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Tax Implications of a Non-US Resident Working in The US

Like many companies, you may need to hire the talent and services of foreign nationals or nonresident aliens from around the world to fill critical positions at your company. To hire these workers with confidence, it’s important to understand the tax rules and regulations as they relate to nonresident employees.

For tax purposes, the IRS categorizes individual workers into four groups: 1) U. S. citizen, 2) permanent resident alien, 3) resident alien (green card) and 4) nonresident alien. 

Below are some basic tax accounting considerations when hiring nonresident employees. 

Complete Form I-9

Regardless of the classification, you must complete a Form I-9 for each person hired. This form documents verification of the identity and employment authorization for either a citizens or noncitizens employed to work in this country. 

Tax regulations require you to complete the verification process within three business days of the employee's first day of employment. You have the sole responsibility to ensure proper completion of the form and to retain it in your tax accounting records. Failure to complete and retain Form I-9’s can lead to a fine.

Social security number verification 

You must record the name and social security number (SSN) of each person you hire—resident or nonresident employees. Although you are not required to, ask to see the person social security card and make a make a copy for your files. If the person does not have a social security card they can apply for one. Do not accept an Individual Taxpayer Identification Number (ITIN) for employee identification.

Withholding rules

For withholding tax purposes, the rules for resident aliens are the same as for U. S. citizens. When it comes to nonresident aliens, the requirements are more complicated. There are special withholding rules for nonresident aliens, which are outlined on the Form W-4.

The U.S. has tax treaties with more than 60 countries. Each nation agrees to limit or modify the application of its domestic tax laws to circumvent cases of double taxation. 

Unless income tax withholdings are specifically exempted— by the U.S. tax laws or by an income tax treaty— nonresident alien's must file the appropriate form to claim the exemption. Most nonresident aliens have a standard withholding rate of 30 percent.

To determine an employee’s U.S. residency status for tax purposes, the employee must conduct a Substantial Presence Test. This computation determines tax residency based on the number of days that a non-U.S. person is physically present in the U.S.

Under IRS rules, all income paid to a nonresident alien in the U.S is taxable in the U.S. unless it falls under one of the following three exclusions:

  1. Internal Revenue Code
  2. Foreign source income
  3. Income tax treaty 

A U.S. nonresident alien's earned income derived from non-U.S. sources is not required to be reported or taxed in the U.S. 

Form 8233 and Form W-8BEN are used to report tax treaty exemptions. You must report annual payments and tax withholding to nonresident aliens, no later than March 15, on Form 1042-S.

We can help you navigate the complex rules for reporting taxable income of a U.S. nonresident employee.

Tax Tips For Business

Karen McCarthy, with 25+ years of tax planning experience, is a Vice President at Meaden & Moore and the Director of the Personal Tax Advisory Group.

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