Federal Withholding Tax for Foreign Nationals
UNCSA is a withholding agent for the Internal Revenue Service (IRS) and is required to withhold tax. All payments made to a nonresident alien (including, but not limited to, travel/business reimbursements, honorarium, scholarships/fellowships/stipends, wages, etc.) are taxable unless specifically exempt from tax by the IRS Code or a tax treaty.
Identifying a Nonresident Alien (for tax purposes)
A nonresident alien (for tax purposes) must pay taxes on any income earned in the U.S. to the Internal Revenue Service unless the person can claim a tax treaty benefit. This applies to students as well. Failure to pay the correct tax can result in an unexpected tax obligation when the individual leaves the U.S. or may jeopardize a future application for residency.
There is a different tax structure for a nonresident alien compared to a resident alien. A nonresident alien (for tax purposes) may qualify for some tax relief through a tax treaty benefit if one exists with the person’s home country. Generally, a resident alien can’t qualify for a tax treaty benefit. Resident aliens for tax purposes are taxed on their worldwide income.
Additionally, UNCSA is liable for any tax not withheld and associated fines and penalties. Any tax amount, fines and penalties determined to be owed by the IRS will be charged to the department responsible for the foreign national.
If foreign national has never lived in the U.S., generally:
- F & J students are NRAs for five calendar years
- J non-students are NRAs for two calendar years
If a foreign national has lived in the U.S. in the past, the individual must complete the Substantial Presence Test. This test determines if the person has been in the U.S. enough time over the previous three years to be considered “substantially present” in the states. If the foreign national has been in the U.S. for 183 days or more in the past three years, the individual is considered a resident alien for tax purposes.
Federal Withholding Tax and Tax Treaties
In most cases, a foreign national is subject to federal withholding tax on U.S. source income at a standard flat rate of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign national’s country of residence and the United States. The tax is generally withheld from the payment made to the foreign national.
A tax treaty is a bilateral agreement between the United States and a foreign government. Tax treaties are intended to avoid double taxation or having the income taxed by both countries. Each treaty is different and includes different exemptions. If a foreign national qualifies for an exemption because of a tax treaty benefit, little or no withholding will be taken from a payment. The foreign national must have a U.S. tax identification number in order to claim the benefit.
See the IRS Publication 515, Withholding of Tax on Nonresident Aliens & Foreign Entities for more information about which countries have treaties with the U.S. Note: Citizens of Hong Kong and Macao are not covered by the People's Republic of China tax treaty.
Tax Identification Number (SSN or ITIN)
IRS regulations mandate that foreign nationals must have either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN) in order to receive any tax treaty benefits.
Obtaining a Tax Identification Number
An Individual Tax Identification Number (ITIN) can be issued to an individual who is not eligible to receive a Social Security Number. To be eligible for a tax treaty a person MUST have an ITIN or Social Security Number (SSN). Some foreign visitors may be eligible for a Social Security Number. If a foreign visitor is receiving wages as an employee, they will need to obtain an SSN. The local Social Security Administration Office is located at 1370 Lockland Ave, Winston-Salem, NC 27103; 336-722-1132. A foreign visitor will need their passport and at least one other piece of identification when they visit the Social Security Office. UNCSA personnel cannot represent a Foreign National in obtaining a Social Security Number.