ALIEN MANUAL - U.S. INCOME, SECTION C

All payments to nonresidents are considered income and will be subject to tax unless excluded. Possible exclusions are:

1. All Foreign Source - nonresident aliens are only taxed on U.S. source income. A discussion on sourcing rules and how to apply the rules to each type of income follows.

2. Exclusion under Internal Revenue Service Code - Amounts paid as Scholarships/Fellowships may be excluded under IRS Code section 117 as long as 3 requirements are met. The requirements are:

   • The funds must be for a ‘qualified scholarship". This is amounts paid for tuition, required fees, books, supplies, and equipment. Amounts paid for room and board, travel, parking, and not required fees and equipment are taxable income.

   • The recipient of the scholarship/fellowship must be enrolled in a degree program.

   • The individual must be studying or conducting research at an educational organization

3. Exclusion under Tax Treaty - payments made to residents of countries that have a tax treaty with the U.S. may be exempt from federal tax withholding as long as all requirements of the tax treaty are met.

Since a nonresident is only subject to tax on US source income, it is important to understand the sourcing rules for different types of income. As will been seen in Tables 2.1 and 2.2, different types of income are sourced and taxed differently. Generally, the types of income that are paid at UCLA fall into five categories: Employment, Independent Personal Services, Royalties, Travel Reimbursement, and Fellowship/Scholarship. Each type will be defined.

C1.1-1 Employment

This is the relationship that exist between an employee and employer. The IRS has identified 20 classification factors, based on common law standard, which can be used to determine whether a worker is an employee or an independent contractor.

An individual is generally an employee if the person for whom the services are performed has the right to direct and control the individual who performs the services, not only as to the results to be accomplished but also the methods and means by which the results are accomplished. If there are any questions concerning the employee status of an individual, please contact Human Resources or Payroll Services for assistance.

Employees at UCLA are paid by Payroll Services per the information that is entered online by their hiring department. They are taxed according to the information on the W-4 or overriding IRS rules and regulations. These are discussed in Section D.

At UCLA, services performed by an independent non-resident alien contractor as opposed to services performed by an employee are paid by Accounts Payable through the "PAC" system.. The type of payments typically made under this category are one time payment lecture fees & honorarium.

Further information is included in the Independent Personal Services section. Departments need to carefully review the service that is being paid to insure that the person is indeed a "non employee". Any questions regarding whether the payments is for non-employment or employment can be directed to Payroll Services.

Payments for non-citizens are reviewed and tax coded by Payroll Services. The PAC System is responsible for withholding taxes.

A royalty can be paid to a nonresident by the University. A royalty is a payment for the right to use a copyright on a book, periodical, articles, etc. The royalty can also be for the use of patents, trademarks, formulas, and goodwill.

Questions related to royalties should be directed to the Accounts Payable office. Payroll Services review these payments to determine it U.S. source or foreign source. The PAC system will withhold taxes based upon Payroll Services recommendation.

Reimbursement of costs for lodging, meals, transportation and related expenses are allowed to an individual who is on business on behalf of UCLA. These expenses must be incurred at the time the business is taking place. Currently, the UC policy does not tax or tax report these reimbursements. Travel office is also responsible for processing relocation of new hired employees.

Questions related to allowable travel reimbursement and relocation should be directed to the Travel Office. Payments for travel reimbursement are reviewed by the Travel Office and paid through the Accounting Payroll System.

Under IRS Section 117, a fellowship is an "amount paid or allowed for the benefit of a student to aid in the pursuit of study or research".   A scholarship is "an amount paid or allowed for the benefit of a student to aid such individual in pursuing his studies".  So, basically the fellowship or scholarship is given without any strings attached.  The student has control of the award and does not have to perform any services now, in the past, or in the future to guarantee the award.  If the award does require a performance of services (whether now or in the future), then the IRS may view this as employment.  Questions should be directed to the Graduate Division, Financial Aid Office, or Payroll.

C2.0 SOURCE OF INCOME

A payments' source must be reviewed to determine if the payment is actually subject to IRS and/or state reporting and withholdings regulations.

FEDERAL

For federal tax purposes, the Internal Revenue Service classifies income into two sources.  The income can either be U.S. source or foreign source.  The source of income depends on the location of the payor, location of service provided, and the type of payment made.

Resident aliens are taxed on their worldwide income.  Nonresident aliens are taxed on their U.S. source only.  Foreign source income paid to a nonresident alien is not tax reported and is not subject to U.S. taxes.  Table 2.1 below illustrates this.

STATE

For the State of California, income is sourced by residency of the individual receiving payment and location of services.  Residents (of California) are taxed on all income earned regardless of where it is earned.  Nonresidents (of California) are only taxed on the income earned while working and living in California.  The exception to this rule is the payment for Fellowship/Scholarship.  The source of the payor of funds needs to be reviewed to determine if the payment is state income.  Refer to Table 2.2 below.

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