Foreign Visitor Tax Guide: Section Two

U.S. Tax Obligations of ASU and Sponsoring Departments

2.1 University Responsibilities
ASU is responsible for maintaining compliance with both the letter and intent of all federal, state and local laws. The implication for university departments, faculty and the foreign visitors they host is simple: ASU must maintain full compliance with federal, state and local tax laws, in addition to federal immigration laws.

ASU also has a responsibility to the foreign visitors who come to campus to pursue their education or other scholarly activities to ensure that payments made to them by the university are properly reported to the appropriate federal and state agencies. Properly reporting payments that are made to foreign visitors will greatly reduce the potential for future tax or immigration problems for visitors. A number of university offices are available to assist departments, faculty, and foreign visitors in gathering and coordinating the appropriate information that is needed to maintain compliance with the tax and immigration laws.

Refer to Appendix 1 for a list of the university offices that provide specific assistance with these matters, and the types of services they provide.

2.2 Sponsoring Department Responsibilities
University departments that host foreign visitors will generally be aware far in advance of their actual arrival date that the visitor will be coming to the university. Accordingly, the hosting department or faculty member bears primary responsibility for ensuring that payments are in compliance with federal and state tax laws and immigration laws. This responsibility is also shared by a number of university offices that are available to assist departments and faculty members in acquiring all of the information and forms required by the federal government. Departments must ensure that no payments of any kind are made to foreign visitors unless they have been granted the appropriate authorization by the BCIS in advance of the payments being made.

The Office of International Programs (for non-student visitors) in Moeur Building, or the International Student Office (for student visitors) in the Student Services Building, must be contacted prior to making any contractual arrangement to pay a foreign visitor, to ensure that violations of immigration law do not occur. (Such violations could lead to fines of up to $10,000 per occurrence assessed against ASU, and/or imprisonment of ASU personnel and detention or deportation of the foreign visitor).

2.3 Classification of Payments for Withholding Purposes
Payments that are discussed in this tax guide fall into three broad categories of:

employee wages
independent contractor payments
fellowship and scholarship grant payments.

Be aware that certain types of payments to a foreign visitor may be taxable, while other payments to the same visitor are not taxable. Also, certain payments that are taxable to one foreign visitor may not be taxable to a visitor from a different country because of an exemption in a tax treaty. Accordingly, it is important that the university determine the taxability (or nontaxability) of each type of payment made to each foreign visitor in order to know whether withholding is required and, if so, the amount required to be withheld from the payment.

2.4 Foreign Source Income Exclusions
2.4.1 For Services Performed Outside the U.S.
Payments that are made by ASU to nonresident aliens, for services that the nonresident alien performs in a country outside of the U.S., are not subject to federal income tax withholding. This exclusion applies only for services performed in a foreign country by an individual who is not a citizen or resident of the U.S. The services are considered to be "sourced" in a foreign country and, therefore, are not subject to federal tax withholding.

2.4.2 For Grants Funded from Outside the U.S.
Fellowship and scholarship grants that are paid for with funds that have come from the foreign visitor's country of residence (or another country outside of the U.S.) are not subject to tax withholding. Such grants are considered to be "sourced" in a foreign country and, therefore, are not subject to federal tax withholding.

2.5 Federal Income Tax
All employee wages, independent contractor payments, and taxable portions of fellowship and scholarship payments that a foreign visitor receives from the university are considered taxable income, unless they are specifically exempt from tax by a tax treaty. In general, the university is required to withhold federal income tax on foreign visitor income as follows.

2.5.1 For Nonresidents (See 1.11)
Employee Wages, generally, have income tax withheld at graduated rates, plus an additional $7.60 per week unless specifically excluded from tax by a tax treaty between the U.S. and the foreign visitor's country of residence. Exemption must be claimed by the visitor using IRS Form 8233.

Independent Contractor Payments have income tax withheld at the rate of 30%, unless specifically excluded from tax by a tax treaty between the U.S. and the foreign visitor's country of residence. Exemption must be claimed by the visitor using IRS Form 8233.

Fellowship and Scholarship Payments have income tax withheld at the rate of 14% on the taxable portions of the payment (amount not used for tuition, books, fees, and course required supplies and materials), unless specifically excluded from tax by a tax treaty between the U.S. and the foreign visitor's country of residence. Exemption must be claimed by the visitor using IRS Form W-8BEN

See Appendix 2 for IRS forms and publications.

2.5.2 For Residents (See 1.12)
Employee Wages have income tax withheld at the same graduated rates that are used to withhold tax on U.S. citizens.

Independent Contractor Payments do not have income tax withheld as the visitor is not considered to be an employee.

Fellowship and Scholarship Payments do not have income tax withheld.

2.6 FICA (Social Security Tax)
2.6.1 Employee Wages
FICA is withheld at the rate of 7.65%, with a matching percentage paid on behalf of the individual by the university, unless specifically excluded from tax by a tax treaty between the U.S. and the foreign visitor's country of residence.

Special exemptions are available from FICA withholding under certain circumstances:

• services performed by nonimmigrants temporarily in the U.S. in F-1, J-1, or M-1 status, which are consistent with that status, are exempt from FICA as long as the nonimmigrant is classified as a nonresident for tax purposes.
• Services performed by a nonresident student in F-1, J-1, or M-1 status, who is employed by the university while enrolled and regularly attending classes are exempt from FICA.
• services performed for a foreign government are exempt from FICA.
• services performed for an international organization are exempt from FICA.

2.6.2 Independent Contractor Payments
Payments for services rendered by an independent contractor do not have FICA tax withheld.

2.6.3 Fellowship and Scholarship Payments
Payments for fellowships and scholarships do not have FICA tax withheld.

2.7 Arizona State Taxes
All employee wages, independent contractor payments, and taxable portions of fellowship and scholarship payments that a foreign visitor receives from the university are considered income for state income tax purposes. In general, the university is required to withhold state income taxes for employee wages in the same way as is outlined in the discussion of federal income taxes in Section 2.4 above. If some or all of the income is exempt from federal taxes, the same income is exempt from state taxes.

2.8 Exemptions From Income Tax Withholding Requirements
A number of possible exemptions from withholding may apply to a nonimmigrant. Several have been mentioned above, but a more complete listing follows:

Foreign Source Income is not subject to withholding. Foreign source income is income that comes from a payer whose residence is outside the U.S.

Tax Treaty Exemptions From Taxation and Withholding may apply, but must be evaluated on a country by country basis. Refer to Section 9 and IRS Publication 901 found in Appendix 2 of this guide.

Per Diem Payments for US AID Grants may be exempt from withholding but only if the foreign nonimmigrant is involved in a USAID training program in the U.S.

2.9 Required Forms
Foreign nonimmigrants from countries that have entered into a tax treaty with the U.S. may be able to exclude all or a portion of the payments that they have received from U. S. Sources under the provisions of that treaty. If a tax treaty exists between the foreign nonimmigrant's country of residence and the U.S. that allows some or all of the nonimmigrant's income to be considered nontaxable, the nonimmigrant must provide certain forms to the university. Appendix 3 contains a form processing flowchart.

2.10 Penalties and Sanctions
The IRS has recently initiated a series of audits of colleges and universities that focus on compliance with the nonresident alien area of the tax laws that are discussed in this guide. In cases where taxes have not been withheld, the IRS may assess the university the full amount of tax that should have been withheld, along with penalties and interest charges, even if the tax was ultimately paid by the foreign visitor on his/her U.S. tax return. In the event that such an assessment would occur, these amounts will be billed back by the university to the department not adhering to the prescribed procedures relating to nonresident alien payments.