Employees who are nonresident aliens for tax purposes are taxed according to a graduated withholding on all wages received from U.S. sources in the same way a U.S. citizen or resident is. Therefore, NRAs must have a basic understanding of the U.S. tax system so that they can minimize over-taxation, are properly taxed on their pay, and do not unexpectedly owe money to the IRS at tax time. (Federal Income Tax Withholding)
You are considered a nonresident alien unless you meet one of two tests: the green card test or the substantial presence test for the calendar year (January 1-December 31).
Wages and Salary for Employees
International employees are entitled to compensation for services rendered. Compensation is generally provided through wages or salary. In addition, international employees are entitled to benefits offered to domestic employees. (www.oregon.gov/boli)
Employees, including international employees, are required to complete the I-9 form with the Human Resources (HR) department in a timely fashion. They are also required to have a Social Security Number (SSN). HR will help direct the employee regarding this requirement. (www.uscis.gov/i-9)
International Tax Overview
All persons receiving payments from a U.S. source, whether they are U.S. residents or internationals, are subject to U.S. taxation. There are specific regulations and processes required for determining the tax withholding for international persons and various factors come into play in determining the percentage of the tax withholding. In certain situations, tax treaties may exist that exempt a person from U.S. taxation. (NRA Tax Withholding)
The Central Payroll Office is responsible for ensuring Oregon State University is compliant with U.S. tax regulations as they pertain to international employees. (NRA Federal Income Tax Reporting and Withholding)
There are three definitions that are important to the international tax process: (NRA Taxation)
- U.S. Resident: this is defined by US immigration law and generally means any person who is a US citizen, US national, Asylee, refugee or permanent resident
- Nonresident Alien for Tax Purposes: this is defined by U.S. tax regulations and simply means any international person who has not been physically present in the USA for the amount of time required to warrant treatment as a Resident Alien for Tax Purposes. The substantial presence test and/or the visa status of an international person is used to determine when this categorization ends.
- Resident Alien for Tax Purposes: this is defined by U.S. tax regulations and simply means any international person who has been physically present in the USA for the amount of time required to warrant treatment as a Resident Alien for Tax Purposes. Resident aliens for tax purposes are taxed in the same manner as U.S. residents. They can use the same filing statuses and claim tax allowances just as a U.S. resident could. In addition, worldwide income must be reported
Oregon State University requires Nonresident Aliens to complete the Nonresident alien tax status form and submit it with copies of the recent I20 or DS2019 (if applicable for Visa Status) and the I94 form to the Central Payroll Office to capture the information required to determine the actual tax status of an international person. This record is required even if the employee meets the definition of a "Resident Aliens for Tax Purposes." This record must be renewed annually.
U.S. Treas. Reg. § Section 1441(b)
Substantial Presence Test (SPT)
All international persons are considered nonresident aliens for tax purposes for a fixed period of time. The fixed period of time is determined by the visa status and classification. International persons become resident aliens for tax purposes after this period or when the Substantial Presence Test (SPT) is met.
For purposes of the Substantial Presence Test, students that are temporarily present in the U.S. under an F, J, M, or Q visa are exempt from counting days toward the substantial presence test for five (lifetime) calendar years. They are NOT exempt from taxation during this time. In the event that you arrive in the U.S. on December 31st of a given year, you are considered present in that U.S. for the ENTIRE year for purposes of the substantial presence test. (Exempt Student)
A teacher or trainee temporarily present in the U.S. under a J or Q visa is exempt from counting days toward the substantial presence test for two years. After this two year period, if the J or Q visa holder is exempt for any two of the prior six years, they are NOT exempt in the current year. This exemption refers to counting days toward the substantial presence test, not tax exemption. (Exempt Teacher or Trainee)
Days of Presence in the United States - You are treated as present in the United States on any day you are physically present in the country at any time during the day. (Days of Presence)
Please see the IRS webpage Substantial Presence Test and also review Chapter One of the IRS Publication 519 for the formula used to calculate your status as resident or non-resident for tax purposes, https://www.irs.gov/forms-pubs/about-publication-519.
