What is a non-resident alien?

What is a non-resident alien?

In the US, the term non-resident alien applies to persons who are neither US citizens nor US nationals and who do not qualify as tax residents of the US. This definition covers individuals who fail the green card test and those who do not meet the Internal Revenue Service's (IRS) substantial presence test.

Non-resident aliens are typically present in the US on a temporary basis using non-immigrant visas, for example J-1 or F-1. This group commonly includes foreign students, participants in academic programmes and non-resident contractors. They are assigned a distinct tax status and, in most cases, do not make FICA contributions for Medicare and social security.

Non-resident aliens may lawfully work in the US only after obtaining authorisation. This is requested by completing the  I-9 Employee Eligibility Verification form.

Organisations and employers must be familiar with the rights, immigration status and tax duties of non-resident aliens to ensure compliance with US law. Failure to comply can result in financial penalties, incorrect tax treatment and legal complications.

Non-resident alien taxation

Taxation is often the most confusing aspect of non-resident alien status. According to the IRS, non-resident aliens are treated under distinct tax rules that differ from those applied to residents.

In practice, non-resident aliens may be liable to tax on US-source income at either graduated resident rates or at flat rates depending on the activities undertaken. For example, non-resident independent contractors are generally subject to a flat 30% withholding on US income. Non-resident aliens also have limited access to tax deductions and credits and are typically ineligible for benefits such as the Earned Income Tax Credit (EITC) or the American Opportunity Tax Credit (AOTC).

A non-resident alien married to a resident alien may elect to file jointly. At year-end the resident spouse can choose to treat the non-resident as a resident for tax purposes; if that election is made, they must file using Form 1040 with the status Married Filing Jointly. On leaving the US, the individual should submit Form 1040-C.

Non-resident aliens must file a US tax return if they carried on a trade or business in the US during the previous year, or if they received US-source income for which tax was not withheld. Those seeking a refund or wishing to claim deductions must also file an income tax return.

As noted above, non-resident aliens are generally not subject to social security and Medicare taxes, although other federal or state taxes may still apply.

Hiring non-resident aliens

A US employer wishing to engage a non-resident alien must comply with applicable immigration laws and regulations. This includes verifying the individual’s eligibility to work, observing visa conditions and meeting tax withholding and reporting obligations to government agencies. 

Typical documentation required includes:

• Authorisation to work in the US by completing Form I-9
• A Certificate of Naturalization
• An unexpired Temporary Resident Card
• A social security number (SSN)
• A driver’s licence or a state- or federal-issued ID card
• An original birth certificate

Compliance can be complex, particularly because of the tax consequences associated with hiring non-resident aliens. Employers should ensure they respect relevant tax treaties where applicable. When hiring remote employees globally, they should take care to avoid creating a permanent establishment that would require the company to set up an entity abroad. Using employer of record services can help mitigate that risk.

Despite the challenges, employing non-resident aliens offers several advantages for employers, including access to a wider talent pool and a broader range of skills. Offering  can also help attract top talent.