Student Payroll: Forms and Procedures

1
Student PayrollForms and Procedures

• Presented by Tax Services
• July 2006

2
Overview

• Tax Residency Whats it all about?
• Nonresident Alien Tax Residency Information Form
  Documentation
• Taxing Nonresident Alien Students

• Student FICA Rules
• I-9 Overview
• W-4 Withholding
• Record Retention

3
Student PayrollNonresident Alien Taxation
4
Tax Residency

• Under U.S. tax laws, all non-U.S. citizens are
  considered to be either
• Permanent resident aliens
• Resident aliens for tax purposes, or
• Nonresident aliens.

5
Taxation Residency

• Permanent resident aliens and resident aliens for
  tax purposes are taxed the same as U.S. citizens
• Resident aliens generally are taxed on their
  worldwide income, the same as US Citizens
• Nonresident aliens are taxed under special laws
• Nonresident aliens are taxed only on their income
  from sources within the US on certain income
  connected with the conduct of trade or business
  in the US.

6
Tax Residency - Why We Care

• Knowing an individuals tax residency status prior
  to payment is essential to accurately report the
  individuals tax liability and to be in
  compliance with IRS tax laws.

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Tax Residency - Why We Care
MnSCU Pays

• If MnSCU incorrectly reports a nonresident
  aliens tax withholding liability, MnSCU may be
  held responsible for the tax not withheld, in
  addition to any penalties for failure to
  withhold, plus the interest from the time the tax
  was not withheld.

8
Tax Residency Tests

• There are two tests used to determine whether a
  non U.S. citizen should be treated as a U.S.
  resident for tax purposes
• The Green Card test, and the
• Substantial Presence Test

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Days Not Counted

• Exceptions to counting days towards substantial
  presence
• Any days the individual regularly commutes to
  work in the U.S. from a residence in Canada or
  Mexico
• Any days the individual is in the U.S. for less
  than 24 hours when in transit between two places
  outside of the U.S.
• Any days the individual was unable to leave the
  U.S. due to a medical condition that developed
  while he was in the U.S., and
• Any days the individual was present in the U.S.
  as an exempt individual.

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Exempt Individuals
Exempt individuals are present in the U.S. for
the primary purpose of being

• a teacher or trainee
• generally present under a J or Q visa
  includes all J non-student categories
• a student
• generally present under a F, J, M or Q
  visa

• a foreign government-related individual
• generally a foreign diplomat or consular officer
  present under an A or G visa
• a professional athlete
• generally present under a P visa

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Tax Residency Information Form

• Student employees who indicate on their I-9 that
  they are other alien authorized to work until
  xx/xx/xxxx must fill out the Student Payroll Tax
  Residency Information Form.
• Section E applies the Substantial Presence Test
  for F-1/J-1 student visa holders

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Tax Residency Information Form
13
Tax Residency Information Form
14
Tax Residency Information Form
2001
F-1
Aug 01 May 02
High school exchange student program
2002
F-1
Above
Ideal Reality Estimate or Range of Dates
Also Known As TRIF
15
TRIF Documentation

• F-1 Students
• I-20 Attachments
• I-94
• Passport

• J-1 Students
• DS-2019 Employment Letters
• I-94
• Passport

16
I-20 Certificate of Eligibility for Nonimmigrant
(F-1) Student
17
I-94 Arrival/Departure Record
18
I-94 Arrival/Departure Record
19
DS-2019 Certificate of Eligibility for Exchange
Visitor(J-1) Status
20
Passport Information

• Identification Page
• Current visa information
• Prior visits to US

21
Tax Residency Form Summary

• All student employees who indicate on their I-9
  that they are other aliens authorized to work
  until xx/xx/xxxx, must fill out the Tax
  Residency Form
• Students must complete Sections A and D. If they
  have been in the U.S. prior to their current
  visit, they must also complete Section C.
• Student Payroll copies the students immigration
  documents completes Sections E, F and G.
• Student Payroll enters the Tax Residency Year
  from Section E into ISRS Student Employee Setup
  (PR0021UG) Screen
• Keep the original form with the employees
  records
• Send a copy of the completed form and related
  immigration documentation to Tax Services