Special W-4 Requirements for NRAs
During the time that an international person is considered to be a nonresident alien for tax purposes, the W-4 will classify them as SINGLE and generally with either NO allowance or ONE allowance. Even if the international person is married or head of household, tax regulations requires that they be taxed at the SINGLE rate with only 1 allowance. (IRS Notice 1392)
Exceptions to this regulation are only permitted for enrolled students from India and those from Canada, Mexico and South Korea. These employees must still file as Single but may opt for more withholding allowances. Other exemptions are the utilization of a tax treaty as discussed in the section titled Tax Treaties, Saving Clause and Exception to the Saving Clause. (Treas. Reg. § 1.1441-4(b)(6)(ii))
FICA Tax & Exemptions
All wage income received in the USA is subject to three main types of tax: (1) federal income tax; (2) Social Security tax; and (3) Medicare tax. Social Security taxes and Medicare taxes are collectively called "FICA taxes." Persons in F-1 and J-1 nonimmigrant status are exempt from FICA payments for a certain period of time, as discussed below.
General Student FICA Exemption
Wages paid to students enrolled in a minimum of six (6) credit hours are exempt from paying FICA taxes. Enrollment status is reviewed each term to determine proper exemption status. (Student FICA Exemption)
International Student & Scholar FICA Exemption
F-1, J-1, M-1 and Q-1/Q-2 International students, scholars, professors, teachers, trainees, researchers, physicians, au pairs, and summer camp workers, are considered NRA for tax purposes and exempt from FICA taxes for the first five calendar years of their presences in the USA. After the five calendar year period, they become Resident Aliens for tax purposes and subject to FICA withholding unless they depart the USA in less than 183 days of non-exempt status. (Exempt Student)
J-1 Scholars, Teachers, Researchers, Trainees and Physicians and other non-students in J-1 status are considered NRA for tax purposes and exempt from FICA taxes for the first two calendar years of their presence in the USA. After the two calendar year period, they become Resident Aliens for tax purposes and subject to FICA withholding unless they depart the USA in less than 183 days. (Exempt Teacher or Trainee)
Limitations on FICA Exemption for International Persons
- The FICA exemption does not apply to spouses and children in F-2, J-2, M-2, or Q-3 nonimmigrant status.
- The exemption does not apply to employment not allowed not closely connected to the purpose for which the visa was issued.
- The exemption does not apply to F-1, J-1, M-1, or Q-1/Q-2 nonimmigrants who change to an immigration status which is not exempt or to a special protected status.
- The exemption does not apply to F-1, J-1, M-1, or Q-1/Q-2 nonimmigrants who become resident aliens.
- The FICA exemption only applies to international persons in F-1, J-1, M-1, Q-1, or Q-2 visas and who are still classified as nonresident aliens for tax purposes under U.S. tax regulations.
- International students in F-1, J-1, M-1, Q-1 or Q-2 nonimmigrant status are entitled to the FICA exemption for the first 5 calendar years of physical presence in the USA. After this period of time has passed, international students are classified as Resident Aliens for Tax Purposes and are subject to FICA tax withholding. . However, if they remain students (primarily) they may be able to claim the Student FICA exemption (see above).
- The five year exemption permitted to F-1, J-1, M-1, Q-1 or Q-2 students also applies to any period in which the international student is in "practical training" as long as the foreign student is still classified as a nonresident alien for tax purposes.
International persons in H-1B, TN, O-1 or E-3 status are fully subject to FICA tax withholding. No FICA exemption is available to persons in these visa categories.
IRC Section 3121(b)(19) and Section 3121(b)(10)
Measuring a Calendar Year
When measuring an alien's date of entry for the purposes of determining the five calendar years or the two calendar years mentioned above, the actual date of entry is not important. It is the calendar year of entry which is counted toward the two or five calendar years respectively. For example, a foreign student who entered the United States on Dec. 31, 2015 counts 2015 as the first of his five years as an "exempt individual." (Days of Presence)
(Treas. Reg. § 301.7701(b)-4(c)(3))
Tax Treaties, Saving Clause & Exception to Saving Clause
Overview of Tax Treaties
The United States has income tax treaties with a number of foreign countries. Under these treaties, residents of foreign countries are exempt from U.S. income tax or taxed at a reduced rate on certain types of income received from a U.S. source.
