Non-Resident Alien Information

Nonresident Alien Taxation

Sacramento State is committed to ensuring compliance with applicable laws governing employment and payments to individuals who are nonresident aliens. Departments making payments to nonresident aliens must comply with established University procedures.

The University makes payments to individuals who are residents of a foreign country. Most of these individuals are considered nonresident aliens by the Internal Revenue Service (IRS). The University is required to withhold income tax and file reports with the IRS and California Franchise Tax Board. These payments include employee compensation (students, faculty, and staff), scholarships and fellowships, travel reimbursements, guest lecture fees, prizes/awards/gifts, payments to performers/entertainers, and independent contractors. Please contact the appropriate department prior to making payments to nonresident aliens.

Identifying Nonresident Aliens

Under U.S. tax law, all non-U.S. citizens are considered to be either "resident aliens" or "nonresident aliens". A nonresident alien is temporarily present in the U.S. through the issuance of a visa. The IRS and the Treasury Department govern rules related to tax residency status. Nonresident aliens are required to pay federal taxes on their income from U.S. sources. Federal and State tax laws require the University to withhold and report income tax from payments made to or on behalf of a nonresident alien (NRA). The Chancellor's Office requires CSU campuses to comply with Internal Revenue Code, California Revenue and Taxation Code, and CSU policies and procedures regarding nonresident alien taxation issues. Failure by the University to withhold and report as required, can lead to fines and penalties for the University and departments authorizing these payments.

Background

The Director of Exempt Organizations Division of the IRS announced that their department was gearing up for a series of new audits in January of 2003. These audits were to focus on compliance with tax withholding and reporting obligations with respect to payments made to nonresident alien students, employees, and independent contractors.

This new audit focus is the result of what the IRS viewed as a very poor response to its voluntary compliance program (VCAP), which was operational from early 2001 to early 2002; only ten institutions participated in the program. The IRS had invited colleges and universities to disclose voluntarily any nonresident alien tax withholding or reporting deficiencies. In return, participating institutions would receive abatement of penalties and leniency in calculating taxes due.

With the poor VCAP participation, IRS took the position that either most institutions are in compliance with nonresident alien tax withholding and reporting obligations, or - as the IRS believes is more likely the case - numerous institutions that are not in compliance simply chose not to participate in the VCAP. Ten CSU campuses were notified by the IRS through written letter of inquiry in December of 2003. Four additional CSU campuses were notified by the IRS as being under audit.

Employment of Foreign Nationals

Once the employment decision has been made and the offer has been accepted, the Office of Human Resources (HR) Payroll Office will determine the individual's tax residency status -

• US citizen
• resident alien
• nonresident alien

For tax purposes, all non-US citizens are either resident aliens or nonresident aliens. A resident alien has been granted lawful permanent residence based on the length of time they have been in the United States. A non-resident alien is temporarily present in the United States through the issuance of a visa. Non-resident aliens may be subject to tax withholdings in addition to the regular tax withholding rates.

During the hiring process, the HR Payroll Office will obtain the needed information to ascertain the individual's tax status, and will complete all necessary forms to support the tax status. Tax liability may be contingent upon the existence of a treaty between the individual's country of tax residency and the United States. The HR Payroll Office will ensure that the appropriate tax is withheld.

Those employees who are non-resident aliens and request tax treaty benefits, must annually submit appropriate documentation.

For clarification or additional information regarding tax residency, withholding or income tax treaty determinations, please contact:

• Payroll Office - Margaret Lee, m.lee@csus.edu

Nonresident aliens receiving financial aid disbursements are subject to 14% tax withholding based on the non-qualified scholarship amount.

A qualified scholarship is an amount received as a scholarship, but only to the extent that it is applied to tuition or fees required for enrollment or attendance at the educational organization. This means that nonresident aliens receiving financial aid disbursements for expenses other than tuition and required fees are subject to taxation. This includes, but not limited to, payments applied to room and board, travel expenses, optional fees, and cash disbursements.

Guest Speaker Payments

Nonresident aliens receiving payments from the University or a third party for guest speaker fees, prizes, awards, gifts, living allowances, or services (performers or independent contractors) are subject to 30% Federal withholding and 7% State tax withholding. Please review the following procedures.

AP Procedures for Payment to NRA Individuals.

Resources and Department Contacts

IRS

• Publication 515: Witholding of tax on Nonresident Aliens and Foreign Entities
• Publication 901: U.S. Tax Treaties
• Publication 519: U.S. Tax Guide for Aliens

California Francise Tax Board

• CFTB Website
• Publication 1031: Guidelines for Determining Resident Status

U.S. Customs and Border Protection

• CBP Website