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Taxing Nonresident Aliens

• Statutory Withholding
• FICA Exemption
• Tax Treaty Benefits

23
Statutory Withholding Rules

• Nonresident Aliens W-4
• May not claim exemption from income tax
  withholding,
• Request withholding as if they are single,
  regardless of their actual marital status,
• Claim only one allowance, and
• On line 6, write Nonresident Alien or NRA
• 15.30 in extra withholding is no longer required

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Exceptions to Statutory Withholding Rules

• Students from India
• Article 21(2) of the United States-India Income
  Tax Treaty
• An additional withholding allowance may be
  claimed for a spouse if the spouse has no U.S.
  source gross income and may not be claimed as a
  dependent by another taxpayer.
• An additional withholding allowance for each
  dependent (usually a child) who has become a
  resident alien.

• Canada and Mexico, American Samoa and Northern
  Mariana Islands
• Entitled to claim additional withholding
  allowances for a nonworking spouse and for
  dependents, the same as a U.S. citizen.
• South Korea
• May claim additional withholding allowances for a
  nonworking spouse and dependents present with
  them in the U.S.

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FICA Exception for F, J, M Q Nonresident Aliens

• IRC Section 3121(b)(19)
• An individual may be exempt from FICA tax
  withholding if he or she meets all of the
  following criteria
• Is a nonresident alien for taxation purposes
  (i.e. has not met the substantial presence
  test)
• Is present in the U.S. under a F, J, M or Q visa
• Is performing services in accordance with the
  primary purpose of the visas issuance (i.e., the
  primary holder of the visa, the -1).
• This exemption does not apply to F, J, M or Q
  visa holders who become resident aliens for tax
  purposes (i.e., individuals who have met the
  substantial presence test).

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Tax Treaties Income Withholding

• Agreement between two countries to reduce or
  eliminate double taxation.
• US has income tax treaties with over 48 different
  countries
• Each treaty is unique and may not contain the
  same provisions or exemptions as another tax
  treaty.
• From time to time, treaties with additional
  countries are signed and existing treaties
  revised
• IRS website has complete text of current tax
  treaties

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Tax Treaties Income Withholding

• Typically, the employee must be a nonresident
  alien for tax purposes to claim treaty benefits
• F-1 Student Tax Treaty Article/Clause
• Compensation during training
• Dependent Personal Services (Canadian)
• Annual maximum dollar amount and/or a time limit
  of presence in the U.S.

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Form 8233 For Claiming Treaty Benefits
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Completing Form 8233
Form 8233 For Claiming Treaty Benefits
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Form 8233 Page 2
Must be mailed within 5 days from the
withholding agent signature date
Campus Contact Student Payroll
12/5/2005
Jane Lee 12/1/2005
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8233 Statement Attachment
Peoples Republic of China 1. I was a resident of
the Peoples Republic of China on the date of my
arrival in the United States. I am not a United
States citizen. I have not been lawfully accorded
the privilege of residing permanently in the
United States as an immigrant. 2. I am present
in the United States solely for the purpose of my
education or training. 3. I will receive
compensation for personal services performed in
the United States. This compensation qualifies
for exemption from withholding of federal income
tax under the tax treaty between the United
States and the Peoples Republic of China in an
amount not in excess of 5000 for any taxable
year. 4. I arrived in the United States on
8/25/2005 . I am claiming this exemption only
for such period of time as is reasonably
necessary to complete the education or
training. Tax year treaty being claimed for
2006______________ Under penalties of perjury,
I declare that I have prepared this form and to
the best of my knowledge and belief, it is true,
correct, and complete. Signature of nonresident
alien individual______Jane Lee _ Date
12/1/2005________________________________________
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Completing Form 8233

• Review 8233 Statement Attachment
• Sign Date 8233
• Must be mailed to IRS within 5 days of signing
• Copy 8233 Attachment
• IRS
• Tax Services
• Employee
• Campus

33
Student Payroll Employment Forms
34
Employment Forms

• Form I-9, Employment Eligibility Verification
• Form W-4, Employees Withholding Allowance
  Certificate

35
Tax Form Management

• General form information
• Form maintenance documentation
• Form storage suggestions
• Record retention requirements

