Some of the more common visas seen by educational institutions are F-1, J-1 and M-1 visas. Other visa types that are commonly seen include; The H-1b for specialty occupations such as teachers, trainees and researchers; and H-1c for foreign nurses. The O-1 visa is issued to foreign scholars, teachers, researchers or trainees, and the TN is issued to foreign scholars, teachers, researchers or trainees arriving from Canada or Mexico under a NAFTA treaty.
Immigration Status and Withholding Agents
A withholding agent should know that each visa type can have different social security, Medicare and income tax withholding requirements. Let’s examine a few of the visa types previously mentioned to illustrate this point.
Types of Immigrant Visas
Visa types F-1, J-1, M-1, Q-1, and Q-2 wages are exempt from social security and Medicare as long as the holder is a “non-resident alien”.
H-1b, H-1c, O-1, and TN visas are subject to social security and Medicare taxes whether the holder is a resident or nonresident alien.
F, J, M, Q, H, O and TN visas assigned to a resident alien are subject to special instructions but are generally taxed under the same graduated rate as U.S. citizens. Scholarship and fellowship payments made to foreign individuals holding these visas may be subject to a variety of different treatments such as;
- A graduated rate subject to special instructions for payment for services
- No withholding if the payment is a qualified scholarship under section 117;
- Fourteen percent withholding on non-service income;
- Or a lower rate specified under a tax treaty, unless the entire payment is exempt from taxes.
As you can see, a withholding agent needs to be familiar with the status of each foreign individual and vendor before payments are ever made.
Documentation Required for Employment in U.S.
Normally, the first time an employer becomes aware that a worker may be a nonresident alien is when the individual submits documentation and identification for I-9 and W-4 purposes. Once foreign workers are identified on the payroll the employer should divide these workers into two groups: Resident aliens and Nonresident aliens. Resident aliens are generally subject to the same tax treatment as U.S. citizens, subject to all social security, Medicare, and federal income tax withholding. Nonresident aliens are subject to additional withholding and reporting rules specific to their unique status as a foreign worker. Generally, the wages of nonresident alien workers are also subject to Social Security, Medicare and Federal income tax, but there are exceptions. A common exception is a nonresident alien employee who claims that he or she is exempt from employment taxes because of a tax treaty.
Treaty Exemption for Social Security and Medicare
If a foreign worker claims a tax treaty exemption from Social Security and Medicare, the foreign individual must complete a Form 8233, Exemption From Withholding on Compensation, for the U.S. employer. The employee is to complete and provide a Form 8233 with respect to the income that is exempt under a tax treaty. Publication 515 identifies countries that have treaties with the United States. All compensation not exempt under the tax treaty will be subject to employment taxes in conjunction with the nonresident alien’s Form W-4, which is also subject to special adjustment, for the applicable number of withholding allowances claimed. A nonresident alien who fails to file a valid Form W-4 should have federal income taxes withheld at the rates pertaining to an individual who is single status and zero withholding allowances.
Form 8233 Tax Withholding
Even if a nonresident alien employee submits a Form 8233, it is a good business practice to secure a Form W-4 from the employee and withhold accordingly until the submitted Form 8233 is not rejected by the IRS. A final word of warning: Do not equate a foreign individual’s “residence” with “citizenship.” Just because an individual has a passport from a particular foreign country does not mean that he or she is a legal resident of that country under the laws of that country or under a tax treaty. Residency is usually defined in an article of a tax treaty and it does not follow the provisions of the Internal Revenue Code.