Tax Procedures for Nonresident Alien(Foreign) Student Employees

Background
Under U.S. tax laws, all non-U.S. citizens are considered to be either permanent resident aliens, resident aliens for tax purposes or nonresident aliens. Permanent resident aliens and resident aliens for tax purposes are taxed the same as U.S. citizens but nonresident aliens are taxed under special laws.

Objective
To provide Minnesota State institutions with procedures to identify nonresident aliens and to comply with federal and state tax laws as they apply to nonresident alien students.

Scope
These procedures apply to payments made to nonresident alien students through the Student Payroll system and to tuition reductions for nonresident alien graduate assistants. These procedures do not apply to scholarship payments to students, payments made to faculty and staff through SEMA4 or to vendor payments. Certain immigration documents will need to be reviewed to make residency determinations, but in general immigration rules and regulations are beyond the scope of this document.

Definitions

Duration of Status (D/S):
The time during which a student is pursuing a full course of studies at an educational institution approved by U.S. immigration for attendance by foreign students. The student is considered to be maintaining status if he or she is making normal progress toward completing a course of studies and is in compliance with specific visa regulations.

Form I-94/ I-94W:
The U.S. Immigration Arrival/Departure card (the small white or green card stapled in the front of the passport). This card indicates the passport holder's place and date of entry to the U.S., their nonimmigrant status and the length of time they may remain (the "until') in the U.S., i.e.: An I-94 for an F-1 student would indicate admitted F-1 and until D/S.

Institution:
A term for the Minnesota State department/individual responsible for performing the necessary procedures.

Nonresident Alien:
The U.S. tax residency status of a non-U.S. citizen who is temporarily present in the U.S. Nonresident aliens are required to pay taxes only on their income from U.S. sources.

Permanent Resident Alien:
An individual granted lawful U.S. permanent residence status. Permanent resident aliens (often referred to as green-card holders) are taxed in the same manner as U.S. citizens.

Resident Alien for Tax Purposes:
The U.S. tax residency status of an individual who has been present in the U.S. for a period of time long enough to meet the substantial presence test (defined below) and are not otherwise exempt. Resident aliens are taxed on their worldwide income and in the same manner as U.S. citizens.

Residency Status Change Date:
Earliest possible date that an exempt individual's tax status will change, calculated by the withholding agent. Ex: An F-1 student visa holder who arrived in the U.S. for the first time on 1/1/2016 would have a residency status change date of 7/2/2021. As an F-1 visa holder, the student is exempt from counting days of presence towards the substantial presence test for a period of 5 calendar years - in this example: 2016, 2017, 2018, 2019 and 2020. On 1/1/2021, the F-1 visa holder must begin counting days towards the substantial presence test. The Residency Status Change Date would be 7/3/2021, 183 days from 1/1/2021.

Residency Starting Date or Residency Start Year:
First day of presence in the U.S. during the calendar year in which the individual met the substantial presence test. This is the day the employer begins to tax the individual as a resident alien. Using the example above, 1/1/2021 is the Residency Starting Date for the F-1 visa holder who arrived in the U.S. in 2016. On 1/1/2021 the employee is considered a resident alien for tax purposes. On MnSCU's Tax Residency Information Form the Tax Residency Start Year would be recorded as 2021.

Substantial Presence Test (SPT):
A test used to determine an individual's U.S. residency status for tax purposes. You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:

1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
   1. All the days you were present in the current year, and
   2. 1/3 of the days you were present in the first year before the current year, and
   3. 1/6 of the days you were present in the second year before the current year.

Any day is excluded as a day of presence if the alien individual is physically present in the United States on that day and is an individual who is (1) exempt, (2) physically unable to leave the United States because of a medical condition, (3) in transit between two points outside the United States, or (4) commuting from Mexico or Canada to work for a U.S. employer.

Tax Treaty:
The U.S. maintains income tax treaties or agreements with over 48 countries in an effort to reduce or eliminate double taxation. Most of these treaties provide tax-free status (up to a specified amount and within a limited timeframe) on income earned in the United States. Approximately half of these treaties extend benefits to students.

Visa Type:(Also known as Immigration Status)
"Visa Type" refers to the category of visa that a non-U.S. citizen holds. The "visa type" is marked on the visa stamp or sticker in the individual's passport, I-94 and/or I-20 or DS-2019 form. Student visa types are listed below.

