Miscellaneous Income Payments to Nonresident Aliens: Overview

Purpose

This document provides an overview of miscellaneous income payments to nonresident aliens.

Miscellaneous income payments include payments for royalties, rent, and nonemployee compensation to independent contractors, business and travel expenses, and nonresident alien fellowship payments made from the accounts payable system.

Research Foundation (RF) Compliance

Operating locations must be aware that a separate tax system is carved out under Internal Revenue Code (IRC) section 1441 with an entirely different set of tax rules and regulations for individuals and other entities deemed to be "nonresident aliens." Institutions making payments to nonresident aliens are subject to different tax withholding, income reporting, and liability requirements. Various factors determine if payments are reportable and taxed. These factors are further described in "Nonresident Aliens: Payments to Independent Contractors, Participant Stipend Recipients, Royalty Recipients and Rent Recipients."

Non-Compliance Penalties

Lack of compliance with IRS and INS regulations could result in extensive fines and penalties for operating locations and potential debarment from federal awards.

IRS Reporting

Reportable Income

There are no minimum threshold amounts. In general, most income is reported on the 1042-S. Foreign source income and certain Independent Contractor payments are not reported on a 1042-S.

Reporting to the IRS

Miscellaneous income payments to nonresident aliens along with any taxes withheld are reported annually by central office to the IRS.

Liability of the Withholding Agent

If withholding is required on a payment made to a nonresident alien, it is the "withholding agent" that is required to perform the withholding (IRC 1441). As a general rule, the withholding agent is defined as the entity who actually makes the payment, whether directly to the person or to a third party on the person’s behalf. The IRC makes it clear that a withholding agent is liable for the income tax that must be withheld from payments made to or on behalf of a nonresident alien, even though the ultimate tax is imposed on the foreign national, not the withholding agent. The withholding tax has to be paid even though it may not be possible to actually withhold the tax from the payment.

If the withholding agent fails to withhold the requisite tax and the nonresident alien payee fails to pay the tax due, the withholding agent will be liable for the tax that was required to be withheld plus any additional interest and penalties imposed by the IRS for failure to properly withhold.

It is critical to determine the foreign person’s appropriate residency status since this determination and the income source (U.S. or foreign) are the basis for the person's taxable income, filing status, and applicable tax rates. Refer to "Classification of Aliens as Residents or Nonresidents for Tax Purposes."

Types of Nonresident Aliens

A nonresident alien receiving a payment must be classified based on the type of payment being made and primary purpose for the person’s visit to the U.S. The general categories of nonresident aliens administered through the Research Foundation include:

Planning Ahead

Operating locations should try to obtain in advance, when possible, information about a foreign person to which payment will be made including residency status and the foreign person’s primary purpose for coming to the U.S., as well as the required IRS forms. This is especially important for persons coming to the U.S. for a short period of time who may have to wait for payment until certain IRS forms are filed.

Refer to the "Nonresident Alien Procedures" block of this document for procedures related to payments to nonresident aliens.

Designing a Tax Compliance Program

It is important for operating locations to develop location-specific guidelines to ensure compliance with the rules and regulations regarding payments to nonresident aliens since this area is a large revenue issue to IRS, and it has been one of the main audit areas for IRS. Lack of compliance with IRS and INS regulations could result in extensive fines and penalties for operating locations and potential debarment from federal awards. The following are recommended steps for designing a tax compliance program:

  1. Understand/accept basic rules and regulations.
  2. Establish centralized nonresident alien tax responsibility.
  3. Educate the campus nonresident alien tax specialist.
  4. Develop centralized information collection process.
  5. Educate institution administrators.
  6. Consistently analyze collected information.
  7. Withhold appropriate tax.
  8. Systematically maintain collected/analyzed information.
  9. Report information to central office.

Nonresident Alien Procedures

The following table lists procedures related to payments to nonresident aliens:

For information on...

refer to...

independent contracts

"Nonresident Aliens: Payments to Independent Contractors, Participant Stipend Recipients, Royalty Recipients and Rent Recipients"

royalty/rent recipients

participant stipend recipients

 

 

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