Written by Dwaine Cook.
Did you know that payments to foreign nationals are taxable? Both the United States Citizenship and Immigration Services (USCIS) and the Internal Revenue Service (IRS) impose complex regulations for payments to foreign nationals. USCIS and IRS refer to foreign nationals as nonresident aliens.
With a large and growing international population, we, as a university, must abide by the rules set forth by these two regulatory agencies. As such, processing payments to foreign individuals and entities often takes additional time to review due to these regulations.
For individuals, the IRS sets a default rate of tax withholding at 30% on all income from a nonresident alien unless a reduced rate or exception can be used. USCIS has limits on what can be paid to certain types of visa holders due to their immigration status.
PaymentWorks, the university’s third-party supplier information management system, allows us to review the visa type and obtain documentation directly from the supplier, which is required prior to payment, in hopes of making the following important determinations:
| Question | Possible Determination |
|---|---|
| What is the payee’s tax residency status? Are they a U.S. citizen, permanent resident, resident alien or nonresident alien, for tax purposes? | U.S. citizens, permanent residents and resident aliens are taxed on their worldwide income. Nonresident aliens are taxed on their U.S. sourced income. |
| What type of income is being paid? Is the payment for services rendered, scholarship/fellowship payment, awards or another type of payment? | Knowing the exact nature of the type of payment helps in determining if tax withholding is required. |
| What is the source of income? Is the payment U.S. or foreign sourced? | This could impact the taxability and reporting of the payment. |
| Is the payment subject to tax withholding? | Understanding the type of payment and where it is sourced is necessary in determining any tax withholding. |
| At what rate should taxes be withheld? | The default tax rate is 30% but certain scholarship payments may be reduced to 14% for non qualified scholarship payments or 0% for qualified scholarship payments. Service payments and awards are always 30% unless a tax treaty applies and all conditions are met. |
| Is the payment reportable? What are the reporting requirements? | Any payments that have tax withheld or fall under a tax treaty must be reported. |
These questions must be answered prior to making any payment to the individual to ensure that the university is maintaining compliance with both USCIS and IRS regulations. Departments paying foreign individuals must allow for extra time to review payments and potentially answer questions about payments to ensure that the university remains compliant with federal immigration and tax laws.
To learn more about payments to foreign nationals, please review the Controller’s Office Foreign National Tax Compliance page.
Want to learn more?
The Finance Division’s Knowledge Base > Taxes category has many articles to help you address different tax questions. You can also reach out to NCSU Tax Compliance for additional assistance.