Processing Taxation or Exemption of Fellowship Payments to Nonresident Aliens

Purpose

This document provides step-by-step instructions on how operating locations process taxation of fellowship payments to nonresident aliens.

Background

A separate taxation system exists for nonresident aliens within the Internal Revenue Code (IRC) section 1441. Nonresident alien payments require tax withholdings unless an exemption from income taxation applies. When processing fellowship payments to nonresident aliens, exemption and residency determinations must be made in order to process the taxation of the payment correctly in the RF business system.

For more information on taxation of fellowships payments to nonresident aliens, refer to the document Taxation Guidance on Fellowship Payments to Nonresident Aliens and the process diagram Nonresident Alien Fellows Income Taxation Process Diagram.

Tax Withholding Rules

Fellowship payments to nonresident aliens are taxable at a withholding rate of 14% unless a foreign source or income tax treaty exemption applies. Refer to the section "Tax Withholding Rules for Nonresident Alien Fellowships" in the document Taxation Guidance on Fellowship Payments to Nonresident Aliens for detailed information on IRS rules and exemption requirements.

Multiple Fellowship Assignments

It is extremely important to determine the tax status of each fellowship payment separately when one individual holds more than one fellowship. In some cases one fellowship may be exempt, while the other is taxable. The tax withholding and reporting information that must be entered in the RF business system and the documentation requirements are different for the different taxation statuses.

Information Required from Fellowship Recipients

Before processing a payment to a nonresident alien fellowship recipient, ensure that the following paperwork is on file to document that the fellow can be set up in the RF business system, that he or she is a nonresident alien, and that an exemption (if applicable) applies:

Memo or Form

Purpose and Requirements

RF Business System Input

Request for Alien Information for Employees or Fellows (pdf) (excel)

To gather information about the non U.S. citizen's residency status for entry into the RF's business application and to test the individual’s residency status.

Once residency for tax purposes is determined, it is entered on the People form in the Nationality field or, if the fellow is a resident alien, the resident alien status must be entered on the Non Citizen Residency Special Information Type (SIT) form.

Nonresident Alien Academic Fellowship Tax Status Certificate

RF document used as a worksheet for tax status on the individual and proof of foreign-source exemption. The form must be signed and dated by the nonresident alien. If a foreign source funding exemption applies, an RF official or designee must also sign and date the form.


Important!

  • A separate RF tax status certificate must be complete for each nonresident alien fellowship (for example, if a person holds more than one fellowship).
  • If the fellow's residency status changes or the individual claims exemption under a tax treaty, a new form must be submitted each calendar year for each fellowship the person holds.

     

If a payment is exempt because of foreign-source funding or income tax treaty exemption, then code for payment using the Stip Fel NQual element.

If a payment is taxable, the FIT NRA Fel NQual element must also be assigned to process tax withholdings.

Refer to the section "Processing Taxation or Exemption of Fellowship Payments to Nonresident Aliens in the RF Business System" below for details.

 

Memo - Tax Information for Fellowship Payment

To inform the individual of the current tax residency status based on information provided. Provides information on available tax exemption claims and requirements. Explains individual’s responsibility to report any changes in residency status. Provides advance notice of 1042-S that will be sent.

Not applicable.

IRS Form W-8BEN - Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding

For income tax treaty exemption. If the individual’s country of residence has an income tax treaty with the U.S. and the fellowship income is covered in the treaty, the individual may claim income tax treaty exemption using the form.


Note: The fellow must have or obtain a U.S. Taxpayer Identification Number (TIN) to be eligible for the income tax treaty exemption.


For more information, refer to Completing the Certificate of Income Tax Treaty Exemption Form (IRS Form W-8BEN).

If a payment is exempt because of foreign-source funding or income tax treaty exemption, then code for payment using the Stip Fel NQual element.

If a payment is taxable, the FIT NRA Fel NQual element must also be assigned to process tax withholdings.

 

Refer to the section "Processing Taxation or Exemption of Fellowship Payments to Nonresident Aliens in the RF Business System" below for details.

 

Processing Taxation or Exemption of Fellowship Payments in the RF Business System

The following table describes the procedure for processing taxation or exemption of fellowship payments to nonresident aliens in the RF business system. For detailed step-by-step instructions, review the work instruction Enter a Fellow Record.

Step

Action

1

Review the fellow's residency for tax status changes to ensure he or she is still a nonresident alien for tax purposes. See Classification of Aliens as Resident or Nonresident for Tax Purposes. For example, a nonresident alien might become a permanent resident or resident alien.

On the People form in the payroll system, ensure that the Nationality field is correctly coded for the residency status of the individual:

  • For nonresident aliens, select Non Citizen in U.S. on VISA.
  • For U.S. citizens, select US Citizen.
  • For non U.S. citizens who have passed the Green Card Test, select Permanent Resident.
  • For resident aliens (those who have passed the Substantial Presence Test), the residency status must be indicated on the Non-Citizen Residency Info special information type form (on the People form, click the Special Info button and select the Non-Citizen Residency Special Information Type (SIT). Select "Y" in the field Res Alien for tax - meets SPT).

