Michigan State University
Controller's Office
Michigan State University carries out its mission on an international scale. As such, those with whom MSU collaborates include U.S. citizens/residents and those who are not. This section of the Manual pertains to issuing payments to those individuals and entities who are neither U.S. citizens nor U.S. residents. (This section will not address matters relating to compensating employees or issuing payments to enrolled students. For information on compensating employees, see Manual of Business Procedures Section 55 - Payroll Department. For information on issuing scholarships, fellowships or other awards to enrolled students, please contact Student Accounts – Fees & Scholarships at 355-8380.)
Issuing payments to international visitors and guests is a complex matter. The United States Citizen and Immigration Services (USCIS) administers the immigration laws of the U.S. Immigration law refers to anyone who is not a U.S. citizen as an "alien".
Immigration law categorizes aliens into three groups.
Successful completion of a payment transaction to a NRA is informed by USCIS and IRS federal government regulations and by MSU policy and procedure. Issuing payments to NRA individuals and companies for services rendered as independent contractors, guest lecturers, researchers, artists or performers; or as recipients of rents or royalties; or as recipients of scholarships/fellowships as non-enrolled students is a complex process to navigate successfully. In the course of planning for and completing these transactions, the University must meet the regulatory requirements of both the USCIS and the IRS.
A summary of requirements for the most common payments to nonresident aliens is provided in table form in Exhibit 77–A. Additionally,Exhibit 77-A2 contains a flowchart to assist with determining the appropriate treatment of these payments.
All recipients of honorarium or reimbursement of undocumented travel expenses for performance of personal service must complete IRS Form W–8BEN "Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)" (see Exhibit 77-H) to document their status as an NRA. Any recipient choosing to apply for tax treaty benefits must also complete IRS Form 8233, "Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual" (see Exhibit 77-G).
Unless it relates to the conduct of a trade or business in the U.S., fiduciaries, partnerships, and corporations receiving income should file IRS Form W-8BEN-E, “Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)” (see Exhibit 77-H2). This would relate to receipt of royalties earned in the U.S., for example. Business entities cannot use Form W-8BEN as that form is only for individuals.
Foreign fiduciaries, partnerships or corporations engaged in a trade or business (and individuals providing something other than independent personal services such as rental operations – see III.A. above for individual personal services) in the U.S. are subject to income tax withholding. Internal Revenue Code Section 864 includes the provision of personal service in the U.S. in the definition of engaging in a trade or business in the U.S. Exemption from withholding may be accomplished by completing IRS Form W–8ECI, "Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States" (see Exhibit 77-I). Those NRA completing this form must file a U.S. income tax return. This exemption does not apply to compensation or reimbursement of undocumented travel expenses related to personal services performed by an individual.
Foreign tax-exempt organizations may be exempt from withholding. To obtain the benefit of tax-exempt status, these organizations must file IRS Form W-8EXP "Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting" (see Exhibit 77-K). This exemption does not apply to compensation for services, or reimbursement of undocumented travel expenses related to personal services performed by an individual.
Scholarships and fellowships for non-degree candidates engaged in study, training or research are subject to income tax withholding at a rate of 18.25% (14% Federal and 4.25% State). Royalties are subject to 34.25% income tax withholding. Recipients of scholarships or fellowships (not enrolled in a degree program engaged in study, training or research) or royalty income may be exempt from withholding. Fiduciaries, partnerships and corporations may also be eligible for reduced withholding on royalties. A listing of countries whose residents may be eligible for limited exemption of withholding from royalty income under tax treaty is provided (see Exhibit 77-F). The actual treaty may not exempt any or all of the royalty income paid to the NRA. In order to learn the details of the tax treaty provisions for a particular country, please call Accounting at 355-5000. If the country of residence for your NRA is not listed on Exhibit 77-F, the payment will be subject to income tax withholding.
Amounts of per diem for subsistence paid by the U.S. Government Agency for International Development (USAID) to NRA engaged in a training program in the U.S. are exempt from withholding even though the amounts may be subject to income taxation. Confirmation of USAID as the source of the scholarship must be documented by award correspondence.