Student Visa Types
The following visa types are issued to students and their spouses and dependents. Authorization to work on campus is indicated by visa type. F-1 and J-1 are the most common visa types seen at MnSCU institutions.

F-1: Students. Work authorized for host institution under limited conditions.

F-2: Spouse and dependents of F-1 visa holders. No work authorization.

J-1: Exchange visitors including students, scholars, teachers and researchers. Work authorized under certain conditions.

J-2: Spouse and dependents of J-1 visa holders. Work authorized under certain conditions.

M-1: Vocational student. Work authorized under extremely limited conditions. Contact the Office of the Chancellor before allowing employment.

M-2: Dependents. No work authorization.

Q-1: International Cultural Exchange. Work authorized for sponsoring employer.

Payments Made to Nonresident Aliens through the Student Payroll System

The steps in this section are necessary to ensure that Minnesota State complies with U.S. Immigration and Internal Revenue Service (IRS) rules as they apply to employment.

All new employees are required to complete a Form I-9 Employment Eligibility Form at the time of hire. It is the responsibility of the institution to review Form I-9 to determine the new employee's tax status by following the steps listed below.

The institution must review the information on the form to determine whether the new employee is a U.S. citizen or permanent resident alien. This information is on the upper right hand side of the Form I-9. All new employees are required to complete this question and provide information about their U.S. citizenship/permanent residency status on this form, regardless of whether there is a reason to believe that the individual may or may not be a U.S. citizen.

1. If the new student employee indicates on Form I-9 that he or she is a "citizen or national of the United States" or "lawful permanent resident alien", there is no change to current procedures; the employee is taxed as a U.S. resident.
2. If the new student employee indicates on Form I-9 that he or she is an "other alien authorized to work until xx/xx/xxxx", the institution must ask the student to provide copies of their I-20 Form, visa and Form I-94. Immigration Form I-94 shows how long the individual may stay in the U.S. For a student, this is generally indicated as D/S, for duration of status, with no specific end date. Note: Visa types F-1, J-1 (Student) and M-1 are student visas which provide authorization (with the endorsement of the institution) for the student to work on campus for the sponsoring institution. The sponsoring institution is the institution listed on the student visa holders I-20 Form. Q-1 visa types must be approved by U.S. immigration to work on campus.
3. In addition to reviewing the student employee's immigration documents, the institution must ask the student to fill out the Student Payroll Tax Residency Information Form. The Tax Residency Information Form will help the institution in determining the tax residency status of the employee by applying the substantial presence test. Generally, a new alien student employee would be exempt from counting days towards the substantial presence test for a period of 5 calendar years, however if the student has been in the U.S. prior to the date of arrival on their current student visa, the substantial presence test might be applicable sooner. In order for the institution to determine the correct residency start year for employees, it is important for all alien employees to fill out the Tax Residency Information Form.
4. Minnesota State requires employees to have a social security number to be compensated. Tech Ids and "999" number are not acceptable. The student payroll system will be programmed to flag any numbers beginning in 999. If the student does not have a social security number, one must be applied for immediately. Form SS-5, Application for a Social Security Card can be downloaded at the Social Security Administration's website. Procedures for paying employees who have applied for social security numbers can be found in Section 9 of this handbook.
5. The institution will determine whether the student qualifies for a U.S. tax exemption under any income tax treaty by reviewing the treaty chart in Section 5 of this handbook, and assist the student with the completion of Form W-4 and Form 8233 (and the accompanying statement) as discussed below. Please note, per the procedures in Section 9 of this handbook, that tax treaty benefits may not be applied until the employee has a social security number.
   You can obtain additional information regarding U. S. Tax treaties on the IRS website.

How to Complete Form W-4
With the assistance of the institution, all nonresident alien student employees must fill out two W-4 forms at the time of hire, one for Federal withholding and one for State withholding. If the nonresident alien is eligible for treaty benefits, the W-4's will become effective at the time the treaty limits are reached. No tax should be withheld during the time the employee is covered by a treaty.

In the first year, the student must attach a statement to the Form W-4 saying that a timely U.S. tax return will be filed. In the subsequent year, the student must attach a statement indicating that the individual has filed a U.S. income tax return for the previous year.

State Withholding Requirements
A separate W-4 will be required for state purposes (use MN Revenue's form W-4MN). The state does not require the statement "Nonresident Alien" on the form. There is no state reciprocity with North Dakota or Michigan for nonresident aliens.

