University department guidelines for nonresident alien (NRA) tax compliance

• News & Views

• Author By Payroll Office
• May 23, 2025

All payments made by the University to or on behalf of an individual or entity must be reviewed to determine the U.S. tax residency status of the payee or beneficiary of the payment.

For U.S. tax purposes, there are four categories of tax residency status: U.S. citizen, permanent resident alien, resident alien for U.S. tax purposes, and nonresident alien for U.S. tax purposes.

Payments made to or on behalf of a nonresident alien are generally subject to income tax withholding unless specially exempted, either by the U.S. tax law or an income tax treaty.

University departments employing or making payments to non-U.S. citizens and entities must follow specific guidelines to ensure tax compliance and avoid penalties.

Here's a breakdown of key areas:

Determining NRA status and tax residency:

• NRA vs. resident alien: Departments must distinguish between nonresident and resident aliens for tax purposes based on IRS guidelines, including the "substantial presence test."
• Visa types: Different visa types (e.g., F, J, M, Q) have implications for tax status and exemptions, and departments should be aware of these.
• Tax treaties: The U.S. has tax treaties with many countries that may provide exemptions or reduced tax rates for NRAs, and the University's tax office through the use of Sprintax Calculus and collaboration with the payee will verify if an individual qualifies.

Income tax withholding and reporting:

• Withholding: Generally, Illinois State University must withhold federal income tax on payments to NRAs, unless an exemption applies (e.g., tax treaty).
• Form W-4: NRAs must complete Form W-4, but with special instructions for nonresident aliens.
• Form 8233 or W-8BEN: To claim a tax treaty exemption for personal services income, NRAs must file Form 8233 or Form W-8BEN.
• Reporting: Illinois State University must report payments to NRAs to both the individual and the IRS using Form W-2 (for wages) and/or Form 1042-S (for other income).

Specific payment types:

• Wages: Illinois State University must withhold and report wages paid to NRA employees, following specific guidelines for completing Form W-4 for nonresident aliens.
• Scholarships/fellowships: Taxable portions of scholarships and fellowships are subject to withholding and reporting, and Illinois State University must differentiate between qualified and non-qualified expenses.
• Honoraria/independent contractor payments: Payments for independent personal services are generally subject to a 30% withholding rate unless a tax treaty applies, and departments must assist in collecting the required forms and supporting documentation.

Software and resources:

• Sprintax Calculus: Illinois State University uses Sprintax Calculus, an online tax compliance system, to manage NRA tax documentation and reporting.
• Tax advice: Departments should consult with the University's payroll tax office, taxoffice@IllinoisState.edu, when necessary.

Compliance and penalties:

• Accuracy and timeliness: Departments are responsible for assisting Illinois State University to ensure accurate and timely withholding and reporting of NRA income and should be aware of potential penalties for non-compliance.
• Documentation: It's crucial to maintain thorough documentation related to NRA tax status, payments, and forms.

If you have concerns, questions, or need assistance, please consult with the University's tax specialist, taxoffice@IllinoisState.edu, for resources and guidance.