Nonresident Aliens and the Accountable Plan Rules
The accountable plan rules apply to nonresident aliens as well as to U.S. citizens and resident aliens.
In a general information letter issued on December 16, 1998, the Office of IRS Assistant Chief Counsel (EB/EO) announced that the "accountable plan rules" and the working condition fringe benefit rules allowed by sections 62, 132, 162, and 274 of the Internal Revenue Code are applicable to nonresident alien individuals as well as to U.S. citizens and resident aliens. This means that payments made to, or on behalf of, nonresident alien individuals for the purpose of defraying or reimbursing the deductible travel and lodging expenses of such nonresident alien individuals are excludible from the gross income of such nonresident alien individuals and are not reportable to the Internal Revenue Service by the payers of such payments, on the condition that the requirements of the accountable plan rules are met.
The requirements of the accountable plan rules are found in Treasury Regulation 1.62-2; and they require that the payee (1) establish the business purpose and connection of the expenses; (2) substantiate the expenses claimed to the payer within a reasonable period of time; and (3) return any amounts to the payer which are over and above the substantiated business expenses within a reasonable period of time. Amounts which are over and above the substantiated business expenses, or not accounted for within a reasonable period of time, are reportable to IRS on Form W-2 and subject to withholding of employment taxes (or are reportable on Form 1042-S and subject to section 1441 withholding, as applicable).
Travel and lodging reimbursements may also fall under the definition of employee working condition fringe benefits as defined by section 132 of the Internal Revenue Code. Treasury Regulation 1.132-1(b)(2) includes within its definition of an "employee" for purposes of section 132" any independent contractor who performs services for the employer."
Revenue Procedure 2008-59 (scheduled to be periodically updated) explains the application of these rules in more detail. In addition, Revenue Ruling 63-77 states the following: "Allowances or reimbursements made to individuals by a prospective employer for expenses incurred in connection with interviews for possible employment, which are conducted at the invitation of the prospective employer, are not 'wages' subject to Federal employment taxes and the withholding of income tax. Also, to the extent they do not exceed the expenses incurred, they are, under the circumstances, not includible in the gross income of such individuals for Federal income tax purposes."
General information letter issued on December 16, 1998 by the Office of IRS Assistant Chief Counsel (EB/EO)
December 16, 1998
This responds to your submission regarding the withholding requirements on travel reimbursement payments made by a tax exempt University to nonresident alien guest lecturers. Jay Rotz of the Exempt Organizations Division forwarded your letter to this office for response. This letter provides general information on the topics you have inquired about. Although you initially submitted a request for a formal ruling, Mr. Rotz has advised us that you subsequently agreed to change your submission to a request for a general information letter. Accordingly, we are happy to provide the following general information, which we hope will be helpful to you.
We understand that the taxpayer, * * * is a tax exempt organization described in Internal Revenue Code (Code) section 501(c)(3). The University frequently invites nonresident aliens to teach as guest lecturers. You have represented that these guest lecturers are not employees of the University. It is the University's policy to pay travel expenses incurred by the guest lecturers either by directly paying the expenses or by reimbursing the guest lecturer for expenses incurred while in travel status.
You have inquired whether section 1441 (Withholding of tax on nonresident aliens) of the Code applies to the withholding of income tax from payments for reimbursed expenses paid to nonresident alien guest lecturers. Additionally, you requested information on whether the reimbursed expenses are exempt from the withholding and payment of employment taxes under the accountable plan rules under sections62(c) and 274 of the Code, and whether treatment under the accountable plan rules will affect the University's tax exempt status.
Nonresident aliens are taxed at the rate of 30% on certain types of U.S. source gross income that are not effectively connected with the conduct of a U.S. trade or business under section 871(a)(1)(A) of the Code. Under section 1441(a) of the Code, the tax is required to be collected by the person making the payment to a nonresident alien at the time the payment is made. The reimbursements for travel and living expenses (treated as remunerations or emoluments) of visiting lecturers are included within the types of gross income subject to the tax and withholding pursuant to section 1441(b) of the Code.
These laws are applicable to nonresident alien visiting lecturers (considered independent contractors of the universities or colleges for employment tax purposes) unless an exemption is provided by another section of the Code or a tax treaty.
Section 61(a)(1) of the Code provides that gross income means all income from whatever source derived, including compensation for services. Section 62(a)(1) provides that the term "adjusted gross income" means gross income minus deductions attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee. Section 62(a)(2)(A) provides that the term "adjusted gross income" means gross income minus the expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer.
Section 62(c) of the Code provides that an arrangement shall not be treated as a reimbursement or other expense allowance arrangement if such arrangement does not require the employee to substantiate the expenses covered by the arrangement or if such arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement. Section 1.62-2(c)(1) of the regulations provides that the phrase "reimbursement or other expense allowance arrangement" means an arrangement that meets the requirements of paragraphs (d) (business connection), (e) (substantiation), and (f) (returning amounts in excess of expenses) of this section.
Section 1-62- 2(c)(2)(i) of the regulations provides that if an arrangement meets the requirements of paragraphs (d), (e), and (f), all amounts paid under the arrangement will be treated as paid under an "accountable plan." Under section 1.61-2(c)(4) of the regulations, amounts treated as paid under an accountable plan are excluded from the employee's gross income, are not reported as wages or other compensation on the employee's Form W-2, and are exempt from the withholding and payment of employment taxes. See also sections 31.3121(a)-3(a), 31.3306(b)-2(a), and 31.3401(a)-4(a) of the Employment Tax Regulations, If an arrangement does not meet each of the requirements under paragraphs (d), (e), and (f) of section 1.162- 2; section 1.162-2(c)(3)(i) of the regulations provides that the amounts paid under the arrangement will be treated as paid under a "nonaccountable plan." Amounts paid under a nonaccountable plan are treated as wages subject to employment taxes under regulation section 1.62-2(c)(5).
