What is a nonresident alien?
In the US, a non-resident alien is anyone who is not a US citizen or US national, and does not qualify to be a tax resident in the US. This includes anyone who does not meet the green card test or pass the Internal Revenue Service's (IRS) substantial presence test.
Non-resident aliens are usually in the US temporarily on non-immigrant visas, such as a J-1 or F-1 visa. Foreign students, individuals in academic programs, and non-resident contractors fall into this category. Non-resident aliens also have a distinct taxation status and usually do not make FICA contributions towards Medicare and social security.
Non-resident aliens can only work in the US after receiving authorization. They can request this by filling out the I-9 Employee Eligibility Verification form.
Organizations and individuals need to understand the rights, status, and tax obligations of non-resident aliens to comply with US laws. Non-compliance can lead to financial penalties, incorrect tax payments, and legal complications.
Non-resident alien taxation
Taxation is one of the most significant areas of confusion when it comes to non-resident alien status. According to the IRS, non-resident aliens have a specific tax status and are subject to separate tax rules than residents.
Typically, this means they are subject to taxation on any US income with either resident rates or flat rates depending on the business carried out. For example, non-resident independent contractors pay a flat 30% rate on any US income. However, non-resident aliens can have limited access to tax deductions and credits. They cannot claim certain tax benefits, such as the Earned Income Tax Credit (EITC) or the American Opportunity Tax Credit (AOTC).
Non-resident aliens with a resident alien spouse may file taxes jointly. At the end of the tax year, their spouse can choose to be treated as a resident alien for tax purposes. In this case, they should file tax using Form 1040 with the status of Married Filing Jointly. On leaving the US, they should file Form 1040-C.
Non-resident aliens must file for tax if they carried out trade or business in the US over the previous year, or if they had US income on which tax was not withheld at the source. Non-resident aliens wanting to claim a tax refund or benefit from tax deductions must also file an income tax return.
As mentioned, non-resident aliens are generally not subject to social security and Medicare taxes, although they may still be subject to other federal and state taxes.
Hiring non-resident aliens
For a US employer to legally hire a non-resident alien, the employer must comply with the relevant immigration laws and regulations. This includes verifying the non-resident alien’s eligibility to work in the country and adhering to visa requirements. Employers must also withhold taxes and comply with reporting obligations to government agencies.
The necessary documentation needed includes:
Authorization to work in the US via Form I-9
An unexpired Temporary Resident Card
A social security number (SSN)
A driver’s license or a state- or federal-issued ID card
An original birth certificate
Navigating compliance can be tricky, particularly concerning the complex tax implications associated with hiring non-resident aliens. Employers must ensure compliance with tax treaties when applicable. If hiring remote employees globally, they must also try to avoid triggering permanent establishment status requiring the company to open an entity abroad. Using employer of record services can help employers avoid this risk.
Despite challenges, hiring non-resident aliens can also bring multiple advantages to employers. These include access to a broader talent pool and diverse skill sets. Offering can also help attract top talent.
If you're planning to hire a non-resident alien:
Understand the person's work authorization status, ensuring there is full compliance with visa requirements and an eligibility to work in the country.
Be aware of the tax obligations for non-resident aliens, including withholding requirements and any tax treaties between the individual's home country and the host country.
If required, be prepared to sponsor the non-resident alien's visa. Understand the specific visa category and any associated responsibilities for you as the employer.
Recognize and respect the cultural differences, providing support and resources to help the employee acclimate to the new work environment.
Stay informed of any updates to immigration laws and regulations, ensuring compliance with documentation, reporting, and verification processes.
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