36
Form I-9
Employment Eligibility Verification Form
37
Form I-9, Employment Eligibility Verification

• Department of Homeland Security
• USCIS United States Citizenship Immigration
  Services
• Law The Immigration Control Act
• Code of Federal Regulations Sec 274
• U.S. Employers Employees
• Last updated 1991

38
Form I-9, Employment Eligibility Verification

• Employees responsibility
• Complete Section I Prior to the close of
  business on the first day of employment services
• Employers responsibility
• Review employment authorization documentation
  prior to the close of business on 3rd day of
  employment services complete I-9

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I-9 Section 1
SMITH JOHN A
12 ANYWHERE AVENUE
1A
01/01/1984
123-45-6789
SOMEWHERE MN
55101
?
?
?
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Section 2 Form I-9, Employment Eligibility
Verification

• Review Documentation
• Authorization to work in U.S.
• Establish identity
• Must match
• Record Document Information
• Employer must sign date

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I-9 Section 2, Verification
F-1/J-1 Students 3 Documents

• F-1 Documentation
• SEVIS Form I-20,
• I-94, Arrival/Departure
• Passport
• Personal Info
• Include visa stamp

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I-9 Documentation

• List of acceptable documents
• List A Employment Eligibility ID
• Lists B C Combination
• Timely verification
• Must be verified within 3 days of start date
• Reasonableness
• If appears genuine, accept document

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Documents that Establish Both Identity
Employment Eligibility
And Form I-766, Employment Authorization Document
44
LIST B Establishing Identity
45
LIST C Establishing Employability
The combination of documents from List B and
List C verifies the I-9
46
LIST C Common Error

• A Social Security Card that reads
• Is NOT an acceptable List C document.
• You must ask to see another document to verify
  employability.

Valid for work only with DHS Authorization
47
I-9 Section 3, Re-Verification
Re-Verification
When work authorization documents reach
expiration date
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I-9 Record Retention

• I-9s must be on hand for
• All current employees
• Three years after employees hire date or 1 year
  after employees termination date whichever is
  later

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I-9 Record Recommendations

• In case of audit, I-9s must be retrievable in 3
  days
• Recommend keeping I-9s separate from other
  payroll documentation

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W-4 Withholding Certificate
51
W-4 General Rules

• What to do if no W-4?
• S-0
• Validity Any unauthorized change or addition to
  Form W-4 makes it invalid. Including
• Taking out any language by which the employee
  certifies that the form is correct
• A Form W-4 is also invalid if, by the date an
  employee gives it to you, he or she indicates in
  any way that it is false.
• When you get an invalid Form W-4, do not use it
  to figure federal withholding. Tell the employee
  that it is invalid and ask for another one.

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W-4 Claiming Exemption

• IRS Code section 3402(n) An employee may claim
  exemption from income tax withholding if he or
  she
• Had no income tax liability last year and
• Expects to have no tax liability this year.
• Exemption is good for one year only
• W-4 must be submitted by February 15th
• If the employee does not provide a new Form W-4,
  the employer must withhold tax as if the employee
  were single with zero withholding allowances.

53
W-4 New IRS Rule in 2005

• Withholding agents are no longer required to send
  copies of W-4s to IRS, unless specifically
  requested
• MN Dept of Revenue still requires copies
• W-4s with over 10 allowances
• Exempt W-4s where employee regularly earns over
  400 a biweekly pay period

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Withholding Allowances Employee Advice

• IRS Withholding Calculator
• http//www.irs.gov/individuals/article/0,,id96196
  ,00.html
• Most recent pay stubs, most recent tax return
• Calculator will determine correct withholding
  allowances to claim on Form W-4
• Link on Tax Services website Student Tax
  Assistance section

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Withholding Allowances Employee Advice

• IRS Publication 919 How Do I Adjust My Tax
  Withholding?
• http//www.irs.gov/pub/irs-pdf/p919.pdf
• Detailed instructions and worksheets for
  computing tax withholding

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W-4 Record Retention

• Form W-4 remains in effect until the employee
  gives you a new one.
• If an employee gives you a Form W-4 that replaces
  an existing Form W-4, begin withholding no later
  than the start of the first payroll period ending
  on or after the 30th day from the date when you
  received the replacement Form W-4.

