A. Tax Residency
Individuals from other countries present in the United States must be taxed according to their country of tax residency. These individuals can be Permanent Residents, Resident Aliens for Tax Purposes, or Nonresident Aliens. While Permanent Residents and Resident Aliens for Tax Purposes are taxed like U.S. Citizens, Nonresident Aliens are taxed differently. The Green Card Test and the Substantial Presence Test are used to determine tax residency.
B. Green Card Test
The Green Card test is used to determine Permanent Residency Status. A permanent resident is someone who has been granted authorization to live and work in the United States on a permanent basis. An individual meets the test on the date his or her permanent resident alien status is approved by the U.S. Citizenship and Immigration Service. The effective date is the notice date on the form I-551 (Green Card or Alien Registration Card) or on the I-797 (Notice of Action).
C. Substantial Presence Test
The Substantial Presence Test is used to determine whether an individual is a Resident Alien for Tax Purposes or a Nonresident Alien. To meet this test, the individual must be physically present in the United States on at least:
- 31 days in the current calendar year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days present in the current year, and
- 1/3 of the days present in the first year before the current year, and
- 1/6 of the days present in the second year before the current year.
Teachers and Trainees
A teacher or a trainee temporarily present in the United States under a “J” or “Q” visa who substantially complies with the requirements for the visa is exempt from counting days. This exemption lasts until he or she has been physically present in the United States for any part of 2 of the current and past 6 calendar years.
A student temporarily present in the United States on an “F,” “J,”, “M,”, or “Q” visa and who substantially complies with the requirements of that visa is exempt from counting days. This exemption lasts until he or she has been physically present in the United States any part of more than 5 calendar years.
If the grand total number of days in the column on the right side of the worksheet is 183 days or greater and the individual will be present in the United States for 31 days in the current calendar year, the individual is a U.S. resident for tax purposes.
Please note that individuals falling under the Teacher/Trainee and Student categories who exclude days of presence in the United States must file a completed IRS form 8843 with their tax return.
D. Tax Residency and Taxes
Social Security and Medicare Taxes
Nonresident aliens are not subject to social security during the time period they are exempt from counting days. Once they become a resident for tax purposes, even if it is partially through the year, the University must withhold Social Security and Medicare taxes on all income earned through the year. This will be deducted from the first paycheck after the individual has been notified that they are a tax resident under the substantial presence test. However, the student FICA exclusion still applies and may still exempt a ‘F’ or ‘J’ student from coverage.
University Human Resources Policy HR0375 prohibits nonresidents from participating in a retirement plan until they are eligible for Social Security Coverage. Once a nonresident pays Social Security and Medicare Taxes and meet all the other participation guidelines for retirement coverage listed in Policy HR0375, he or she must be enrolled for membership in a retirement plan.
Income Tax Treaties
The United States has tax treaties with a number of foreign countries. Under these treaties, tax residents of foreign countries are taxed at a reduced rate or are exempt from United States taxes on certain items of income they receive from sources within the U.S. Most income tax treaties contain a “savings clause” which prevents citizens or tax residents of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income. Some treaties, including China, have an exception to the “savings clause” that allows some tax residents to claim the benefits of the tax treaty.
- Tax Treaties for Independent Services
- Tax Treaties for Student Wages
- Tax Treaties for Student Scholarships
- Tax Treaties for Teachers and Researchers
Income Tax Withholding
Unless exempted by tax treaty, the University must withhold income taxes on wage payments to nonresidents. The amount to be withheld is based on the IRS tax tables for the payment year. Except for nonresident alien students from India and business apprentices from India, an additional amount is added to wages solely for the purpose of calculating income tax withholding. The additional amount can be found in IRS Publication 15.
All non-resident alien employees are required to complete a Form W-4. According to the Internal Revenue Service, nonresident aliens are required to:
- Not claim exemption from income tax withholding,
- Request withholding as if they are single, regardless of their actual marital status,
- Claim only one allowance (if the nonresident alien is a resident of Canada, Mexico, or Korea, he or she may claim more than one allowance), and
- Write “Nonresident Alien” or “NRA” above the dotted line on line 6 of the Form.
A nonresident alien employee may request additional withholding on form W-4 at his or her option.