Review the Tax Impact of Hiring Foreign Professors for Remote Learning

Many higher education institutions expanded their online learning programs to meet student interest and demand. With an increase in remote learning came increased remote workforce opportunities. Now colleges and universities have the flexibility to hire adjunct professors from outside the state — or even the country — to teach remote classes.

While opening positions to remote teaching can widen your candidate pool, it can also bring unforeseen tax implications.

Review tax considerations of foreign employment

From a tax perspective, where services are performed is where the income is sourced — and where such income may be taxed. When remote professors are working in another state, your higher education institution may have filing requirements in that state for payroll tax purposes.

But what happens if you hire an adjunct professor in another country?

If the adjunct professor does not live in the United States and provides all services (teaching, preparation, meetings, and virtual office hours) from outside the country, the income for such services is considered foreign sourced income and would not be subject to U.S. taxation.

However, if this professor comes to the United States to provide a lecture or meet with students, faculty, or administrators, then the income associated with such activities while in the United States will be U.S. sourced income.

Therefore, it is important to understand when it is necessary to withhold U.S. income tax and what you must do to be compliant.

Take steps to help stay in compliance

As part of onboarding, have the adjunct professor who lives outside the United States complete Form W8-BEN, which declares the individual’s foreign status, and keep it on file. Make sure they also complete the treaty section of the form (if applicable).

These forms are valid for three years, so request them from the individual every three years, or at any time the individual has a change in country of residency.

How does tax withholding work outside the United States?

When all services are performed outside the United States, the institution does not need to withhold on their payments. However, if the individual (or the institution) decides they must lecture or attend meetings associated with teaching services for the institution in the United States, payment for these services are subject to U.S. income taxation, and a flat 30% withholding on such payment may be required to be remitted to the IRS.

Apportioning payments between foreign and U.S. source income is typically performed based on the number of days the individual is physically present within and outside the United States, with U.S. withholding applying only to the U.S. source portion. To recoup any such withholding, the individual would have to personally file a Form 1040-NR with the IRS.

Tax withholding responsibility

Your institution is usually responsible for the tax withholding requirements for payment to the foreign individual for services performed in the United States and must withhold 30% U.S. tax from the payment. In some cases, a reduced rate may apply if there is a tax treaty between the foreign individual’s country of residence and the United States.

If your institution does not withhold, and the foreign individual does not satisfy the tax obligation, your institution will be held liable for the tax and any associated interest and penalties.

In addition, you must file Forms 1042 and 1042-S with the IRS by March 15 of the year following the calendar year where such U.S. compensation was paid. Also, you must furnish a copy of Form 1042-S to the foreign individual by the same deadline.

Consequently, your higher education institution must prepare and implement policies to meet these U.S. tax compliance and reporting requirements, as well as to avoid any penalties associated with not withholding on foreign individuals providing services while in the United States.

How we can help

The tax compliance rules around employing foreign individuals can be complex. CLA’s higher education and international tax professionals can assist your institution with understanding and complying with these requirements.