The NRA recipient of a scholarship or fellowship award (including a USAID stipend) or royalty income must complete IRS Form W-8BEN if an individual, or IRS Form W-8BEN-E if a business entity, whether or not application is made for tax treaty benefits.
Where can I obtain guidance at MSU to ensure that I make the proper arrangements for a future visit of an international guest?
The MSU Office of International Students and Scholars (OISS) is the preferred source of counseling to properly structure an invitation to an international guest. The OISS Immigration Specialist may be reached by phone at 353-1720 or on the Web. OISS will advise you on the visa requirements for your international guest considering the circumstances and purpose of the visit you are contemplating.
If payment to the international guest is anticipated (or even if there is the possibility of payment), Accounting should be consulted to obtain guidance on the payment documentation required to satisfy USCIS and IRS rules, and to avoid misunderstandings relating to the payment. Accounting may be reached by phone at 355-5000.
Are payments to all international visitors handled the same way?
No. International visitors have both an immigration status governed by the U.S. Citizen and Immigration Service (USCIS), and a tax status governed by the U.S. Internal Revenue Service (IRS).
USCIS status is generally either "non-immigrant" or "immigrant". A "non-immigrant" is an international visitor to whom the USCIS has given permission to reside temporarily in the United States. Generally, a non-immigrant has represented to the USCIS that he/she is a permanent resident of a foreign country to which he/she fully intends to return after a temporary stay in the U.S. The IRS generally refers to these individuals as "nonresident aliens" (NRA). In order to enter the U.S. a NRA must have a visa (or visa waiver) issued by the U.S. Department of State giving him/her certain limited permissions while in the U.S. Some visas permit limited payment to the NRA. Payments to qualified NRA are generally subject to U.S. income tax withholding unless the visitor is entitled to treaty benefits or other exemption.
An immigrant is an alien who has the right to reside permanently in the United States. Eventually, these aliens can earn a "green card" (USCIS Form I-551). A green card is tangible proof of immigrant status. The Internal Revenue Service (IRS) refers to these individuals as "resident-aliens". Resident-aliens do not need a visa and are paid in the same manner as U.S. citizens.
What is a visa?
A visa is written evidence of permission to enter the U.S. granted by the U.S. Department of State to a non-immigrant. Typically, the visa status is recorded in the form of a stamp on one of the pages of the individual's passport. Visa status' come in different categories and give the non-immigrant different permissions and limits while they are temporarily in the U.S.
What is an USCIS Form I-94 "Arrival-Departure Record"?
A Form I-94 "Arrival-Departure Record" is created by the USCIS when the traveler is inspected upon arrival in the United States. The inspector endorses the USCIS Form I-94 with the date, place of arrival, the "class of admission" (which corresponds to the visa class), the length of time the traveler may remain in the United States, and any special conditions which may apply to the visit. A validated Form I-94 must be presented with any Disbursement Voucher to document the NRA visa status, date of entry and authorized length of stay. A visitor who was not issued a Form I-94 upon inspection at the border (B1/B2 or Visa Waiver visitors only) can complete a "Substitute Form I-94”.
What is a U.S. tax identification number?
A U.S. tax identification number is required to provide a unique identifier to an individual who is required to report income and/or pay taxes to the U.S. federal government. A U.S. tax identification number can take one of several forms:
ITIN: U.S. Individual Tax Identification Number. This number is issued to NRA individuals who need a tax identification number, but did not enter the U.S. under a visa status that authorizes employment. For example an F or J visa may authorize employment. A B visa does not authorize employment. An individual may obtain an ITIN by applying to the U.S. Internal Revenue Service using IRS Form W-7.
SSN: U.S. Social Security Number. This number is issued to NRA individuals who need a tax identification number, and who entered the U.S. under a visa status that does authorize employment. An individual may obtain a SSN by applying to the U.S. Social Security Administration using SSA Form SS-5 (or Form SS-5-FS if applying from the NRA country of residence).
