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

Background

Payments to or on behalf of nonresident alien (NRA) independent contractors, participant stipend recipients, royalty recipients and rent recipients are subject to 30 percent tax withholding rate. Certain tax exemptions may apply.

For more general information, refer to the following documents in the Accounts Payable (AP) business area:

Independent Contractors - Reimbursement for Travel Expenses

Payments to reimburse an independent contractor for travel expenses do not have to be reported if the contractor submits adequate documentation of the expenses to the Research Foundation (RF).

Adequate documentation consists of:

What Operating Locations Must Do

Operating locations must take the following steps before a miscellaneous income payment to a nonresident alien is made, to ensure that IRS documentation and taxation requirements are met:

Step

Action

1

Classify foreign person as independent contractor, RF participant stipend, royalty recipient or rent recipient based on the type of payment being made.

2

Check the foreign person’s visa or North American Free Trade Agreement (NAFTA) status to ensure eligibility to receive payment and obtain appropriate information to support that status.

3

Classify foreign person as resident or nonresident alien for tax purposes. For more information, refer to "Classification of Aliens as Residents or Nonresidents for Tax Purposes."

4

Determine the source of income to identify whether or not reporting is required. For more information, refer to "How to Determine Foreign Source Funding."

5

Obtain an Individual Taxpayer Identification Number (ITIN) or a Social Security Number (SSN) from the supplier.

Note: Payment cannot be processed until a ITIN or SSN is obtained.

6

Ensure proper forms are completed and on file for persons claiming income tax treaty exemptions. Ensure proper tax withholding groups are setup in the business system (if applicable).

7

Ensure payments are properly input and monitored in the Accounts Payable (AP) module.

Payment Classification

Operating locations must determine that a foreign person is either an independent contractor, a royalty recipient, a rent recipient or a participant stipend recipient based on the type of payment being made.

For more information on classifying workers, refer to the following documents:

Classification of Alien for Tax Purposes

Operating locations must determine and document whether a foreign person is a permanent resident, resident alien or nonresident alien for U.S. income tax purposes. Refer to "Classification of Aliens as Residents or Nonresidents for Tax Purposes" for more information.

If the Non-US Citizen is a permanent resident or resident alien under the Substantial Presence Test (SPT), you must instead set the supplier up as a 1099 supplier.

Supplier File Classification

In the AP module of the RF business applications, select "Non Citizen-Individual" as the supplier "type" value. At the time of invoice payment, select this payment classification and tax status value in the invoice distribution descriptive flex field (DFF).

Visa or NAFTA Status

Under U.S. immigration regulations, there are restrictions on miscellaneous income payments to nonresident aliens who hold certain types of visas. In addition, if the nonresident alien is from Mexico or Canada, he or she may be classified under the North American Free Trade Agreement (NAFTA).

Therefore, to determine whether miscellaneous income can be paid, the person’s visa or NAFTA status should be checked against the visa status table and the NAFTA status descriptions provided in "Visa and NAFTA Status" in the Miscellaneous Income Payments Procedure Group of the AP business area.

Documentation Requirements

Some type of documentation must be retained in operating location records to support the person’s nonresident classification and visa or NAFTA status. If the "Request for Alien Information for Employees And Fellows" form or the "Request for Alien Information for Miscellaneous Income Payments" form was used during the classification process, this form can be used for documentation purposes.

Source of Income

The source of income must be determined in order to ascertain if a payment is to be taxed and reported. Nonresident aliens are subject to income tax only on income received from sources within the U.S. Therefore, if the income is not from U.S. sources, the payment is exempt from withholding, and also not reportable on Form1042-S.

For more information on determining the source of income, refer to "How to Determine Foreign Source Funding" for independent contractors, RF participant stipends, royalty recipients, and rent recipients.

Reportable Income

There is a common misconception that only the taxable portions of a payment must be reported to the IRS. This is not the case. Both taxable and non-taxable U.S. source income payments are required to be reported.

Taxpayer Identification Numbers (TINs)

A nonresident alien must have a Taxpayer Identification Number (TIN) before a miscellaneous income payment is made to them from AP. A TIN can be either a Social Security Number (SSN) or an IRS Individual Taxpayer Identification Number (ITIN).

Note: Operating locations may be subject to IRS penalties for failing to include the taxpayer ID number on the year-end tax statement 1042-S.

Documentation of TINs

Operating locations should obtain an IRS Form W-8BEN, "Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding," from nonresident aliens. For more information, refer to "Taxpayer Identification Number (TIN) Overview."

