Understanding the U.S. tax system can be challenging, particularly for non-resident aliens. This guide simplifies the core taxation rules that apply to non-resident aliens, covering critical areas such as tax status, income types, withholding requirements, and specific considerations for employers.
Tax Status of Non-Resident Aliens
The U.S. tax system categorizes individuals into two main groups:
- Resident Aliens: Taxed on worldwide income, similar to U.S. citizens.
- Non-Resident Aliens: Taxed only on U.S.-sourced income and income connected to U.S. trade or business.
Green Card Test
A taxpayer is considered a U.S. resident for tax purposes if they are a lawful permanent resident (green card holder) at any time during the calendar year. This status begins on the first day they are present in the U.S. as a lawful permanent resident and continues unless officially abandoned or revoked.
Substantial Presence Test
This test determines residency based on the number of days an individual is physically present in the U.S. To qualify as a resident for tax purposes, one must be present:
- 31 days in the current year and
- 183 days over a 3-year period, including:
- Full days in the current year,
- 1/3 of the days in the first year before the current year,
- 1/6 of the days in the second year before the current year.
Example: Eduardo, who spent 112 days in the U.S. in 2024, 119 days in 2023, and 136 days in 2022, calculates his presence as:
- 2024: 112 days
- 2023: 119×1/3= days
- 2022: 136×1/6= days
- Total: 174.34 days (112 + 39.67 + 22.67)
Since the total is under 183 days, Eduardo remains a non-resident for 2024.
First-Year Residency Option
Non-residents can opt for First-Year Choice to be treated as a resident earlier than usual if:
- Present in the U.S. for 31 consecutive days in the chosen year,
- Present for at least 75% of days between the start of that period and year-end,
- Meet the substantial presence test the following year.
Example: Maria, a Brazilian citizen, arrived on October 15, 2023, and stayed until November 20, 2023, then returned on December 5, 2023, staying through year-end. She:
- Met the 31-day consecutive presence requirement.
- Met the 75% presence requirement (64 days out of a necessary 59). Her residency begins on October 15, 2023, and she’s taxed as a resident for that period.
Types of U.S. Sourced Income
Non-resident aliens are taxed on U.S.-sourced income, such as:
- Earned income (wages, salaries),
- Investment income (interest, dividends),
- Rental income from U.S. properties,
- Royalties from U.S. sources,
- Gains from selling U.S. real estate.
Effectively Connected Income (ECI)
ECI refers to income tied to a U.S. trade or business and must be reported on a tax return. It includes:
- Sales income,
- Rental income,
- Business-related investment income.
Fixed, Determinable, Annual, or Periodic (FDAP) Income
FDAP income encompasses non-business income like wages and compensation that isn’t ECI. It is subject to a 30% tax rate or lower, based on treaty agreements. Individuals with only FDAP income typically don’t need to file a return if withholding is applied.
Withholding Tax: 30% or Treaty Rates
A 30% withholding tax applies to U.S.-sourced FDAP income unless reduced by a tax treaty. To benefit from lower rates, individuals must submit Form 8233.
Employing Non-Resident Aliens in the U.S.
Employers need specific documentation, including:
- Form I-9 for employment eligibility,
- Form W-4 for withholding allowances,
- Form 8233 for tax treaty exemptions.
Special Note: Non-residents cannot claim the standard deduction, except eligible students from India. Employers should follow IRS Notice 1392 for withholding guidance.
Working Remotely Outside the U.S.
Non-resident aliens working for a U.S. employer from their home country:
- Not subject to U.S. income tax,
- Exempt from U.S. withholding and reporting requirements (e.g., Form 1099),
- Employers can still deduct payments as business expenses.
Totalization Agreements
These agreements prevent dual Social Security taxation. Foreign workers need to provide a certificate of coverage to claim exemptions.
Withholding Requirements for U.S. Employers
Employers must adjust withholding based on visa type and tax treaty benefits:
- Forms W-4 with special adjustments,
- Procedures in Publication 15-T,
- Reporting on Forms 941/944 and W-2.
Common Visa Categories and Their Tax Implications
- F-1 and J-1 Visas: Students and exchange visitors are generally exempt from Social Security and Medicare taxes for a limited time and may qualify for treaty benefits.
- H-1B Visas: Taxed like residents if meeting the substantial presence test.
- H-2A Visas: Agricultural workers are exempt from Social Security and Medicare taxes but may owe income tax based on residency.
- B-1/B-2 Visas: Non-resident status and taxed only on U.S.-sourced income.
Essential Tax Forms for Non-Residents
- Form W-8BEN: Establishes foreign status, claims tax treaty benefits, and certifies beneficial ownership to avoid Form 1099 reporting.
- Form W-8ECI: Used to claim ECI, ensuring income is taxed as connected with U.S. trade/business activities.
Final Thoughts
Non-resident aliens must carefully navigate residency tests, income types, and withholding requirements. Employers must comply with specific tax documentation rules and understand totalization agreements and visa impacts. By following these guidelines, non-resident aliens and U.S. employers can remain compliant and avoid tax complications.
