Compensation of Foreign Nationals in State Government

It is the policy of the State of North Carolina to comply with all applicable laws and regulations governing the employment and compensation of foreign nationals within state government.  The reporting and withholding of taxes associated with payments made to non-U.S. citizens by universities, community colleges, and other agencies of the State of North Carolina are in accordance with the laws and regulations of the U.S. Citizenship and Immigration Services (USCIS) and the Internal Revenue Service (IRS). The U.S. Citizenship and Immigration Services define what payments may be made to aliens who perform services in the United States. The Internal Revenue Service defines which payments made to aliens are reported and subject to taxes, as well as establishes the tax rates for those payments.

Note: Although the preferred term for identifying a person who is not a U.S. citizen is "Foreign National", the Internal Revenue Service and the U.S. Citizenship and Immigration Services use the word "alien". Therefore, all non-U.S. citizens will be referred to as "aliens" in this text to minimize confusion with the federal government publications.

Internal Revenue Service Code - Sections 1441 and 1461

Immigration Act of 1990, as amended

OSC Policy - "Policy and Procedures Pertaining to Payments and Compensation of Foreign Nationals, Governments, and Corporations" - August 2004

Generally, every person born or naturalized in the U.S. and subject to its jurisdiction is a citizen. All other individuals are referred to as "aliens" for immigration and taxation purposes. Aliens are classified as either "nonresident aliens" or "resident aliens". Section 1441 of the Internal Revenue Code provides a separate tax system with a different set of tax rules and regulations for individuals deemed to be nonresident aliens. Agencies making payments to nonresident aliens are subject to different tax withholding, reporting and liability requirements. It is important to understand that the definition of nonresident alien for tax purposes is different from that for immigration purposes. The special rules to determine whether or not an individual is a nonresident alien for tax purposes are included in this manual.

The general tax rule regarding nonresident aliens is that 30 percent must be withheld on all fixed and determinable payments of U.S. source income made to nonresident aliens unless the income is excluded under a specific provision in the Internal Revenue Code. Income includes, but is not limited to:

• Personal services of employees,
• Personal services of independent contractors (e.g. consulting fees, guest speaker fees, honoraria, prizes and awards),
• Scholarships and fellowships awarded to students (e.g. tuition, room and board, stipend/living allowance, books),
• Royalty for the right to use some type of intangible property, or
• Other purposes.

Payments to aliens are handled through different departments, i.e. the Payroll System or the Accounts Payable System within the agency, depending upon the tax residency status of the individual (resident or nonresident), the worker's classification (an employee or independent contractor), and the source of the payment (foreign or U.S.). These factors also affect the applicability of federal reporting and taxation.

Care should be taken to ensure that the proper amount of tax is withheld from payments made to nonresident aliens. Section 1461 of the Internal Revenue Code states that a withholding agent is liable for the income tax that must be withheld from payments made to or on behalf of a nonresident alien. Thus, if the agency fails to withhold the requisite tax and the nonresident alien payee fails to pay the tax due, the agency will be liable for the tax required to be withheld. There are also penalties associated with the failure to correctly report the income to the IRS, or failure to pay or deposit the tax when due. Agencies may also be liable for penalties and interest, unless it can be shown that the failure to pay or file was due to reasonable cause and not willful neglect.

All compensation paid to nonresident aliens for services performed in the U.S. is subject to these requirements and procedures. Agencies that employ or contract with nonresident aliens are required to maintain an understanding of the Internal Revenue Code and Treasury Regulations related to nonresident aliens. A person should also be designated to maintain a working knowledge of the Immigration Act of 1990, amendments to the Act and regulations promulgated pursuant to the Act.

The tax status of foreign nationals is indicated in the comments section of the PD-104 and is submitted by the agency Personnel Office to the Payroll Office.

This policy applies to all State entities.

There are no exceptions to this policy.

• Alien - any person who is not a citizen of the United States.
   
• Resident alien - a foreigner who is a permanent resident of the United States (U.S.), but does not have citizenship.  They have met the IRS requirements through their possession of a green card (an alien registration card issued by the U.S. Citizenship and Immigration Services) or have met the substantial presence test (criteria used to calculate the number of days an alien has been physically present in the U.S.) for the calendar year.  Their income is generally subject to tax in the same manner as a U.S. citizen; therefore worldwide income is taxed.
   
• Nonresident alien - a foreigner who does not meet either the IRS's green card test or substantial presence test.   Their income is usually subject to U.S. income tax only on U.S. source income.