April 5, 2019
By Dena Wurman, MPA, JD Attorney at Law
Do you need to pay tax?
For people who come to the U.S. to study and work there is usually some confusion as to whether they should pay U.S. tax on their income. Here is a short explanation of the various immigration categories and whether one may be subject to tax while working in the U.S.
Employers and employees
As with any area of the law, it’s easiest to start with who is doing what. In many cases, an employer is paying money to an employee in an employer relationship. The employer is required to withhold taxes and payments to the employee. This is called “withholding.” *
When in doubt, ask
The withheld amount is tabulated at the end of the year. Then a form is issued. This may be a W-2 or 1099 form. Employers are expected to know the law and act accordingly. In many cases a bookkeeper or accountant will be the individual an employee may need to ask for guidance on employer forms you need to attach to your tax return.
Did you get a form?
For tax payments, the employee is responsible for filing their own tax forms. When you receive your W-2 or 1099, this will be a clue that you need to get started, if you haven’t already. In some cases, you may need to ask for the forms. This short article will not cover he self-employed or small business which have different filing requirements.
Start counting the days you have been in the US
If you spent more than 200 days in the U.S. in a calendar year as a non-immigrant, you will probably be required to report your income to the IRS.
The nonimmigrant classifications include: foreign government officials, visitors for business and for pleasure, aliens in transit through the United States, treaty traders and investors, students, international representatives, temporary workers and trainees, representatives of foreign information media, exchange visitors, fiance(e)s of U.S. citizens, intracompany transferees, NATO officials, religious workers, and some others. Most nonimmigrants can be accompanied or joined by spouses and unmarried minor (or dependent) children.
Generally, all U.S residents pay tax income. A foreign national who is not also a U.S. citizen, is a resident for U.S. tax purposes if the individual meets one of two tests:
1) They have a green card (they are a lawful permanent resident for immigration purposes) or 2) The individual meets the substantial presence test.
The second category is the one we will talk about here. For the non-immigrant, the substantial presence test determines U.S. tax residency based on a 183-day formula.
Is it 183?
A foreign national meets this 183-day formula with respect to any calendar year (January through December) in which the individual is in the United States more than 31 days and the total days in which the individual was in the United States in the calendar year and the two preceding calendar years equals or exceeds 183 days.
Now that we have reviewed the rule, here are some of the exceptions.
Closer connections to foreign country
A foreign national may be able to claim a closer connection to a foreign country than to the United States. To meet this exception, a foreign national must submit a Form 8840 disclosing the facts and circumstances that support the closer connection to the foreign country.
An individual, or a member of the individual’s immediate family, who is temporarily present in the United States as a full-time employee of an international organization or by reason of diplomatic status is not required to count days spent in the U.S.
A student in F, J, M, or Q status including an individual in derivative status, who substantially complies with the requirements of that status, does not count days of U.S. presence for up to five calendar years. To continue to be treated as an exempt individual after five calendar years in F, J, M, or Q status, a student must establish to the satisfaction of the IRS that he or she does not intend to reside permanently in the United States. A letter presenting the facts and circumstances that support the claim must be sent to the IRS Center in Philadelphia, PA 19255. Once approval has been received from the IRS, the student is an exempt individual for the period claimed.
The first five years as a student don’t count
The majority of students become residents retroactive to their first day of U.S. presence, usually January 1, of the individual’s sixth calendar year in the United States in student status. The majority of J and Q nonstudents become residents retroactive to their first day of U.S. presence, usually January 1, of the individual’s third calendar year in the United States in J or Q nonstudent status. For all withholding and reporting purposes, the IRS requires that the individual be treated as a resident as of the residency start date, which is the first countable day in the calendar year in which the individual becomes a resident under the 183-day residency formula.
Read the tax treaty
The United States has income tax treaties with a number of foreign countries. For nonresident aliens, these treaties can often reduce or eliminate U.S. tax on various types of personal services and other income, such as pensions, interest, dividends, royalties, and capital gains. Each individual treaty must be reviewed to determine whether specific types of income are exempt from U.S. tax or taxed at a reduced rate. More details can be found in IRS Publication 901, U.S. Tax Treaties.
If you are not sure whether any of these rules apply, the short answer is:
- More than 200 days in the U.S.? Yes, you may have to pay tax
- If part of that time was as a student, the first five years in the US as a student don’t count or on a J visa, it’s less
If taxes are due and you don’t pay them, here is what will happen:
- When you apply for your green card, it will come up on the forms you need to file or in the interview
- You can wait for that to happen, or you can get a SS# or ITIN and get a payment plan with the IRS going
*This article does not cover illegal forms of income such as cash payments during the tax year that do not take into account “withholding.” It is possible an employer will try to circumvent the tax law by not documenting payments to employees, or referring to an employee as an independent contractor. Additionally, for a discussion of capital gains tax read: https://www.irs.gov/individuals/international-taxpayers/the-taxation-of-capital-gains-of-nonresident-alien-students-scholars-and-employees-of-foreign-governments