Nonresident Paycheck Tax Withholding

Determining U.S. Tax Residency 

The substantial presence test determines if a foreign national is treated as nonresident or tax resident for U.S. income tax purposes. Residents are generally taxed that same as U.S. citizens and nonresidents have special withholding rules discussed later.  

Following are the general rules and exceptions that apply when determining substantial presence for tax residency.

Green Card Test

Under the green card test, the foreign national is treated as a U.S. resident for tax purposes if USCIS issues him/her lawful permanent residency ("green card") at any time during the calendar year. 

Substantial Presence Test

General Rule:

The substantial presence test is comprised of the 31-day test and the 183-day test. The foreign national must be present in the U.S. for at least 31 days during the calendar year, and 183 days during the three-year period that includes the current year and the two preceding years. Below is the calculation for the 183-day test, and the exceptions follow. 

Add together:

All the days present in the U.S. during the current calendar year 
+⅓ of the days present in the U.S. in the preceding calendar year 
+⅙ of the days present in the U.S. during the second preceding calendar year
= Total days counted for U.S. tax residency

If that total equals 183 days or more an individual becomes a tax resident.  Generally, the change is retroactive to the beginning of the year, but exceptions do apply.  

Counting Days of Presence in the U.S.

If the foreign national is present in the U.S. during any part of a day (24-hour period), that day will be counted towards substantial presence. There are some exceptions from counting days.

  • Any days the individual regularly commutes to work in the U.S. from a resident in Canada or Mexico
  • Any days the individual is in the U.S. for less than 24 hours in transit between two places outside the U.S. (e.g. airline layovers)
  • Any days the individual was unable to leave the U.S. because of a medical condition that developed while in the U.S.
  • Any days the individual was present in the U.S. as an "exempt individual"

“Exempt Individual" Rules

A foreign national is an "exempt individual" and not permitted to count days towards the substantial presence test if he/she is present in the U.S. under an F, J, M, or Q student visa status, or under a J or Q non-student visa status in these two scenarios:

  • Students under an F, J, M, or Q status are exempt from counting days for five years.
  • Non-student J, and Q visa holders (e.g., teaching, research, trainee, short-term scholar) are exempt from counting days towards substantial presence for two years out of the last six years.

If the individual is present in the U.S. as an exempt individual for any part of a calendar year, it is counted as a full year.

For the purposes of determining exempt individual year for those in a student visa status (e.g., F-1 and J-1 student status), the student is only allowed one five-year exemption period in their lifetime. Those years do not need to be consecutive, but cannot total more than five.

A current J non-student visa holder will not qualify as an exempt individual if he was exempt as a teacher, trainee, non-student or student for any two of the last six calendar years. The exempt individual rule is applicable to the current visa status at the time the test is applied. For those who have previously entered under both student and non-student status, all of the years of exempt individual status, regardless of whether the year was originally applied toward a student or non-student status should be applied to the total exempt years. In no case can the total of exempt years ever exceed five.

Scholarships, Fellowships, and Grants Paid to Foreign Nationals

Qualified Scholarship/Fellowship Payments Nonresidents

Under section 117 of the Internal Revenue Code a "qualified scholarship" is defined as scholarships and fellowships used to pay "tuition and fees required to enroll at or attend an eligible educational institution; and Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.” Only qualified scholarship payments made to nonresident aliens are not subject to withholding.  Students must review IRS Publication 970 to determine which portions of their scholarship or fellowship payments are considered qualified.

Non-Qualified Scholarship/Fellowship Payments Nonresidents

Any portion of the scholarship, fellowship, or grant that does not directly pay for items mentioned above is considered non-qualified and subject to 14% federal taxation as long as the student is a candidate for degree at Northwestern and in F, M, J, or Q status.  Illinois state taxes are not withheld on non-service payments and any tax payments must be paid directly to the state by making estimated tax payments.  Individuals will receive Form 1042-S summarizing their non-qualified scholarship by March 15th of the following year. 

Non-Qualified Scholarship/Fellowship Payments U.S. Tax Residents

Scholarship/Fellowship payments for U.S. citizens, Permanent Residents, and U.S. tax residents are taxable but not subject to tax withholding unless a student specifically requests taxes to be withheld via federal and state W-4 forms.   The payments may be considered taxable income and must be reported when filing your U.S. federal and state tax returns.  Please see IRS publication 970 to assist in determining which portion of these payments is considered taxable income.  If you would like Payroll to withhold taxes, complete the Federal and IL W-4 Employee’s Illinois Withholding Allowance Certificate forms by entering a specific dollar amount on line 6 for the federal W-4 and line 3 on the Illinois W-4. 

Once you add the additional tax withholding, it is very important to know this extra withholding will continue on each payment you receive from the University until you submit new federal and state W-4s removing the additional amount.  That means if you later switch to an assistantship payment (GA, RA, TA) or any other type of employment income (prize, additional pay, etc.) where regular federal and state taxes are withheld, you will then be taxed on the payment for BOTH the normal tax withholding and the additional amount you entered on the W-4s.  To avoid this, make sure to stay alert to any funding changes.  If you will be changing from scholarship/fellowship to another type of payment (or back), you must submit the federal and Illinois W-4 forms to the Payroll Office by the 15th of the month for the tax change to be effective for that month.  Due to federal and Illinois tax laws, Northwestern is unable to refund any taxes to students that fail to adjust their W-4s by the required deadlines.