Section 1.62-2(d)(i) of the regulations provides that an arrangement meets the business connection requirement of this paragraph if it provides advances, allowances (including per diem allowances), or reimbursement only for business expenses that are allowable as deductions under Part VI (sections 161 through 196), subchapter 8, Chapter 1 of the Code, and that are paid or incurred by the employee in connection with the performance of services as an employee of the employer.
Under section 1.62-2(e) of the regulations, an arrangement meets the substantiation requirement if the arrangement requires each business expense to be substantiated to the payer within a reasonable period of time. An arrangement that reimburses travel, entertainment or other deductible expenses governed by section 274(d) of the Code meets this requirement if information sufficient to satisfy the substantiation requirements of section 274(d) and the regulations there under are submitted to the payer.
The third requirement of an accountable plan is satisfied if the arrangement requires the employee to return to the payer within a reasonable period of time any amount paid under the arrangement in excess of the substantiated expenses. See [section] 1.62-2(f) of the regulations. The determination of whether an arrangement requires an employee to return amounts in excess of substantiated expenses will depend on the facts and circumstances.
If an arrangement meets the three requirements, but the employee fails to return, within a reasonable period of time, any amount in excess of the amount of the expenses substantiated in accordance with the regulations, the amounts paid under the arrangement that are in excess of the substantiated expenses are treated as paid under a nonaccountable plan. See section 1.62- 2(c)(3)(ii) of the regulations.
Section 132(a)(3) of the Code provides that gross income shall not include any fringe benefit which qualifies as a working condition fringe. Section 132(d) defines the term "working condition fringe" as any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 (trade or business expense) or section 167 (depreciation expense).1
For purposes of working condition fringes, section 1.132- 1(b)(2) of the regulations provides that the term "employee" means (i) any individual who is currently employed by the employer, (ii) any partner who performs services for the partnership, (iii) any director of the employer, and (iv) ANY INDEPENDENT CONTRACTOR WHO PERFORMS SERVICES FOR THE EMPLOYER (emphasis added).
Under section 1.132-5(a)(1)(v), a cash payment made by an employer to an employee will not qualify as a working condition fringe unless the employer requires the employee to (A) use the payment for expenses in connection with a specific or prearranged activity of undertaking for which a deduction is allowable under section 162 or section 167, (B) verify that the payment is actually used for such expenses, and (C) return to the employer any part of the payment not so used.
Section 1.132-5(a)(1)(ii) of the regulations provides that if, under section 274 or any other section, certain substantiation requirements must be met in order for a deduction under section 162 or section 167 to be allowable, then those substantiation requirements apply when determining whether a property or service is excludable as a working condition fringe.
Section 1-274-5T(h) of the regulations provides rules for the reporting and substantiation of certain expenses for travel, entertainment, gifts, or with respect to listed property paid or incurred by one person (hereinafter termed "independent contractor") in connection with services performed for another person other than an employer (hereinafter termed "client or customer") under a reimbursement or other expense allowance arrangement with such client or customer.
Section 1.274-5T(h)(2) provides that an independent contractor shall substantiate, with respect to his reimbursement, each element of an expenditure (described in section 1.274-5T(b)) in accordance with the requirements of section 1.274-5T(c); and, to the extent he does not so substantiate, he shall include such reimbursements in income.
Under the provisions of the Code and regulations discussed above, the reimbursements provided to the nonresident aliens who incurred travel and related expenses in visits to the United States to serve as guest lecturers at the University do not appear to be includible in their gross income if the individuals properly substantiated their deductible expenses to the payer within the meaning of section 274(d) and the regulations there under and if the reimbursements do not exceed those substantiated expenses. If the nonresident aliens served as guest lecturers in their capacities as employees of another entity (e.g., employees of foreign universities), the reimbursements are in connection with the performance of services as employees of the employer under section 62(a) and (c) and the relevant regulations. The fact that the reimbursements are paid by a third party (e.g., the host university) is not determinative. Consequently, if the nonresident aliens' employer maintains an accountable plan within the meaning of section 1.62-2(c)(2), the reimbursements for substantiated expenses are excluded from the individuals' incomes, are not reported as WAGES or other compensation on the individuals' Forms W-2, and are exempt from the withholding and payment of employment taxes.
Alternatively, if the nonresident aliens participated in the conference in connection with a separate trade or business (i.e., as independent contractors), the reimbursements are not governed by section 62(a) and (c). However, section 132(a)(3) and the regulations there under exclude from income the cash payments to reimburse expenses if the individuals properly substantiated the expenses to the payer. 2
We hope the above information is helpful to you. The attorney assigned to this matter is Lynne Camillo. She can be reached at (202) 622-6040.
Mary E. Oppenheimer
Assistant Chief Counsel
(Employee Benefits and
Exempt Organizations Division)
Department of the Treasury
1Section 132(l) of the Code provides that section 132 (other than subsections (e) (de minimis fringe) and (g) (qualified moving expense reimbursement) shall not apply to any fringe benefits of a type the tax treatment of which is expressly provided for in any other section of Chapter 1 of the Code.
2Section 132(l) does not prohibit the application of section 132 to these cash payments since no other section, including section 62(a) and (c), expressly provides for the tax treatment of reimbursement for travel and related expenses provided to individuals who are not employees.
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.