What is a non-resident alien?

What is a non-resident alien?

In the US, a non-resident alien is a person who is neither a US citizen nor a US national and who does not qualify as a US tax resident. This includes individuals who fail the green card test or do not meet the Internal Revenue Service's (IRS) substantial presence test.

Non-resident aliens are generally present in the US on a temporary basis under non-immigrant visas such as J-1 or F-1. This group typically covers foreign students, participants in academic programmes and non-resident contractors. They hold a separate tax status and commonly do not make FICA contributions towards Medicare and social security.

Non-resident aliens may only take up employment in the US once authorised. They obtain this authorisation by completing the I-9 Employee Eligibility Verification form.

Employers and individuals must be aware of the rights, status and tax obligations of non-resident aliens to ensure compliance with US law. Non-compliance can result in financial penalties, incorrect tax payments and legal complications.

Non-resident alien taxation

Tax matters are a common source of confusion for non-resident aliens. The IRS states that non-resident aliens have a distinct tax classification and are governed by different rules than residents.

In practice, non-resident aliens are taxed on US-source income and may be charged either resident rates or flat rates depending on the activity involved. For example, non-resident independent contractors are typically liable for a flat 30% tax on US income. They frequently have limited access to deductions and credits and cannot claim certain tax 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 can elect to be treated as a resident for tax purposes and file jointly. In that case they should file using Form 1040 with the status Married Filing Jointly. When leaving the US they must file Form 1040-C.

Non-resident aliens are required to file a US tax return if they carried on trade or business in the US during the prior year, or if they received US income on which tax was not withheld at source. Those seeking a refund or claiming deductions must also submit an income tax return.

As noted earlier, non-resident aliens are generally not liable for social security and Medicare taxes, although other federal and state taxes may still apply.

Hiring non-resident aliens

A US employer wishing to lawfully employ a non-resident alien must comply with relevant immigration laws and regulations. This includes verifying the individual’s eligibility to work and meeting visa requirements. Employers must also withhold taxes where required and satisfy reporting obligations to government agencies.

The required documents include:

• Authorisation to work in the US via 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

Navigating compliance can be complex, particularly given the tax implications of hiring non-resident aliens. Employers must ensure they apply relevant tax treaties where appropriate. When engaging Remote employees abroad, employers should seek to avoid creating a permanent establishment that would require opening an Entity overseas. Using employer of record services can help reduce this risk.

Despite these challenges, employing non-resident aliens gives employers access to a wider talent pool and a broader range of skills. Providing competitive benefits can also assist in attracting top talent.