These payments are not issued a tax form unless taxes were requested to be withheld from the payment.  Payroll will send an email around January 31st of the following year summarizing your non-qualified U.S. scholarship and point you to IRS Publication 970 for instructions on determining which portion is taxable and how to report the income on your 1040 tax return.  If you request taxes to be withheld from these payments, you will receive a W-2 that reflects the taxes withheld. 

Scholarship/Fellowship Source of the Payment - U.S. or Foreign Source

In general, scholarship/fellowships that originate from sources outside the United States are not taxable or reportable to tax nonresidents. Revenue ruling 89-67 describes the source of the payment is determined by the "residence or the payor" not the location of the educational activity.  A nonresident alien studying in the U.S. but receiving scholarship from a foreign source is not subject to tax withholding or IRS reporting on those funds, even if paid through Northwestern.  Also non-resident scholarship/ fellowship stipends that will be used for educational purposes outside the U.S. may be exempt from U.S. taxation if certain requirements are met.  Individuals receiving those payments should complete the Statement for Independent Educational Activities Conducted Outside the U.S. along with the appointment/position form. 

Example: The scholarship/fellowship payment is considered foreign source if the foreign student's government contracts with Northwestern to administer the scholarship funds to their students in the U.S.

Example 2: A nonresident student is performing research in their home country related to their studies at Northwestern and will be using the funds to pay for these activities outside the U.S.  

Tax Treaty Information 

Tax Treaties are bilateral agreements between the U.S. and a number of countries that exempt all or part of your income from U.S. taxation for those temporarily in the U.S.  Claiming a treaty allows the individual to pay taxes on the income in their home country instead of the U.S.  Eligible individuals can complete treaty forms with Northwestern or claim the treaty when filing their U.S. tax return. It is optional.

Details on treaties is in IRS publication 901 on the IRS website.  Most of the tax treaties are for particular types of income, such as student wages or wages for teaching/research and have many limitations on eligibility, amounts, and duration.  Northwestern will only grant a tax treaty on income that specifically applies to the treaty and not on miscellaneous payment types such as additional pay, special pay, or temporary wages. 

In order to receive tax treaty benefits, you must have tax residence with the treaty country and you must have the applicable tax ID (U.S. Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)). New students & employees will enter their information into the Foreign National Information System (FNIS) and we will analyze your tax treaty eligibility. If you do not have a taxpayer ID, ITIN or SSN, you will not be able to claim tax treaty benefits until you receive your number. 

Form 8233 & W-9 tax treaties apply for the calendar year, unless the treaty terms has an earlier expiration and you must renew each year.  We will send an email in December to request forms for the following year.  If you miss the deadline in January, we will apply your treaty on future income and any retroactive treaty benefits will be claimed on your tax return.  W-8BEN treaties are granted for three calendar years including the year we apply the tax treaty. 

 All income exempt under a tax treaty will be reported on Form 1042-S and mailed no later than March 15th of the following year.  Individuals are required to file a U.S. tax return on this income, even if no taxes are withheld. 

Social Security & Medicare (FICA) Taxes

Nonresident F-1 & J-1

F-1 & J-1 nonresidents are exempt from FICA taxes as long as they remain a nonresident for tax purposes under the substantial presence test for on campus employment (IRC 3121(b)(19) or if they are authorized for Curricular Practical Training, Optional Practical Training, Academic Training, or Economic Hardship.  Once an individual becomes a tax resident, they are subject to FICA taxes unless they meet the U.S. student exemption (below).  This exemption does not apply to dependent visas (J-2, F-2).

U.S. Student Exemption

Social Security and Medicare (FICA) Taxes do not apply to service performed by students employed by a school, college or university where the student is pursuing a course of study in at least half time status. This exemption is available for employees whose primary purpose is a student and services are incident to and for the purpose of pursuing a degree.  This exemption is not applicable to full-time employees, teaching positions, or benefits eligible positions.

Refunds for Social Security & Medicare Taxes

Please request this refund directly from Northwestern and not from the IRS by contacting your nonresident tax specialist in Payroll/Tax.  If you are a nonresident, you can contact us without providing any supporting documentation.  If you are requesting a refund under the U.S. student exemption, you will need to include your proof of full-time enrollment from CAESAR and a copy of the paystubs where the taxes were withheld. 

If the refund is for a previous year, we will produce a check, a corrected W-2, and a statement that you will not claim this refund from the IRS. 

W-4 Withholding

Nonresident students and employees have special withholding instructions on their W-4.  IRS Notice 1392 provides special instructions to nonresident W-4s.  Once an individual becomes a tax resident these rules no longer apply. 

Line 3. Check the single box regardless of your actual marital status.
Line 5. Claim zero or one withholding allowance (with a few exceptions).
Line 6. Write “nonresident alien” or “NRA” on the dotted line.
Line 7. Do not claim that you are exempt from withholding on line 7 of Form W-4 (even if you meet both of the conditions listed on that line).  You do not claim tax treaties using Form W-4.