57
W-4 Record Retention

• A Form W-4 claiming exemption from withholding is
  valid for only one calendar year
• Request new W-4 each year from
• Employees claiming exemption
• NRAs with 8233s
• W-4s must be kept on file for 7 years after the
  last applicable tax year

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W-4 Record Retention Example

• Ann is hired in 2001 fills out a 2001 W-4
• In 2004, Ann fills out a new W-4
• The 2001 W-4 was used to figure Anns withholding
  for 2001, 2002, 2003 and part of 2004.
• The 2001 W-4 must be kept until 2011

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Summary I-9 W4
Current Employees Keep most recent I-9 W-4
form on file

• I-9
• Keep I-9s for 3 years after hire date or 1 year
  after termination, which ever is later.
• Reverify I-9 when employment authorization expires

• W-4
• Current and terminated employees Keep all W-4s
  for 7 years past applicable year
• If missing or invalid W-4 Withhold S-0

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Retention Payroll Forms

• 7 Years past applicable tax year
• Timesheets
• W-4 Forms
• TRIF
• 8233 Forms
• Contracts

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Tax and Student Employees

• Student FICA Exception
• Payday Tax Reports
• Graduate Assistants Taxable Tuition Benefit

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Student FICA Exception

• IRC Section 3121(b)(10)
• To be eligible for the student FICA exception the
  student must
• Work for the institution at which they are
  enrolled, and
• Be enrolled for at least half-time and regularly
  attending classes.
• This exemption is available during breaks between
  sessions if the breaks do not exceed 5 weeks.
• The student is not eligible for this exception if
  they regularly work more than 30 hours per week.

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Student FICA Exception

• Rule Changed 4/1/2005
• Full time employees are not exempt
• Employees who regularly work 40 hours a week
  full time, career employees
• gt30 Hour a week full time
• Tracking
• Supervisor Hire Form
• ISRS Report
• PR0212CP Hours Worked

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Student FICA Exception Issue

• Pay Period Controller (PR0002UG), Academic Terms
  and the Student FICA Exception
• The Term associated with a pay period will be
  used by the ISRS Student Payroll Module to
  determine the student workers enrollment for
  purposes of the Student FICA Exception.

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Guidelines for Associating Pay Periods to
Academic Terms

• If the pay period straddles terms, the pay period
  may be tied to either term's enrollment.
• Summer term ends 8/20, Fall term starts 8/21, and
  pay period 04 starts 8/9 and ends 8/22. Since
  pay period 04 straddles Summer and Fall terms,
  the institution can tie this pay period to either
  Summer or Fall term.
• If the pay period falls completely in a
  between-term break of 5 weeks or less, use the
  enrollment data for the term prior to the break.
• Summer term ends 7/28, Fall term starts 8/28 and
  pay period 04 starts 8/9 and ends 8/22. Because
  pay period 04 falls completely in the
  between-term break, it must be tied to Summer
  term enrollment.

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Guidelines for Associating Pay Periods to
Academic Terms

• If the pay period straddles a break and a term,
  the current term's enrollment data must be used.
  
• Summer term ends 7/28, Fall term starts 8/21, pay
  period 04 starts 8/9 and ends 8/22. Pay period
  04 must be tied to Fall term enrollment since it
  is the only term that includes any portion of the
  pay period.
• If the pay period falls in an academic break of
  more than 5 weeks, the Student FICA Exception is
  not allowed.
• Please contact Tax Services with questions

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Payday Tax Reports Checks

• Student Payroll Calendar (see website)
• By the Wednesday prior to PayDay
• Tax Reports PR0009GR PR0010GR should be sent to
  printer named BW350A
• Tax Checks should be mailed to OOC

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Graduate Assistant Tuition Reductions

•  Determining Taxable Tuition Reductions

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Internal Revenue Code

• Section 117 (d) paragraphs 1 2 of the Internal
  Revenue code provides that gross income shall
  not include any qualified tuition reduction
  provided to an employee for education below the
  graduate level.
• Section 117 (d) paragraph 5 extends the
  provisions of paragraphs 1 2 to graduate
  assistants engaged in teaching and research.
• Section 117 (c) limits the exclusion from income
  to tuition reductions that do not have a service
  requirement as a condition of receiving the
  tuition reduction.

