Income Taxation Overview

Purpose

This document provides an overview of income taxation and associated requirements and responsibilities.

Social Security and Medicare taxation is not included in this document, because these taxes are subject to separate and distinct rules from income tax. For more information, refer to Social Security and Medicare Taxation.

Background

As a general rule all income paid to individuals is subject to taxation, unless a U.S. Internal Revenue Services (IRS) ruling (usually an associated form to file) allows partial or full exemption from income tax withholding. IRS rules for taxation and reporting are dictated by the combination of a person’s Payment Classification and Residency Determination for Tax Purposes at the time of payment. Payment classification and residency determination for tax purposes must be correct; otherwise it is impossible to apply proper withholding rules and conduct accurate year-end reporting.

Non-U.S. citizens who are permanent residents in the U.S. ("Green Card" holders) and resident aliens (those who meet the Substantial Presence Test criteria) are generally subject to taxation on their worldwide income, the same as U.S. citizens. Nonresident aliens are generally only subject to taxation on their income from sources within the U.S. (See Glossary for definitions of alien, resident alien, and nonresident alien.)

Operating locations must be aware that a separate income tax system is carved out under the Internal Revenue Code (IRC) section 1441 with an entirely different set of income tax rules and regulations for persons deemed to be “nonresident aliens for tax purposes.” Payments to nonresident aliens are subject to different tax withholding, income reporting and liability requirements. Various factors determine if payments are reportable and taxed, depending on the specific circumstances of each individual nonresident alien and their country of residence.

Each state has its own specific income tax rules covering what is taxable income and withholding rates that corporations must apply. The state income tax rules are complex in that they factor in a combination of the individual’s physical location of residence and the location where the individual works. New York State mimics federal IRS income tax rules to a large extent.

Residency status for tax purposes has no bearing on an individual’s immigration status. For additional information on residency determinations and monitoring guidelines, see Classification of Aliens as Resident or Nonresident for Tax Purposes and How to Monitor Residency Determination for Tax Purposes.

Overview of Taxes and Reporting Compliance Diagram

Importance of Monitoring Data in the System

The RF is responsible for withholding the correct federal and state income taxes where applicable. Amounts withheld and reporting information contained in reports and year-end tax statements are collected from the data and payment information stored in the RF's Payroll and Accounts Payable business applications.

Any errors in tax withholding or classifications may bring significant risk exposure during audits, and may result in penalties and fines to the RF that will be passed on to the responsible operating location. Operating locations should have a procedure in place for monitoring and reviewing the classification, payment and withholding data in the Oracle business applications so that accurate income tax withholding or exemption is maintained throughout the year.

Refer to Monitor Employee Income Taxation for information on monitoring employee income tax withholding or exemptions.

Income Tax Processing

Income taxes withheld each pay period are remitted by the RF central office to the appropriate federal and state government agencies. Operating locations are responsible for compliance in tax withholding and reporting.

The following table summarizes the income tax withholding categories and system mechanism (if applicable), based on Payment Classification and Residency for Tax Purposes determination.

Payment Classification

Residency for Tax Purpose Determination

System Module

Income Tax Withholding Mechanism

Year-End Tax Statement

Employee

U.S. citizen, Permanent Resident Alien

Payroll

Graduated tax rate tables from IRS and NYS. Provided by Vertex for update to RF's Oracle business application.

W-2

Fellowship Recipient

U.S. Citizen, Permanent Resident, Resident Alien

Payroll

Not applicable – No tax withholdings required.

Payment Reporting Memo, per IRS Notice 87-31

Independent Contractors

US Citizen, Permanent Resident, Resident Alien

Accounts Payable

Not applicable – No tax withholdings required.

1099-MISC Box 7 – Nonemployee Compensation

Participant Stipend Recipient

US Citizen, Permanent Resident, Resident Alien

Accounts Payable

Not applicable – No tax withholdings required.

1099-MISC Box 3 – Other Income

Rent Recipient

US Citizen, Permanent Resident, Resident Alien

Accounts Payable

Not applicable – No tax withholdings required.

1099-MISC Box 1 – Rent

Royalty Recipients

US Citizen, Permanent Resident, Resident Alien

Accounts Payable

Not applicable – No tax withholdings required.

1099-MISC Box 2 – Royalties

Employee

Nonresident Alien

Payroll

Graduated tax rate tables from IRS and NYS. Provided by Vertex for update to RF Oracle business application.

W-2 Amounts not Income Tax Treaty Exempt

1042-S Amounts claimed as Income Tax Treaty Exempt. Income codes 18 (teacher researcher) or 19 (student). Some Canadian employees Income code 17.

Fellowship Recipient

Nonresident Alien

Payroll

Stip Fel NQual element + FIT NRA NQual element to withhold 14% where required. Note: RF's Oracle Application Tax Information form is not used.

1042-S (exception – IRS defined Foreign Source Income not reported). Income code 15 (Fellowship)

Independent Contractors

Nonresident Alien

Accounts Payable

Supplier set up with a NRA Independent Contractor Supplier Type based on tax status. Set up appropriate Tax Withholding Group when taxes required (30%). Taxes processed on each invoice when Withholding Group set up on supplier.

1042-S (exception – IRS defined Foreign Source Income not reported) Only consultant services expenditure type payments. Income code 16 (Compensation for Independent Personal Services)

Participant Stipends Recipient

Nonresident Alien

Accounts Payable

Supplier set up with a NRA Participant Stipend Supplier Type. Set up appropriate Tax Withholding Group when taxes required (30%). Taxes processed on each invoice when Withholding Group set up on supplier.

1042-S (exception – IRS defined Foreign Source Income not reported) Income code 50 (Other income)

Rent Recipient

Nonresident Alien

Accounts Payable

Supplier set up with a NRA Rent Supplier Type. Set up appropriate Tax Withholding Group when taxes required (30%). Taxes processed on each invoice when Withholding Group set up on supplier.

1042-S (exception – IRS defined Foreign Source Income not reported) Income code 13

Royalty Recipients

Nonresident Alien

Accounts Payable

Supplier set up with a NRA Royalty Supplier Type. Set up appropriate Tax Withholding Group when taxes required (various rates under treaty exemptions, based on country). Taxes processed on each invoice when Withholding Group set up on supplier.

1042-S (exception – IRS defined Foreign Source Income not reported) Income code 10 (Industrial royalty) or 12 (Other royalties)

Refer to How to Determine Foreign Source Funding for further guidance.

Tax Withholding Errors

Operating locations are responsible for withholding the proper amount of income tax based on an individual’s tax status and IRS and New York State tax or exemption forms on hand at the time of each payment. The RF is obligated to remit the proper income tax to the IRS and New York State throughout the year. The taxes withheld must be remitted timely by the RF to the government agencies involved, or the RF will be assessed penalties and interest from the government agencies. Payment of any penalties or interest assessed by the federal or state government related to income tax withholding are the responsibility of the operating location.

Generally, corrections to over- or under-withholdings are the individual employee's responsibility when they file their federal and state income tax returns at each calendar year-end. As a general rule, the RF cannot refund to the employee income taxes withheld during a calendar year.

Change History

 

 

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