EIN: U.S. Employer Identification Number. This number is issued to taxpayers that employ others and must report payroll taxes. It is also issued to entities other than individuals (such as partnerships and corporations). An NRA entity may obtain a U.S. EIN by applying to the U.S. Internal Revenue Service using IRS Form SS-4.
Can a NRA avoid U.S. income tax withholding on taxable payments received from MSU?
In most cases, MSU is required to withhold income taxes from payments made to nonresident aliens for income earned in the United States. Those NRA who qualify under a number of different circumstances may avoid income tax withholding. The NRA must provide MSU with his/her U.S. tax identification number when completing the appropriate form.
Independent personal services: The NRA may be eligible for exemption from withholding if they qualify for the benefits of a tax treaty between his/her country of residence and the U.S. A tax treaty is an agreement between the U.S. and another nation that documents a protocol for each country (home country and host country) to follow in taxing one another's residents when that resident earns income in the "host" country. IRS Form 8233 must be completed.
Services performed by a NRA corporation, partnership or fiduciary: The NRA entity must complete IRS Form W-8ECI or W-8BEN-E.
Services performed by a NRA tax-exempt organization: The NRA organization must complete IRS Form W-8EXP. If only tax treaty benefits are sought, the tax-exempt organization should complete form W-8BEN-E.
Scholarships or fellowships to non-enrolled student: The NRA may be eligible for exemption from withholding if he/she qualifies for the benefits of a tax treaty between his/her country of residence and the U.S. IRS Form W-8BEN must be completed.
Royalties earned in the U.S.: If an individual, the NRA may be eligible for exemption from withholding if he/she qualifies for the benefits of a tax treaty between his/her country of residence and the U.S. IRS Form W-8BEN must be completed. If the NRA is an entity, Form W-8BEN-E must be completed to take advantage of tax treaty benefits. If the income was earned in the pursuit of a trade or business in the U.S., a corporation, partnership or fiduciary may be exempt upon completing IRS Form W-8ECI. A NRA tax-exempt organization may be exempt upon completing IRS Form W-8EXP. If only tax treaty benefits are sought, the tax-exempt organization should complete form W-8BEN-E.
Rental income: If the rental income was attributable to engaging in a trade or business in the U.S., the income may be exempt from withholding if the recipient completes IRS Form W-8ECI.
Are Native Americans who live outside the U.S. considered to be NRA?
Yes. While Native Americans are defined as NRA if they reside outside the U.S., they require neither a visa, nor an USCIS Form I-94 prior to receiving payment for services rendered, etc. To avoid withholding tax, however, a Native American NRA must provide a U.S. tax identification number and complete the necessary form (as described above).
My NRA consultant is subject to income tax withholding. We don't want to cause hard feelings with the NRA by issuing a check that is netted down by the withholding taxes. How can we make a payment that will result in him/her receiving a net check in the amount we originally agreed to pay?
If the necessary communication and preparations have not occurred prior to processing a Disbursement Voucher to pay a NRA consultant, the issue of withholding taxes can be a sensitive issue. To avoid withholding, the NRA must complete the appropriate IRS form. Either an IRS Form 8233, W-8BEN, W-8BEN-E, W-8ECI or W-8EXP must be completed with the appropriate U.S. or foreign tax identification number. In some cases the NRA will not qualify for exemption from withholding, or he/she may refuse to apply.
If the MSU department wants to pay the withholding taxes for their NRA consultant, the department must gross-up the payment. The additional payment amount will also be reportable income and subject to income tax withholding. The formula for calculating the grossed-up amount is: (desired net amount) divided by 0.6575 (which is 1.0 – 0.3425) or, in the case of scholarship/fellowship, 0.8175 (which is 1.0 – 0.1825). This grossed-up amount will then be subject to income tax withholding at 34.25% (18.25% in the case of a scholarship/fellowship). The department must not enter a changed value for the payment amount. Instead, the fiscal officer should add a Note to the DV requesting that Accounting gross up the payment.
Upon filing his/her IRS 1040NR annual income tax return, the NRA may be able to obtain a refund of all or a portion of this additional withholding.