Gregory Cislak

The United States taxes noncitizens (“aliens” under the tax law terminology) differently depending on their tax status, i.e., whether they are resident aliens or nonresident aliens.

As a not-for-profit or governmental entity—a university, arts group, etc.—you may find that your payroll contains citizens as well as noncitizens and you may need guidance on what rules apply to those noncitizen employees. Below, we provide some direction for you on this issue.

Resident aliens are taxed in a very similar manner to U.S. citizens. For federal tax purposes, nonresident aliens are taxed—in the case of U.S. source business income or work-related earnings—on a gross basis at a flat rate of 30% if they are independent contractors (earning independent personal services income) or at graduated rates if they are employees. Income tax treaties between the United States and the alien’s home country may affect the U.S. tax consequences of working here. In any case, state income tax rules need to be considered since separate state and local rules frequently apply regardless of whether an income tax treaty is applicable.

Resident Alien or Nonresident Alien

If you are an alien (not a U.S. citizen), you are considered a nonresident alien unless you are a resident alien under U.S. tax rules. You are a resident alien for tax purposes if you meet either the green card test or the substantial presence test for the calendar year (January 1–December 31). Even if you do not meet either of these tests, you may be able to choose to be treated as a U.S. resident for part of the year.

Green Card Test

You are a resident for tax purposes if you are a lawful permanent resident of the United States under the U.S. immigration rules at any time during the calendar year.

You are a lawful permanent resident of the United States if you have been given the privilege of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Services (USCIS) has issued you an alien registration card, also known as a “green card.” You continue to have resident status under this test unless the status is taken away from you or is administratively or judicially determined to have been abandoned.

Substantial Presence Test

You will be considered a U.S. resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States on at least:

1. 31 days during the current year
2. 183 days during the three-year period that includes the current year and the two years immediately before that, counting:
1. All the days you were present in the current year
2. 1/3 of the days you were present in the first year before the current year
3. 1/6 of the days you were present in the second year before the current year

In the first year you meet the substantial presence test, it may be possible to choose to be treated as a U.S. resident for part of the prior year (“First Year Choice”).  You must attach a statement to your tax return for the year that you meet the substantial presence test in order to make the first-year choice.  You are treated as present in the United States on any day you are physically present here and you can be present at any time during that day.

Closer Connection to a Foreign Country

Even if you meet the substantial presence test, you can be treated as a nonresident alien if you:

1. Are present in the United States for fewer than 183 days during the year.
2. Maintain a tax home in a foreign country during the year.
3. Have a closer connection during the year to one foreign country in which you have a tax home than to the United States (unless you have a closer connection to two foreign countries).

You can demonstrate that you have a closer connection to two foreign countries (but not more than two) if you meet all of the following conditions:

1. You maintained a tax home beginning on the first day of the year in one foreign country.
2. You changed your tax home during the year to a second foreign country.
3. You continued to maintain your tax home in the second foreign country for the rest of the year.
4. You had a closer connection to each foreign country than to the United States for the period during which you maintained a tax home in that foreign country.
5. You are subject to tax as a resident under the tax laws of either foreign country for the entire year or subject to tax as a resident in both foreign countries for the period during which you maintained a tax home in each foreign country.

Your tax home is the general area of your main place of business, employment or post of duty, regardless of where you maintain your family home. Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

You will be considered to have a closer connection to a foreign country rather than the United States, if you or the IRS establishes that you have maintained more significant contacts with the foreign country than with the United States. In determining whether you have maintained more significant contacts with the foreign country than with the United States, the facts and circumstances to be considered include, but are not limited to, the following:

1. The country of residence you designate on forms and documents
2. The types of official forms and documents you file, such as Form W–9, Form W–8BEN or Form W–8ECI
3. The location of:
1. Your permanent home
2. Your family
3. Your personal belongings, such as cars, furniture, clothing etc.
4. Your current social, political, cultural or religious affiliations
5. Your business activities
6. The jurisdiction in which you hold a driver's license and
7. The jurisdiction in which you vote

It does not matter whether your permanent home is a house, an apartment or a furnished room. It also does not matter whether you rent or own it. It is important, however, that your home be available at all times and not solely for short stays.

You cannot claim you have a closer connection to a foreign country if ei

ther of the following applies:

1. You personally applied, or took other steps during the year, to change your status to that of a permanent U.S. resident
2. You had an application pending for adjustment of status during the current year

These rules to determine if you are a U.S. resident for tax purposes do not override tax treaty definitions of residency.  If you are a dual-resident taxpayer, you can still claim the benefits under an income tax treaty.  A dual resident taxpayer is one who is resident of both the United States and another country under each country’s tax law.  Income tax treaties provide rules to resolve the conflicting claims of residence (“tie-breaker rules”) and persons claiming benefits must file a U.S. tax return.

It is possible that a person is both a nonresident alien and resident alien during the same year (“dual-status alien”).  This usually occurs in the year you arrive in or depart from the United States.  Various tax planning options may be available to dual-status aliens.

For more information on this topic, please contact your BKD advisor.