     

    If there is no change, continue to Step 2

    If there is a change, change the person's residency status in the system. The required steps are described in the "Processing Residency Changes" later in this document. After the residency status is changed in the system, refer to the procedure Processing Taxation or Exemption of Fellowship Payments to U.S. Citizens, Permanent Residents, or Resident Aliens for information on processing the payment.

2

Enter or ensure the earnings element Stip Fel NQual has been assigned.

3

 

Foreign-source OR Income Tax Treaty Exemptions

Taxable

Review to ensure that the individual does not have the FIT NRA Fel NQual element assigned.

Assign the FIT NRA Fel NQual element to withhold taxes.

Important! When the FIT NRA Fel NQual element is assigned to the fellow record, the payroll system automatically calculates and withholds 14% of the Stip Fel NQual element payment(s).

4

Enter/Update Noncitizen Residency Data:

Go to the People form, click the Special Info button, and then select the Non Citizen Residency SIT. Review the information, and enter or update data as necessary.

Important! Ensure any older forms are end dated.

5

 

Enter/Update Noncitizen Reporting Data:

Go to People form, click the Special Info button, and then select the Non Citizen Reporting SIT. On the Non-Citizen Reporting Info form, enter data for the current calendar year and fellowship payment type. The key items to enter are noted below, but all fields need to be completed.

Note: Individuals may have multiple fellowship assignments or fellow and employee assignments. These situations require separate Non Citizen Reporting Special Info Type lines. Refer to "Non Citizen Reporting Special Info Type Lines" below for more information.

Foreign-source Exemption

Income Tax Treaty Exemption

Taxable

Foreign source exemption must include the following entries:

  • Income Code = 15
  • Treaty Benefits Allowed = N
  • Foreign Source = Y
  • Tax Rate = 00
  • Exemption Code = 3

Income tax treaty exemption must include the following entries:

  • Income Code = 15
  • Treaty Benefits Allowed = Y
  • Treaty begin and end date applicable
  • Tax Rate = 00
  • Exemption Code = 4

Tax withholding must include the following entries:

  • Income Code = 15
  • Treaty Benefits Allowed = N
  • Tax Rate = 14
  • Exemption Code = 0

Residency Changes

During a calendar year a non U.S. citizen's residency for "tax purposes" may change. The majority of situations will be from a nonresident alien to a resident alien (meeting the Substantial Presence Test - SPT) or even possibly to a permanent resident. Tax withholding and reporting requirements are very different for nonresident aliens and resident aliens and "split reporting" is required. A 1042-S is required for the income and taxes for the period during which the fellow was a nonresident alien and a Fellowship Payment Reporting Letter is required for the income for the period during which he or she was a resident alien or permanent resident.

It is important to promptly and properly code residency changes in the RF business system. The process is described in the table that follows:

Step

Action

1

Ensure the FIT NRA Fel NQual element is not assigned or is end-dated in the prior pay period.

2

Change the residency status on the People form:

  • If the non U.S. citizen is a permanent resident: In the Nationality field, select Permanent Resident.
  • If the non U.S. citizen is a resident alien (meets the substantial presence test): Click the Special Info button, select Non Citizen Residency SIT, and on the Non Citizen Residency Info form select "Y" for Res Alien for tax - meets SPT.


     

3

Review the original non citizen reporting data to ensure that a Non Citizen Reporting SIT line existed for the original nonresident alien fellow income. On the People form, click the Special Info button, select the Non Citizen Reporting SIT, and review the SIT lines that appear in the Details area of the form.


Note: Individuals may have multiple fellowship assignments or fellow and employee assignments. These situations require separate Non Citizen Reporting Special Info Type lines for a calendar year. Refer to "Non Citizen Reporting Special Info Type Lines" below for more information.

 

4

Enter New Reporting Data:

Complete an additional Non Citizen Reporting Special Info Type line to indicate the current exempt fellowship portion due to the residency change to permanent resident or resident alien.


To specifically designate the exemption because of resident alien status, enter:

  • Income Code = 15
  • Treaty Benefit Allowed = N
  • Tax Rate = 00
  • Exemption Code = 0

     

    Important! Completion of this is key for central office review and year-end reporting requirements.

Non Citizen Reporting Special Info Type Lines

The Non Citizen Reporting Special Info Type form itemizes an individual's reportable information according to fellowship and employee status. You need to enter a separate line for each type of income received during the calendar year under all residency statuses for the current calendar year. It is possible for an individual to have multiple reporting lines for each income. This captures taxable and exempt portions of income for reporting purposes.

For Example: An individual may be an employee under income tax treaty and a fellow with part of the fellowship income exempt and part taxable. This would require three lines of Non Citizen Reporting Special Info. One for the employee income, one for the taxable portion fellowship, and one for the exempt portion of the fellowship. This is very important to ensure each portion of income is reported properly on the IRS 1042-S form for year end reporting.

Reviewing Tax Status

The nonresident alien's tax status must be reviewed to ensure that the residency and/or exemption status is unchanged. For example, if circumstances change and the individual is no longer eligible for exemption, taxes must be withheld on future payments. For more information, review the section "Key Data to Review" in the procedure Taxation Guidance on Fellowship Payments to Nonresident Aliens. Also refer to 1042-S Noncitizen Special Info Type (SIT) Monitoring.

Change History

 

 

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