The University of Washington is a withholding agent for the Internal Revenue Service (IRS) and is required to withhold tax. All payments made to a nonresident alien (including, but not limited to, travel/business reimbursements, honorarium, scholarships/fellowships/stipends, wages, etc.) are taxable unless specifically exempt from tax by the IRS Code or a tax treaty.
U.S. Tax Responsibilities of Foreign Nationals
A foreign national's tax responsibilities are complex. Significant differences exist between how nonresident aliens and resident aliens for tax purposes are taxed. Nonresident aliens for tax purposes are only taxed on their U.S. source income. Consult the chart, Comparison of Nonresident Alien vs. Resident Alien for Tax Purposes for further information.
Identifying a Nonresident Alien (for tax purposes)
A nonresident alien (for tax purposes) must pay taxes on any income earned in the U.S. to the Internal Revenue Service, unless the person can claim a tax treaty benefit. This applies to students as well. Failure to pay the correct tax can result in an unexpected tax obligation when the individual leaves the U.S. or may jeopardize a future application for residency.
There is a different tax structure for a nonresident alien compared to a resident alien. A nonresident alien (for tax purposes) may qualify for some tax relief through a tax treaty benefit, if one exists with the person’s home country. Generally, a resident alien can’t qualify for a tax treaty benefit. Resident aliens for tax purposes are taxed on their worldwide income.
Additionally, the UW is liable for any tax not withheld and associated fines and penalties. Any tax amount, fines and penalties determined to be owed by the IRS will be charged to the department responsible for the foreign national.
If foreign national has never lived in the U.S., generally:
- F & J students are NRAs for five calendar years
- J nonstudents are NRAs for two calendar years
If a foreign national has lived in the U.S. in the past, the individual must complete the Substantial Presence Test. This test determines if the person has been in the U.S. enough time over the previous three years to be considered “substantially present” in the states. If the foreign national has been in the U.S. for 183 days or more in the past three years, the individual is considered a resident alien for tax purposes.
Federal Withholding Tax and Tax Treaties
In most cases, a foreign national is subject to federal withholding tax on U.S. source income at a standard flat rate of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign national’s country of residence and the United States. The tax is generally withheld from the payment made to the foreign national.
A tax treaty is a bilateral agreement between the United States and a foreign government. Tax treaties are intended to avoid double taxation, or having the income taxed by both countries. Each treaty is different and includes different exemptions. If a foreign national qualifies for an exemption because of a tax treaty benefit, little or no withholding will be taken from a payment. The foreign national must have a U.S. tax identification number in order to claim the benefit.
See the IRS Publication 515, Withholding of Tax on Nonresident Aliens & Foreign Entities for more information about which countries have treaties with the U.S. Note: Citizens of Hong Kong and Macao are not covered by the People's Republic of China tax treaty.
If you do qualify for a tax treaty benefit, visit the Forms Needed to Process Payments page for links to the appropriate form(s) to use to apply for the benefit.
Tax Identification Number (SSN or ITIN)
See the chart, Tax Identification Numbers for Nonresident Aliens, for more information about applying for a tax identification number.
Social Security and Medicare Taxes
In general, Social Security and Medicare (FICA) taxes apply to salary or wage payments made by U.S. employers to foreign national employees for services performed in the United States unless an individual qualifies for an exemption. In order to be exempt from FICA tax, a foreign national must be:
- A nonresident alien for tax purposes
- Present in the United States under an F, J, M or Q immigration status
- Performing services in accordance with the primary purpose of the visa’s issuance (i.e. F-1 student working as a TA)
Note: The exemption determination is based on the calendar year which may be a partial year. See the Payroll website for further information.
Filing an Income Tax Return with the IRS
There are specific rules about filing an income tax return with the IRS that nonresident and resident aliens must follow. See IRS Publication 519, U.S. Tax Guide for Aliens, for more information. More information and resources can be found at:
Certificate of Compliance or "Sailing Permit"
A Certificate of Compliance or “Sailing Permit” must be requested from the IRS to demonstrate compliance with the tax law and verify that all required taxes have been paid before leaving the U.S.
F-1, F-2, J-1, H-2, H-3 and H-4 visa holders are not required to obtain a Certificate of Compliance if they had no U.S. source income other than:
- Allowances or payments to cover study expenses (including travel, room, board, and tuition)
- Wages from authorized work, including practical training
- Interest on bank deposits
All nonresident aliens with a visa status other than those noted above including permanent residents (green card holders), must obtain a Certificate of Compliance from the IRS before leaving the U.S.
- IRS Form 2063 – required if the foreign national owes no U.S. tax at the time of departure
- IRS Form 1040-C (Instructions) – required if the foreign national owes U.S. tax at the time of departure
- Form should be filed at least 14, but no more than 30 days before departure
- More information is available in IRS Publication 519, U.S. Tax Guide for Aliens
Penalties and Sanctions
Failure to file the appropriate tax returns, making intentionally false or misleading statements on tax returns or otherwise failing to comply with U.S. tax law can lead to the imposition of fines and penalties including potential criminal penalties. The regulations provide that a nonresident alien’s tax return deductions will be allowed “only if a true and accurate return for the taxable year is filed by the nonresident alien on a timely basis.” This means that unless a timely and accurate tax return is filed, tax is assessed against the nonresident alien’s gross income without regard for any deductions or credits that might otherwise be allowable. Tax compliance will be evaluated at the time the foreigner seeks to leave the country.
Fuchi Obioha, Tax Office, 206-616-9021