Taxation of Resident & Non-Resident Aliens

Will Our Expatriate Employees Need to Pay U.S. Taxes?

The United States taxes an individual based on their residency status. Once a person is deemed a resident, they become subject to tax on their worldwide income in the same manner a U.S. citizen is taxed.

The first step in determining how an alien will be treated for U.S. tax purposes is to determine their classification. There are two basic tests in determining residency; they are referred to as the “Green Card” test and the “Substantial Presence” test.

Green Card Test

A Green Card holder (permanent resident) is someone who has been granted authorization from the U.S. Citizenship and Immigration Services (USCIS) to live and work in the United States on a permanent basis. As proof of that status, a person is granted a permanent resident card, commonly called a “Green Card.” An individual can become a permanent resident several different ways, however, most individuals are sponsored
by a family member or employer in the United States.

Once an alien receives a Green Card, the length of time they are physically present in the U.S. is no longer a consideration. They are considered a resident alien and will be taxed as such in the U.S.

Substantial Presence Test

An alien will be considered a resident if, in the current year, they are present in the U.S. at least  31 days and have been in the U.S.  at least 183 days during a three year period, based on a weighted formula. The formula works in the following manner: add up the number of days present in the U.S. for the current year; add the number of days present in the first preceding year multiplied by one-third; add the number of days present in the second preceding year multiplied by one-sixth. If the sum of these numbers is greater than 182, the alien is considered
a resident for the current year.

Nonresident Returns

Nonresident aliens file Form 1040 NR. The advantage of filing this form is that only U.S. source income is required to be reported. A disadvantage of filing this form is that only  limited deductions are available to offset income. The ability to use a certain filing status and to deduct dependent exemptions may also be limited on a Form 1040 NR.

Obtaining Individual Taxpayer Identification Numbers (ITIN)

Tax exemptions  may be available for spouses and dependent children. In order to be eligible to take the exemption, the spouse and children must have either a Social Security Number (SSN) or an ITIN. SSNs are only available for aliens who have visas that allow them to work in the U.S. All other aliens must apply for ITINs. An ITIN can be obtained by filing Form W-7. The form must be accompanied by either an original document or a certified copy  of an original document from the issuing agency that show proof of identity and foreign status.The W-7 is filed with a federal tax return or in person at an IRS office that accepts this type of application.