Tax treaties vary; some allow for tax exemption for a specific period of times, some for a limited amount of earnings. It is important to note that the tax treaty benefit clock begins as of the date you enter the USA not upon employment. Tax treaties exempt employees from Federal tax and sometimes State tax, but do not effect FICA taxes (Medicare and Social Security). (Tax Treaties)
Students, Apprentices, Trainees, Teachers, Professors, and Researchers Who Became Resident Aliens for Tax Purposes
Generally, you must be a nonresident alien student, apprentice, trainee, teacher, professor, or researcher in order to claim a tax treaty exemption. Once you become a resident alien, you generally can no longer claim a tax treaty exemption for this income. However, if you entered the United States as a nonresident alien for tax purposes, but are now a resident alien for tax purposes, the treaty exemption may continue to apply if the tax treaty has an exception to its savings clause (see below) that allows you to continue to claim treaty benefits.
Saving Clause & Exception to Saving Clause
Most tax treaties have a saving clause. A saving clause preserves or “saves” the right of each country to tax its own residents as if no tax treaty existed. Therefore, once an international person become a U.S. resident or resident alien for tax purposes the tax treaty benefits can no longer be claimed. However, many tax treaties have an exception to the saving clause, which may allow an international person to continue to claim certain treaty benefits even after becoming a U.S. resident or resident alien for tax purposes.
Found within the text of the treaty Ex: U.S.-Greece tax treaty Article XIV
Form 8233 and Form W-9
IRS Tax Treaty Claim Form 8233
If an employee being paid wages from Oregon State University is a nonresident alien for U.S. tax purposes and is eligible for a tax treaty benefit, form 8233 and the proper treaty attachment letter must be submitted to claim the tax exemption benefit. This must be renewed each calendar year to continue claiming the benefit.
Treas. Reg. 1.1441-6(b)
IRS Tax Form W-9
If an employee being paid wages from Oregon State University is a resident alien for U.S. tax purposes with an EIN, ITIN or SSN and can claim a tax treaty benefit under a saving clause exception, a form W-9 is required to claim tax exemption or withholding. A form W-9 only has to be provided once.
Treas. Reg. 1.1441-6(b)(5)
1042-S and W-2 Tax Forms
International persons receiving payments from Oregon State University will usually receive either a W-2 or 1042-S and sometimes both. International business persons or entities may receive other tax forms; those forms are not discussed on this page.
Form 1042-S, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, reports taxable income for international persons who have received the following types of income:
- Wage payments made to employees who have claimed tax treaty benefits.
- Fellowship/Scholarship income received directly by the student beneficiary. This includes all income not applied directly to the tuition and fees.
- Non-employee Prize or Award payments
Not every international employee, student or scholar will receive Form 1042-S. It will only be provided to international persons who meet one of the criteria listed above. For payroll purposes this is primarily if you claimed a tax treaty.
Form 1042-S will be mailed to employees, students and scholars around March 15, each year. Please verify your postal mailing addresses are up to date in Online services or myOSU. Please wait until you receive the 1042-S to file your tax return even if you have a W-2 (remember, some employees may get both). (Form 1042-S)
Form W-2, Wage and Tax Statement, reports taxable income paid to employees and taxes withheld. Every employer who pays income for services performed by an employee must file a Form W-2 for each employee with the IRS and Social Security Administration. Employees use this form to calculate and file their tax return.
The form is issued no later than January 31st each year for the prior tax year and you will receive three copies, one for your records, one to attach to the federal tax return, and one to attach to the state tax return.
Be sure your postal mailing address is correct in Online services or myOSU before the end of the year so that your W-2 is sent to the correct address. (Form W-2)
Treas. Reg. § 1.1461-1
Tax Determination System (TDS)
Tax Determination System (TDS) is a tool that helps to ensure that students and scholars are taxed correctly on income earned in the US. The system helps OSU properly document and withhold on payments to foreign students, scholars, teachers, researchers, trainees and all other international visitors. OSU must add you to TDS and invite you to login. Then you will simply fill in the online questionnaire and we do the rest. Based on the information provided, TDS will determine whether you are eligible for any tax treaties or other deductions.