For more information about Form W-8BEN, refer to Instructions for Form W-8BEN. These instructions, as well as the form, are available from the Internal Revenue Service (IRS) Forms and Instructions Web page at http://www.irs.gov/forms-pubs.

Income Tax Treaty Exemptions

Operating locations must ensure that all appropriate forms are completed by the nonresident alien before a payment is made. The forms that must be completed depend on the tax withholding status of the alien. The tax withholding status may also depend upon whether the alien’s country of residence has a tax treaty with the U.S.

The tax status can be one of the following:

When No Tax Treaty Applies

Section 1441(a) of the Internal Revenue Code (IRC) sets forth the general rule that the payer of taxable income to a nonresident alien, independent contractor, RF participant stipend, royalty recipient or rent recipient is required to withhold tax in an amount equal to 30 percent of the payment.

When a Tax Treaty Applies

When an income tax treaty exists between the U.S. and the person's country of residence, the nonresident alien independent contractor, royalty recipient or rent recipient can go through the process of claiming U.S. income tax exemption.

Note: Participant stipend payments are not eligible for income tax treaty exemption.

Monitoring Payments

Miscellaneous income payments are made to nonresident alien independent contractors, participant stipend recipients, royalty recipients, and rent recipients who are set up as Non Citizen-Individual Supplier Types in the Supplier File. Set up and payments are processed through the Accounts Payable module. In the AP module of the RF business applications, each invoice must be assigned the appropriate 1042-S values in the invoice distribution descriptive flex field (DFF). Certain NRA suppliers must also be assigned an appropriate Withholding Group when withholdings are required. In general, NRA payments are taxable at the rate of 30% unless there is proof of partial or whole exemption on file. At the end of each calendar year, central office submits 1042-S information to the IRS for each nonresident alien set up with reportable invoice payments.

Operating locations should have a procedure in place for monitoring and reviewing input into Oracle so that accurate data is maintained throughout the year. Payments for miscellaneous income coded for 1042-S reporting must be monitored to ensure that the data is correct and that any necessary adjustments are made in a timely manner. The Research Foundation has developed a customized monitoring report, "RF NRA Payments Review" report to provide details for review of payments to nonresident aliens. To provide correct year-end reporting information, corrections and updates may be required to the supplier set up and/or invoice distributions before year's end.

Information contained in reports and year-end tax statements is collected from the data stored in the RF business applications. If data is missing or inaccurate, tax statements will be missing or inaccurate. For more information about monitoring records, refer to "1099-MISC and 1042-S Accounts Payable Monitoring" in the AP business area.

Tax-on-Tax Issue when Taxes Are Under Withheld

It is the operating locations responsibility to withhold the proper amount of income taxes based on an individual’s tax status at the time of each payment. If taxes are under withheld, operating locations should attempt to recoup the under withholdings directly from the individual.

Under the law, if the operating location pays taxes due on behalf of the individual instead of withholding them, the RF is required to report the amount of tax paid as additional income to the individual. When you add the additional income to the original record it creates a "tax-on-tax" issue and a "tax-on-tax calculation" must be performed. This results in the proper withholding amount for reporting purposes (final gross x 30% = proper withholding amount). Since the operation location is office of record, any under withholding and tax on tax calculation will be charged to the responsible operating location at year end.

Example

An independent contractor has income of $1,000.00 and the payment is taxable at the 30% rate. During the year the AP record was never set up for tax withholdings and taxes were not withheld. At year end it becomes apparent when the preparation begins for the 1042-S that there were no taxes withheld. The RF will assume the tax liability to ensure that the year-end tax statement is correct.

At first glance it appears that the amount that must be assumed is $ 300.00 (1,000.00 x 30%). However, since the $300.00 was not withheld and instead will be paid by the RF on the individual's behalf, this amount must be added to the individual's reportable income for the year and a "tax-on-tax calculation" must be performed.

Formula: Under withheld amount / (1 - tax rate of .30)

Calculation: $300 / .70 = $428.57

Result: $300 was the under withheld amount and $128.57 is the tax-on-tax "gross up" amount. The total of the two is $428.57, which becomes additional income that must be added to the original income amount. Original income amount of $1,000 + $428.57 = adjusted gross income of $1,428.57.

1042-S Reporting: New income amount reported on 1042-S from is $1,428.57 and the tax amount reported is $428.57. ($1,428.57 x .30 = $428.57)

Change History

 

 

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