Detailed information on completing W-4 forms for nonresident alien students

FICA Exception for F, J, M and Q Visa Holders
A nonresident alien student employee can be exempt from FICA tax withholding if he or she meets all of the following criteria:

• Is a nonresident alien for tax purposes (i.e.: has not met the Substantial Presence Test),
• Is temporarily present in the U.S. under F-1, J-1, M-1 or Q-1/Q-2 nonimmigrant status, and
• Is performing services in accordance with the primary purpose of the visa's issuance (i.e., the primary holder of the visa, the "-1" visa holder).

The student must meet all the above requirements as discussed above in order to qualify for FICA exemption.

Income Tax Treaty
An income tax treaty is a bilateral legal agreement between two countries to reduce or eliminate double taxation. The United States maintains bilateral income tax treaties with over 48 different countries in an effort to reduce or eliminate double taxation. It is important to note that each individual treaty is unique and may not contain the same provisions or exemptions as another tax treaty. From time to time, treaties with additional countries are signed and existing treaties revised.

About half the tax treaties contain a limited exemption for personal service income earned by students, trainees, teachers and researchers while in the U. S. There is typically an annual maximum dollar amount and/or a time limit of presence in the U.S. for which the exemption can be claimed.

Example: Article 21(1) of the U.S.-France income tax treaty allows an exemption of $5,000 per calendar year for personal services income earned by a student for a period of five calendar years from the date of the student's arrival in the U.S.

Section 5 of this handbook lists current tax treaties, maximum amounts allowed, maximum calendar years allowed and the article within the tax treaty that relates to student employment. The charts are from IRS Publication 901 which has not been updated since 2001. For the most comprehensive listing and the complete text of tax treaties, go to the IRS website. The institution must review this chart and determine if the student is eligible for a treaty exemption they wish to claim. If the student is eligible, the student, with the help of the institution, must fill out Form 8233 as discussed below.

Form 8233 Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual

Form 8233 is used to claim a tax treaty exemption for compensation payments. The most important things for the institution to remember about Form 8233 are:

• The form must be reviewed, signed and submitted to the IRS within 5 days of receipt by the institution. Note: the employee must not, either separately or with an income tax return, submit this form directly to the IRS.
• Provide a copy of the completed 8233 to the student, keep one on file and send a copy to Tax Services (System Office)
• The institution may allow treaty benefits immediately upon receiving Form 8233, subject to IRS approval or rejection or wait until 10 days after mailing the Form 8233. Either method is acceptable at the discretion of the institution.
• The form is valid for one calendar year and a new form must be completed, reviewed, signed and submitted each calendar year for which a treaty exemption will apply. All treaty beneficiaries should be notified in November or early December to fill out a new Form 8233 for the upcoming calendar year. No treaty benefits can be given in the new year until Form 8233 is on file.
• The student employee is required to submit an additional statement along with Form 8233 (excepting students from Canada). Section 7 of this handbook provides sample forms by country for the statement. The institution should select the appropriate country statement, fill in the blanks with information provided by the student and submit along with Form 8233. If there is no statement for a particular country, use the blank form provided in Section 7 of this handbook and change the language as needed.
  The attachment to Form 8233 must also:
  

  • Be dated
  • Identify the tax year to which it relates
  • Be signed by the employee, and
  • Contain a written declaration that it is made under the penalties of perjury
  • The statement becomes a part of the form itself, and everywhere the form is required to be retained, the statement must also be retained; and
  • The student can claim the tax treaty exemption either at the time of payment or when he/she files Form 1040NR, U.S. Nonresident Alien Income Tax Return.

Form 8233 & Instructions

Graduate Assistant Tuition Reductions (For State Universities Only)
If a tuition reduction granted to a nonresident alien graduate assistant is determined to be taxable in accordance with Minnesota State Procedures for Taxation of Graduate Student Tuition Reductions, contact the Tax Services for further instructions.

Quarterly and Year End Reporting
Tax Services will prepare either Form W-2 or Form 1042S or a combination of both to report payments made to nonresident aliens. Form W-2 will be used to report payments subject to tax and Form 1042S will be used to report payments exempt from tax based on a treaty. These forms will be sent to the student by January 31 of the year following payment and to the IRS by the required deadlines. Form 8233 must be on file for wages reported on IRS Form 1042S.

Tax Servcies will do all quarterly and annual reporting to the IRS and Minnesota Department of Revenue.