What are resident aliens?
According to the Internal Revenue Service (IRS), an alien is someone who lives in the US but is not a US citizen. For income tax purposes, aliens can be classified as either resident aliens or nonresident aliens. Employees should know how they are classified, as this affects how their taxes are calculated.
A non-resident alien is someone who does not have full citizenship and also does not pass either of two tests known as the Green Card test and substantial presence test.
A resident alien, on the other hand, is an alien who meets one of the two aforementioned tests. A resident alien can be a permanent resident, a conditional resident with a two-year green card, or a returning permanent resident.
The Green Card test
A Green Card, also known as a Permanent Resident Card, is an authorization from the US government for immigrants to reside and work in the country. For tax purposes, individuals are considered resident aliens if they are lawful permanent residents. That distinction satisfies the Green Card test, which means permanent residents — as well as anyone possessing a Green Card for the current tax year or the previous tax year — are considered resident aliens.
The substantial presence test
If an individual has had a substantial presence in the US during a given tax year, they may be considered a resident alien and may be liable for worldwide income taxes for that tax year.
To satisfy the substantial presence test, and to be treated as a resident alien for a given tax year, an individual needs to have been physically present in the US for:
31 days during the calendar year, and
183 days during the three-year period, including the current year as well as the two preceding years.
For the substantial presence test, the following time does not count:
Days spent commuting from Canada or Mexico if the employee commutes at least 75% of the workdays during a working period in the current year.
Transit periods through the US of less than 24 hours.
Time spent in the US as a crew member of a foreign vessel.
Days spent where an employee was stuck in the country due to a medical issue.
Days while exempt. Exempt individuals are government individuals under an A or G visa, teachers under a J or Q visa, students temporarily present under F, J, M, or Q visas, and athletes competing in charity events.
The substantial presence test does not include US airspace, US possessions, or US territories. The substantial presence test does include all 50 states, the District of Columbia, US waters and seabed, and areas adjacent to US territorial waters that the US has rights to explore for natural resources under international law.
How are resident aliens taxed?
The main difference between resident aliens and non-resident aliens is how they are taxed. Non-resident aliens are not taxed by the IRS for their worldwide income. They are citizens of other countries, so they pay taxes in their home country. They do, however, owe taxes to the IRS on income derived in the US. Non-resident aliens report their taxes on Form 1040-NR.
Resident aliens are taxed in the same way as US citizens. They owe taxes on all income derived from the US, as well as their worldwide income. Resident aliens report their income on Form 1040. Tax returns are required to be filed by April 15 each year for the previous tax year.
Compliance issues for resident aliens
Neither resident or non-resident aliens are authorized to work for a US company until their employers has submitted Form I-9. This form verifies the employee’s identity and authorization to work in the US.
Employers also need to be aware of international labor laws and comply with them at all times. This ensures that your employees, including resident aliens, are all treated fairly and their taxes filed properly. Many organizations partner with an employer of record (EOR) to ensure they comply with local and foreign laws.
When hiring a resident alien:
Verify the individual's work authorization status, ensuring compliance with immigration laws and regulations.
Ensure you understand the tax implications for resident aliens, including tax withholding requirements, eligibility for tax credits, and any tax treaties that may apply.
Ensure the individual provides proper documentation, such as a valid Green Card or other proof of lawful permanent resident status.
Treat resident alien candidates equally in the hiring process, providing the same opportunities and benefits as US citizens.
Aim to foster a diverse and inclusive workplace, recognizing and respecting the cultural background of resident aliens. This can include offering support to help resident aliens integrate smoothly into the work environment.
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