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Taxation of Non-Resident Alien Employees |
Non-resident aliens (NRA’s) for tax purposes are
generally taxed at much higher rates on income than
are residents and citizens. Often, off-campus
employers withhold taxes from payments made to
non-resident aliens the same as Americans which is a
mistake for the following reasons:
- In the event of an IRS audit, if the employer
underwithheld, penalties and interest will be
assessed to the employer, in addition to the taxes
owed. The IRS will not attempt to seek
retribution from the NRA.
- FICA withholding is not required for NRA’s in
F and J status who are working legally.
Therefore, the off-campus employer is not liable
for the matching portion of FICA payments.
- The non-resident alien has significantly higher
federal tax liability than an American worker.
When off-campus employers underwithhold
taxes, the student is required to make high
payments to the IRS at the time of their tax
return, which is often a significant hardship.
- Off-campus employers often mistakenly issue
Forms 1099 to NRA employees treated as independent
contractors. This provides
documentation to the IRS that the employer has
not followed required procedures for
non-resident alien employees. Such payments
should be documented on the Form 1042S
showing appropriate withholding (up to 30%).
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Who is a Non-resident Alien? |
Two U.S. government agencies, the U.S. Immigration
and Naturalization Service (now known as CIS) and the U.S. Internal
Revenue Service (IRS) use the term non-resident alien (NRA).
CIS Definition:
Persons who reside temporarily in the United States in non-immigrant
status are known by CIS as non-resident aliens. Non-immigrant
statuses represented by off-campus employees are usually limited to
persons in F-1 and J-1 student status, or J-2 dependents.
IRS Definition:
For IRS purposes, an NRA is anyone other than a US citizen
or US legal permanent resident who has been present in the
USA less than 183 days as measured by the Substantial
Presence Test (SPT). Persons who meet the SPT will be taxed
primarily the same as legal permanent residents and citizens.
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Exceptions to the Substantial Presence Test and
Resulting FICA Exemption |
Persons in F and J student status are exempt
from counting days toward the SPT for a period of
five tax years, and will remain non-residents during
that time. NRA’s in F-1 and J-1 status are exempt
from FICA withholding (see pages 45-46 of IRS
Publication 519 for more information).
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F-1 Student Employment Authorizations |
- Off-campus due to economic necessity:
- Employment authorization is provided by
the INS on an Employment Authorization
Document (EAD), a small card containing
the student's photograph and the dates of
employment eligibility.
- Employment is limited to 20 hours per week
when school is in session. Work may be
full-time during authorized vacations,
including summer (even if the student is
enrolled for summer classes).
- The EAD is valid for one year. The student
may not be employed beyond the end date of
the EAD, even if an application has been
submitted for a renewal. The student must
have an EAD in-hand to be eligible for
employment.
- Students may work for any employer, and
may change employers without notification
to INS.
- For I-9 purposes, students with work
authorization under this provision are most
likely to provide the INS-issued EAD as a
List A document to verify both identity and
employment authorization.
- Optional Practical Training (OPT):
- May be either full-time or part-time
employment in the student’s field of study.
The INS issues authorization on an
Employment Authorization Document (EAD).
- Students most often use OPT for full-time
employment near or after completion of
their degree program. Employment may not
be authorized for more than 12 months of
full-time optional practical training. (Part time
OPT prior to completion of studies
may be available.)
- Students may work for any employer under
this authorization, and may change
employers without notification to INS as long as
the work is directly related to the student's
field of study.
- Curricular Practical Training (CPT):
- Allows the Designated School Official
(DSO) to authorize full- or part-time
employment for students to fulfill academic related
jobs off-campus.
- Page 4 of the student’s I-20 ID Student
Copy lists the name and location of the
employer, as well as the beginning and end
date of the authorization. No INS EAD is
issued for CPT employment.
- CPT is employer-specific. Students may not
change employers unless they have received
a new employment authorization notation
from the DSO on page 4 of the I-20 ID
Student Copy.
- For I-9 purposes, students with CPT will
likely provide the I-20 ID as a List C
document. Employers should review page 4
of the I-20 ID to assure that the notation is
valid, relates to their company, and that
work is within the dates listed. Students for
whom the I-20 is used as a List C document
must also produce a List B identity
verification document.
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Students in J-1 Status |
Students in J-1 status may be authorized for off-campus
employment, but only by the Responsible
Officer or Alternate Responsible Officer (RO or
ARO) of organization that issued the Form DS-2019
(the immigration document the J-1 used to enter the
U.S.). Work authorization must be on institutional
letterhead and must spell out the terms of employment.
- Off-campus employment for economic necessity
for students in J-1 status is not employer specific,
but limits the student to no more than
20 hours/week of employment when school is in
session and full-time during authorized school
vacations.
- Academic training for a J-1 student is
authorized by the RO or ARO and must list the
name and location of the employer in the
authorization letter. Academic training work
permission is job-specific, and must be
consistent with the terms and conditions of the
work authorization letter.
- INS will not issue a student in J-1 status an EAD
under any circumstances.
- Persons in J-2 status are dependents of persons in
J-1 status. Employment authorization may be
issued by INS in one-year increments, and is not
job-specific. The INS EAD will likely be used
for completion of the Form I-9. Persons in J-2
status are not eligible for exemption from FICA
withholding while working off-campus.
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For additional information please contact: |
Judy L. Todd
Nonresident Alien Taxation Specialist
Cashiers/Payroll/Student Loan Collections
15 Jesse Hall
University of Missouri-Columbia
Columbia, MO 65211-1020
(573) 882-5509
ToddJ@missouri.edu
Or
David Currey
Director, Int’l Student and Scholar Services
Assistant Director, International Center
N52 Memorial Union
University of Missouri-Columbia
Columbia, MO 65211
(573) 882-5510
CurreyD@missouri.edu
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