Key Terms and Definitions
|1040NR-EZ and 1040NR||IRS forms used for federal tax filing, one using the standard deduction one for itemized deductions. Search :1040N”|
|1042-S||IRS form showing international person's U.S. source income and tax withholding. Issued no later than March 15th of every year (for the previous calendar year). All international persons with nonwage payments and taxes or wages that were exempt from tax withholding due to a tax treaty will receive this form.|
|EAD||Employment Authorization Document or “work permit” is issued by the USCIS. It allows the holder to legally work in the United States|
|Exempt Student||A student is any individual who is temporarily in the United States on an "F, " "J, " "M, " or "Q " visa for the primary purpose of studying at an academic institution or vocational school.|
|Exempt Individuals||A teacher or trainee is an individual, other than a student, who is temporarily in the United States under a "J " or "Q " Any nonimmigrant temporarily present in the U.S. in "J" or "Q" status who is not a student is included within the definition of "Teacher or Trainee." For example, alien physicians, au pairs, short-term scholars, and summer camp workers temporarily present in the U.S. in "J" nonimmigrant status are included within the IRS definition of "Teacher or Trainee." In addition, cultural exchange visitors in "Q" nonimmigrant status are also included within the IRS definition of "Teacher or Trainee".|
|FICA||FICA (Federal Insurance Contributions Act) tax is actually two separate taxes: Social Security Tax and Medicare Tax. Together, the two taxes are referred to as FICA tax.|
|Form 8233||IRS form used, by international persons, to request application of tax treaty exemption or tax treaty benefits, as applicable. Search “8233”|
|Form 8843||IRS form filed annually, by all international persons in the U.S., whether receiving U.S. income or not.|
|Form OR-40-N||Oregon Income tax return for Nonresident Aliens. Search “40” and scroll to Personal Income.|
|I-9 Form||USCIS form completed by all domestic and international employees requiring them to show proof of employment eligibility in the USA.|
|I-94||The CBP arrival/departure record. A copy can be accessed online, https://i94.cbp.dhs.gov/I94/consent.html|
|Immigration Law and IRS Regulations||
If the person is not a U.S. Citizen or permanent resident, two sets of laws must be taken into consideration.
|IRS||Internal Revenue Service (IRS) is the agency in the U.S. Department of the Treasury responsible for enforcing the internal revenue laws.|
|ITIN||Individual Taxpayer Identification Number; Issued by the IRS to individuals not eligible for a SSN who have tax filing requirements or who wish to file for a tax refund.|
|Nonresident Alien Tax Status Form (NRATS)||OSU form that all nonresident alien employees must complete to properly determine their tax withholding status.|
|Nonresident Alien For Tax Purposes||A person who is not a United States citizen, refugee, Asylee or permanent resident, and has not met the substantial presence test.|
|Permanent Resident||A permanent resident (PR) is a person who has been granted permission to remain in the United States indefinitely, so long as they continue to meet PR qualifications or do not elect to relinquish the status. These individuals are also known as 'green card' holders.|
|Publication 519||US tax Guide for Aliens. Search “519”|
|Publication 901||US Tax Treaty Reference. Search “901”|
|Resident Alien For Tax Purposes||A person who is not a United States citizen or permanent resident, but has met the substantial presence test.|
|State Tax||In addition to a Federal (US) tax return, you might need to file a state income tax return.|
|Substantial Presence Test||A mathematical test used to determine residency in the United States for tax purposes.|
|SS-5||Application for a Social Security Card|
|SSA||Social Security Administration; agency responsible for issuing SSNs|
|SSN||Social Security Number. This is a nine-digit number that remains your first and continuous link with Social Security. It helps accurately record wages and earnings. It is used to get a job, collect social security benefits, and to access some government services.|
|Tax Treaty||The United States has income tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income.|
|Tax Treaty Attachment Letter||Must be provide with the 8233 tax treaty claim form. Email request including your tax resident country and status as an enrolled student or a Teacher/Researcher, Faculty or Scholar.|
|U.S. Citizen||A U.S. Citizen is a person born in the United States or who meets specific criteria related to birth and parents. A U.S. Citizen may be a person who is 'naturalized' by meeting certain criteria.|
|USCIS||United States Citizenship and Immigration Services|
|Visa status||Visa classifications used by the Dept. of Homeland Security that define the reason for the person coming to the U.S., the nature of any services, for whom they can be performed and what remuneration can be received.|
|W-2||Employer Wage and Tax Statement issued to persons with wages no later than January 31st of each year for use in filing a tax return.|
|W-4||Employees Withholding Allowance Certificate; provided to employer to determine amount of tax to withhold from wages. (Special rules for nonresident aliens)|
|W-8BEN||Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding; most often used here for persons claiming tax treaty benefits for scholarship or fellowship grants.|
|W-9 Taxpayer ID request Form||Request for Taxpayer Identification Number and Certification; required of certain persons receiving wages who have tax treaty benefits. Search “W-9”|
Abbreviation for entry status of international individuals entering the
U.S. using the Visa Waiver Program. WB is Waiver Business. WT is Waiver Tourism.