Payments to Foreign Entities

Some payments made to foreign individuals and companies may be subject to 30% federal nonresident alien withholding tax and IRS reporting.   Generally if the payment is to a foreign entity and is 1099-Misc reportable, it will be subject to nonresident alien taxation and reporting. 

• Services
• Honorariums
• Software
• Royalties (ex: purchasing the right to use a photo, video, music, play etc)
• Legal Settlements
• Prizes/Awards - including gift cards and non-monetary awards
• Scholarships

When setting up a contract and creating encumbrances with a foreign vendor, you must request that they provide you with the appropriate IRS W-8 series form:

• W-8BEN
• W-8BEN-E
• W-8ECI
• W-8EXP

Procedure for Withholding of Tax on Payments to Nonresident Alien Vendors

Objective: To provide Minnesota State Colleges and Universities with procedures to comply with tax laws as they apply to nonresident alien vendor payments.

Scope: This procedure is for all payments made by a Minnesota State College or University to vendors who are nonresident aliens for tax purposes. 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.

Background: In general, the IRS requires 30% federal income tax withholding on compensation paid to a foreign national^* for independent personal services and on royalty payments (ex: purchases of software licenses or other copyrights) made to a foreign entity, unless the amounts are either exempt under the terms of a tax treaty, subject to a lower or reduced tax rate under the treaty, or exempt from tax under the Internal Revenue Code.

Independent personal services are services performed as an independent contractor in the U.S. by a self-employed nonresident alien rather than an employee. Compensation, including honorarium, for professional or contractor services includes (but is not limited to) the following:

• Payments for contract labor
• Payments for professional services, including fees paid to attorneys, physicians, and accountants
• Consulting fees
• Honoraria paid to visiting professors, teachers, researchers, scientists, and speakers
• Payments for performances by public entertainers or artists
• Business expense reimbursements

The institution issuing these types of compensation payments must follow this procedure to properly report under Internal Revenue Code Section 1461. Noncompliance can result in the institution being held responsible for the payment of required federal tax withholding and penalties. Noncompliance can result in negative consequences to the foreign national as well.

In addtion to independent personal services, foreign students, individuals and entities may be subject to nonresident alien tax reporting and withholding for purchases of software and other royalties, for legal settlements, for prizes & awards and for scholarship awards.

Employment Eligibility: Before a payment can be made, we must determine if the payee is eligible to receive compensation. Eligibility for a nonresident alien to receive compensation from a U.S. source depends on the individual's immigration status. Immigration laws are complex and each situation must be carefully reviewed to determine what type of compensation is acceptable. Contact Tax Services for guidance prior to engaging foreign vendors. There are potential planning opportunities that may benefit all parties involved.

If, based on their immigration status, Minnesota State determines that the foreign national is eligible to receive compensation; the payment is subject to 30% federal withholding unless legally exempted.

Contact Tax Services prior to contracting with a foreign vendor and before a foreign visitor arrives on your campus for situation specific guidance on the taxation of the payments.

*A foreign national includes: nonresident alien individual, foreign corporation, foreign partnership, foreign trust, a foreign estate and any other person who is not a U.S. citizen.

Vendor Tax Residency Information Form - honoraria, speaker's fees, services
B Honoraria Certification - contact Tax Services for B Honoraria Rules
NRA Vendor Tax Reporting Spreadsheet