Alien - Tax Rules & Regulations Overview
The Internal Revenue Service (IRS) interprets regulations regarding federal income tax withholding and holds employers responsible for complying with the regulations. The Social Security Administration (SSA) oversees the programs established to help protect aged Americans against the loss of earnings due to retirement, disability and death which are funded by employment taxes such as Old Age Survivor’s and Disability (OASDI) and Medicare. Various state taxing agencies provide tax rules for state income tax withholding. The Franchise Tax Board (FTB) is the agency in California.
In Section 1441 of the Internal Revenue Code (IRC) it states that the withholding agent must withhold taxes for nonresident aliens. The withholding agents are held responsible for accurate and timely tax withholding per IRC Section 1461. If an error should occur, the University is liable for the tax payment and/or any penalties which may incur. Strict adherence to IRS requirements in tax coding of foreign individuals is of primary importance for the Personnel Payroll System to withhold taxes accurately.
Generally, Federal taxes are withheld at the rate of 30% for all payments made to nonresident aliens unless an Internal Revenue Code Section provides for a reduced rate or an exemption.
Exceptions to Federal Income Tax Withholding
All U.S. sourced payments to nonresidents are considered income and will be subject to tax unless excluded by law. Exceptions to this rule include:
- Foreign Source - Nonresident aliens are taxed solely on U.S. source income. Please see the Sources of Income article for more information.
- Exclusion under Tax Treaty - Payments made to residents of countries that have an agreement with the U.S. may be exempt from federal tax withholding if all requirements of the tax treaty are met. Please see the Tax Treaty Overview article for further information.
- F and J Exclusion under Internal Revenue Service Code– Per IRC Section 117 amounts paid as Scholarships/Fellowships may be excluded if the following rules are verified. The requirements include:
- A “qualified scholarship" that pays for tuition, required fees, books, supplies and equipment. All other fees are deemed taxable.
- The recipient of the scholarship/fellowship must be enrolled in a degree program.
- The individual must be studying or conducting research at the university.
California Revenue and Taxation Code Sections 18661-18667 and 17951-17955 state that payments made to individuals who perform services in California are subject to California taxes regardless of tax residency status. When a California nonresident receives a payment, it is only subject to California taxes when the work is done in California.
- Employees are subject to tax withholding in accordance with the graduated California Withholding Tax Table.
- Non-employees are subject to withholding at a 7% rate by the State of California for payments greater than $1,500.00.
Employees who work in states other than California may also be subject to income tax withholding from the state in which they work. Refer to the article, States Withholding Requirements and Withholding Forms, for information on out of state taxation.
Employment Taxes (Social Security Tax)
All employees must contribute to Federal Insurance Contribution Act (FICA) unless exempt by law. The eligibility for mandatory participating in Social Security is based on many factors such as the percent and duration of an employee’s appointment. Individuals exempt from contributing to FICA (OASDI or Medicare) are University students enrolled in at least half-time units and nonresident employees for tax purposes with F-1 or J-1 visas. Provided are the two exemptions:
Per IRC Section 3121(b)(10) students enrolled in "at least half time" are exempt from paying into employment taxes. At UCLA, this rule only applies to UCLA students. The half time requirement at UCLA for an undergraduate student is 6 units while the requirement for a graduate student varies.
In order to qualify for this exemption, the employee must:
- be a nonresident for tax purposes
- have an F-1, J-1 visa and
- work to further the purpose for which the visa was issued
Note: If a student with an F-1 or J-1 visa status stays in the United States beyond a specified period, the employee may become a resident for tax purposes. The compensation earned by this person will then become subject to the employment tax withholding unless the individual meets the criteria for the student FICA exemption.
FICA and Retirement
If an employee is not eligible to participant in Social Security, then the employee defaults into the University’s Safe Harbor Program unless they qualify for an exemption. Under the Safe Harbor Program, University employees do not pay the OASDI portion of employment tax; instead, they contribute to the UC Defined Contribution Plan (DCP) which is a qualified pension plan:
- A UC employee who is not a member of the UC Retirement System falls into the Safe Harbor Program unless exempt by law. The exemptions listed above also apply to Safe Harbor.
- FICA eligibility is affected by the Retirement Eligibility of University employees in the Safe Harbor Program.
- Eligibility for both FICA and UC Retirement is determined simultaneously although each is recorded separated on EDB.
In response to the Omnibus Budget Reconciliation Act of 1990, State Assembly Bill 906 authorizes the University to mandate that employees who are not member of UCRS to become “safe harbor” participants in the DCP in lieu of contribution to OASDI.
- As a result all eligible non-career employees hired or re-hired on or after October 19, 1992, are required by University policy to contribute, on a pre-tax basis, 7.5% of their covered wages to the DCP.
- These employees are also required to contribute to 1.45% of their covered wages to Medicare, in accordance to the 1990 act.