 and Forms W-8 BEN submitted without a SSN
or an ITIN cannot be processed and the individual will be taxed at the rates
mentioned above. Therefore, if an individual does not have a SSN or an
ITIN, only complete and submit an Alien Certificate.
See examples of a completed Alien Certificate, Form 8233 and Form W-8 BEN in
Appendix III.
Frequency of Submitting Forms
Type of Form
Alien Certificate
Forms W-4
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Frequency to Submit Form
Once - upon initial arrival at U-M. Updated if
visa type changes.
Once - at beginning of employment relationship.

Updated when individuals attains “resident alien”
status.
Form 8233 & Attachment
Form W-8 BEN
Form W-9
Annually – prior to the beginning of each
calendar year. ONLY submit if country of
residence has a tax treaty with the United States
and ONLY if individual has a SSN or ITIN.
Once - at beginning of student/scholar
relationship with the University. ONLY submit if
country of residence has a tax treaty with the
United States and ONLY if individual has a SSN
or ITIN.
When individual has attained a “resident alien”
status, but are still tax treaty eligible. ONLY
submit if country of residence has a tax treaty
with the United States and ONLY if individual
has a SSN or ITIN.
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NAME OF Non-resident Alien
SSN or ITIN
Choose
One
Complete if
applicable
Choose
One
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All highlighted
fields must be
completed for the
Form 8233 to be
valid.
Box checked
for student,
teacher or
researcher. Not
independent
contractor.
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12
Box must be
completed for
independent
contractor.

NAME OF Non-resident Alien
Individual’s country of residence
0%
Scholarship/Fellowship
Student at the University of Michigan
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