A nonresident alien is an individual who is not a U.S. citizen and does not have a green card or passed the substantial presence test. For a nonresident alien, taxes are charged differently than a U.S. citizen. Depending upon the nature of the employment conducted by the nonresident in the U.S., specific tax rules apply on the income earned in the U.S. Note that income tax is only charged on income that is earned in the U.S. or from a U.S. source. Income earned outside the country by a nonresident alien does not attract taxes in the U.S.
Who Needs to File
A nonresident alien needs to file a tax return in the U.S. if:
- they were engaged in a business in the U.S. during the year or,
- they were not engaged in a business in the U.S. butt earned income from a U.S. source on which taxes were not withheld by the employer.
If a nonresident ran a small business in the U.S. for a part of the year and earned income from it, they will need to file a tax return in order to report the income to the IRS. However, nonresidents who earn income from a U.S. source and have taxes withheld from their income are not required to file a U.S. tax return.
Though resident aliens (those who are not U.S. citizens, but have a green card or passed the substantial presence test for the year) attract taxes on worldwide income, nonresident aliens only need to pay income tax on the income earned in the U.S. or from a U.S. source.
A nonresident student or trainee who was temporarily residing in the U.S. on a visa is considered by the IRS to be engaged in a trade or business in the U.S. However, only non-resident income such as from wages, gigs, tips, scholarship, grants, etc. that is subject to tax are required to file a tax return.
Which Income Needs to be Reported
Nonresident aliens are not required to report all types of income on their tax return. They are required to report only if their income comes under these two categories:
- income earned from a source within the U.S. that is connected to their trade or business. This is called Effectively Connected Income (ECI).
- income earned from a U.S. source that is fixed, determinable, annual or periodical (FDAP). This is called FDAP income.
ECI is taxed at graduated rates that are the same rates that apply to U.S. citizens. Deductions are allowed on ECI income. FDAP income attracts a tax rate of 30% unless there exists a treaty between the U.S. and the country of which the nonresident is a citizen. Deductions are not permitted for FDAP income.
Where to File
A nonresident alien needs to file Form 1040-NR, U.S. Nonresident Alien Income Tax Return only if they are earning income in the U.S. and their income is subject to tax. Certain nonresident aliens who have dependents may file Form 1040-NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens with Dependents.
ECI income is reported on page one of Form 1040-NR. If you earn FDAP income that is not effectively connected with a U.S. source, it can be reported on Schedule NEC of Form 1040-NR, Tax on Income Not Effectively Connected With a U.S. Trade or Business.
Along with fulfilling the required tax obligations, it’s important for non-resident aliens to first determine your tax filing status since a person can be both a nonresident and a resident during the same year. If so, they need to file a dual-status return. Also, if they are a resident or a citizen and their spouse is a nonresident, their spouse can be considered a resident alien on a joint tax return. Since different tax rules apply for different situations, non-resident aliens should make sure that they are aware of their tax filing status and tax obligations n order to stay compliant with the U.S. tax laws.