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Graduate Assistant Tuition Reductions

• A tuition reduction is tax free to a graduate
  student under the following circumstances
• The student is engaged in teaching or research,
  and
• The tuition reduction does not represent
  compensation for service.

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Documenting Teaching/Research Positions

• It is recommended that all assistantships which
  qualify as teaching or research have the
  following Supporting Documentation
• Teaching or Research as a descriptors in the job
  title- i.e. Biology Graduate Research
  Assistantship
• Job description that lists duties which are
  appropriate for job title.

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Compensation for Services

• The tuition reduction is considered compensation
  for service if the graduate assistant must
  perform some service for which they are not
  otherwise compensated.
• To the extent the tuition reduction represents
  compensation for services, the fair market value
  of the portion of the tuition reduction that
  represents compensation is taxable.

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Determination of Taxable Benefit

• Fair Market Value of Tuition
• How does the graduate assistants hourly rate
  compare with wages for the same work in the local
  private sector?
• Comparison choices given by IRS
• Wages paid by college to students performing same
  work and not receiving tuition benefits
• Wages paid by college to employees who are not
  students performing same work
• Wages paid by other educational organizations to
  students or employees performing same work
• Supporting Documentation
• Fair Wage Comparison based on one or more of the
  above

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Example 1

• The graduate student is employed by the
  university as an office assistant and receives an
  hourly salary plus a tuition reduction of 1,000
  per year.
• The tuition reduction is taxable because the
  graduate student is not engaged in teaching or
  research.
• Whether the graduate student is being paid fair
  market value is irrelevant since the graduate
  student is not engaged in teaching or research.

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Example 2

• Deb, a graduate student at a MnSCU State
  University, is engaged as a teaching assistant,
  for which she receives a salary of 6,000 per
  year plus a tuition reduction of 1,000 a year.
• Adjunct faculty who teach the same number of
  credits and have comparable qualifications
  receive a salary of 6,000 per year.
• The graduate students salary is reasonable
  compensation when compared to the adjunct salary
  so the tuition reduction is tax-free.

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Student Payroll Setup of Taxable Tuition
Reductions

• Use FA Award Code 10189 to record taxable tuition
  reductions.
• Student Payroll must use the Taxable Benefit
  Browse screen (PR0026UI) to list the student
  employees who have had an Award ID of 10189 (Grad
  Assist Tuit Waiver-Taxable) applied to their
  account.

77
Student Payroll Setup of Taxable Tuition
Reductions

• Use the Taxable Benefit Entry screen (PR0026UG)
  to set up the distribution time period and
  amount.
• Taxable Benefits must be set up to be spread
  across the pay periods for that period of time
  which the graduate student is reasonable expected
  to be employed by a MnSCU institution.
• Note If the reduction is distributed into summer
  session when graduate student is not enrolled in
  classes, the reduction will be subject to FICA as
  would any regular wages.

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Reporting Taxable Tuition Reductions

• Taxable benefits must be reported on Form W-2 and
  are subject to the usual employment taxes. In
  general, graduate assistants will be exempt from
  FICA under the student FICA exemption.
• Student Payroll must use the Taxable Benefit
  Screen, PR0026UG, to distribute the taxable
  benefits to the graduate students wages.
  Taxable benefits must be distributed during the
  same semester as awarded.

79
Tax Services Website

• Tax Services Website
• http//www.financialreporting.mnscu.edu/Tax_Servic
  es/index.html
• Nonresident Alien Manuals
• Student Payroll
• Student FICA Tax Guidelines
• Sales Tax
• Student Tax Assistance

• Bonds Tax-Exempt Financing Reporting
• Employee Expense Reimbursement Policy
• Unrelated Business Income Tax (UBIT)
• Nonresident Entertainer Tax (MN)
• Phone Bills Taxes
• Auto, Boat and Airplane Charitable Donations

80
Contact Information

• Ann Page, 651-632-5007 Ann.Page_at_so.mnscu.edu
• Steve Gednalske, 651-632-5016, Steve.Gednalske_at_so.
  mnscu.edu
• Tax Services Website
• http//www.financialreporting.mnscu.edu/Tax_Servic
  es/index.html