Generally, payment made to a nonresident alien or foreign entity on U.S. source income is tax reportable & may be subject to tax withholding. Exemption or partial exemption from withholding is applied if the nonresident alien’s (NRA) resident country has a tax treaty with the United States & the nonresident alien or entity files the appropriate form to claim treaty benefits. Applicable nonresident alien vendor payments are reported to the IRS on Form 1042-S. Failure to report nonresident vendor payments may result in IRS fines and/or penalties against PSU. The purpose of this policy is to provide guidance to ensure that PSU is following the withholding & reporting obligations that apply to NRA vendor payments.
For more information pertaining to doing business with a NRA, please see the Procurement and Contracting Services website.
RESPONSIBILITIES: PSU’s University Financial Services is responsible for the following (see See IRS Publication 515,http://www.irs.gov/publications/p515/index.html, for additional information):
- Verifying eligibility of the nonresident alien or entity to receive payments.
- Identifying nonresident alien payment recipients and obtaining the necessary paperwork and documentation from the recipient.
- Processing payments correctly to facilitate proper tax withholding and year end reporting.
- Determining tax withholding requirements on payments made to nonresident aliens.
- The most common types of payments are listed below; refer to IRS Publication 515 to determine appropriate withholding rate:
- Independent Personal Service Contracts: Generally, PSU must withhold 30% federal tax for Personal Service Contracts paid to NRAs, unless the individual qualifies for full or partial exemption due to a tax treaty. The amount of income subject to withholding may be reduced if a personal exemption is claimed on IRS Form 8233.
- Scholarship and Fellowship Grants: The withholding rates on scholarships or fellowship grants paid to nonresident aliens depend on whether the recipient is a candidate for a degree or is a non-degree candidate, and on the nonresident alien’s immigration status. Tax treaty benefits may apply.
- Royalty or Passive Income: Typically a payment for a right to use some type of intangible property. Generally, PSU must withhold 30% federal tax for royalties paid to foreign entities or nonresident aliens unless the individual qualifies for exemption or reduced rate of withholding due to a tax treaty.
- Payments to Foreign Entities: Payments made to Foreign Entities that are U.S. Source Income are generally subject to 30% federal tax withholding unless the entity is eligible for treaty benefits or qualifies for exemption under IRS code due to its organizational status.
- In order to claim tax treaty benefits, a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) is required and the individual must file the appropriate tax treaty document (dependent upon the type of income). Form 8233 is used for independent personal services income. Form W-8BEN is used for scholarship or royalty income. Foreign entities may claim exemption from tax withholding by indicating the income is effectively connected to business conducted in the U.S. by filing Form W8-ECI.
ANNUAL REPORTING: By February 15 of each year, PSU’s Finance & Accounting Services (FAST) will gather the following information to prepare the file to the IRS to issue an 1042-S to all non-resident aliens who received payment. This listing will include all personal service, royalty, scholarship, and fellowship payments made to non-resident aliens. This information must include:
- SSN, US EIN or ITIN, if available
- Addresses (foreign and U.S. mailing address if available)
- Country of residence
- Type of payment or income code
- 10, 11, 12 – royalty payments
- 15 – scholarship or fellowship payment
- 16 – personal services contract
- 50 – other income
- Gross amount of reportable income
- Percentage of tax withholding and Amount withheld
- Exemption Code (if applicable)
ACCOUNTING: PSU’s FAST will reconcile their NRA tax withholding fund on a quarterly basis to determine if all tax withholdings have cleared. Withholding that has not been cleared in a timely manner should be investigated as this could be an indication that a tax withholding has not been reported to the IRS.