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Date: October 15, 2010

Bulletin Number: 1014

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Subject

Withholding rate of 30% for Nonresident Alien Scholarship Recipients

 

Purpose

To inform agencies of new functionality in PayServ that allows for the selection of a 30% tax rate for nonresident aliens that are income code 15.

 

Affected Employees

Nonresident alien scholarship recipients (income code 15) that have not provided an Individual Taxpayer Identification Number (ITIN) or do not have an F-1, J-1, M-1 or Q-1 visa.

Effective Date(s)

Immediately.

 

Background

In accordance with the 2010 IRS Instructions for Form 1042-S, nonresident alien scholarship recipients (income code 15*) are generally eligible for a federal tax withholding rate of zero or 14% depending if the country of origin has a treaty with the United States and as long as the employee is a F-1, J-1, M-1 or Q-1 visa holder.  But, if the employee does not provide the employer with a valid SSN or ITIN or holds any other visa type, a withholding rate of 30% is required

PayServ has now been updated to allow the election of a 30% Federal Tax withholding rate for nonresident aliens earning income designated as a Scholarship or Fellowship payment.

*Scholarship and Fellowship payments to nonresident aliens are designated by the IRS as Income Code 15

 

OSC Actions

OSC has established a specific Treaty ID value for each country code in PayServ.  This value can be chosen in the Treaty ID field of the Federal Tax Data page to allow for the taxation at 30% for employees designated as income code 15.  It is not an actual  Treaty ID as prescribed in IRS Publication 901, but rather a mechanism to withhold at a rate of 30% when withholding at a lower rate is not appropriate.  The value is 30% W/H RT. 

 

Agency Actions

Agencies should review the records of any nonresident alien designated as income code 15 that do not have SSNs or ITINs recorded in PayServ.  Agencies should then seek to obtain the employees SSN or ITIN.  If no SSN or ITIN can be provided, the agency must update the record so that the employee is taxed at a rate of 30%.

Agencies should review the Visa types for any nonresident alien designated as income code 15 and identify those that have a visa type other than F-1, J-1, M-1 or Q-1.  The agency must update the record so that the employees that have a visa type other than F-1, J-1, M-1or Q-1 are taxed at a rate of 30%.

Failure to withhold at a rate of 30% for these employees can compromise New York State’s ability to file tax information electronically with the IRS and may subject the State to fines and penalties.  IRS fines, if any, may be passed on to Agencies.

To update the records go to the Employee Federal Tax data panel (Home>Payroll for North America>Employee Pay Data USA>Tax Information>Update Employee Tax Data). 

  1. Insert a row into the panel.
  2. Click the Non-Resident Alien; Tax Treaty/NR Data radio button in the Special Tax Withholding Status area.
  3. In the Tax Treaty/NR Data area, enter the original (first) date of entry into the United States and enter the country of residence.
  4. Select the Treaty ID from the search button equal to “30% W/H RT”
  5. Enter in Income Code 15 for the scholarship recipient.
  6. Since the scholarship recipient is not using a treaty, no treaty expiration date is necessary and no other areas need to be marked. 

Agencies should use NPAY 752 (Social Security Number Verification Report) to verify the accuracy of employee provided Social Security Numbers.

 

Questions

Questions regarding this bulletin may be emailed to the Tax and Compliance mailbox.