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Tax Withholding for International Students and Employees

2012-04-26

There’s no question that the rules regarding income tax withholding and reporting for employees are tough for employers to navigate. The confusion can become amplified at educational institutions where you are dealing with many nonresident aliens. We have summarized the fundamental information to help you answer questions and gain confidence in this most tricky of tax reporting areas.


Know with whom you’re dealing

Is the individual you have hired a U.S. citizen? If not, is she or he a resident or a nonresident alien? Before you pay a single dollar to an alien, you must establish the individual’s tax withholding status. If an alien passes either the green card or substantial presence tests, she or he is deemed a “resident” alien and should be treated as a U.S. resident, with taxes withheld accordingly. Otherwise, you should assume nonresident alien status, which requires a different set of withholding rules. In addition, various treaties exist between the U.S. and foreign countries that may exempt some or all of the income from withholding.

The forms that must be completed by nonresident aliens prior to employment will vary depending on their specific fact pattern. A nonresident alien employee who is eligible for a tax exemption pursuant to a treaty will need to file a Form 8233 or Form W-8BEN. A nonresident alien employee wishing to use graduated withholding tax rates will need to file a Form W-4.  Please note in order to complete Form W-4, the alien will need a social security number (SSN) rather than an individual taxpayer identification number (ITIN), so she or he may also need to file Form SS-5.

Independent contractors

Generally, employers using a nonresident alien independent contractor must withhold at the statutory rate of 30% on all payments for labor or personal services performed in the U.S., unless that pay is specifically exempted from withholding. This rule applies regardless of the place where the contract for services was made or the place of payment. The amount of pay subject to 30% withholding may be reduced should the alien meet certain requirements.  Resident aliens employed as independent contractors are treated the same as U.S. residents. Withholdings and the related income are reported to the IRS via Forms 1042 and 1042-S.

Scholarships and fellowship grants

Nonresident alien candidates for a degree are not subject to tax withholding on qualified scholarship or fellowship grants, which are ones that pay for tuition, fees, books and supplies. However, the portion of a scholarship paid to a nonresident alien that is not qualified (i.e., travel, room and board) is subject to a federal withholding rate of 14%, unless exempted by a tax treaty.

If the nonresident alien receiving the scholarship or fellowship grant is not a candidate for a degree, the 14% withholding rate is applied to the total scholarship or grant, not just the portion attributable to travel, room and board. The withholding rate could be as high as 30% depending on the circumstances.