A client recently asked if a foreign national employee was subject to federal withholding taxes. Naturally, since the question involved the U.S. tax code the answer, like the code, is complicated. Fortunately, the IRS has drafted a useful and surprisingly readable guidebook entitled U.S. Tax Guide for Aliens.  In this book the IRS explains that for tax purposes, “aliens” are persons who are not U.S. citizens. Aliens are classified as Nonresident Aliens and Resident Aliens. Resident Aliens generally are taxed on their worldwide income, the same as U.S. citizens. Nonresident Aliens are taxed only on their income from sources within the United States and on certain income connected with the conduct of a trade or business in the United States. The designation of “resident” for tax purposes is completely distinct from one’s immigration status as a “permanent resident.” One might qualify as a resident for tax purposes while remaining a nonimmigrant alien for immigration purposes.

Nonresident Aliens

If you are an alien (not a U.S. citizen), you are considered a Nonresident Alien unless you meet one of the two tests described below under Resident Aliens.

Resident Aliens

You are a Resident Alien of the United States for tax purposes if you meet either the Green Card test or the Substantial Presence test for calendar year 2014 (January 1–December 31).

Green Card Test

You are a resident for tax purposes if you are a lawful permanent resident of the United States at any time during calendar year 2014.   This is known as the “green card” test. You are a lawful permanent resident of the United States at any time if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant.

The Substantial Presence Test

You will be considered a U.S. resident for tax purposes if you meet the Substantial Presence test for calendar year 2014. To meet this test, you must be physically present in the United States during a period you do not hold an A, F, G, J, M or Q visa on at least (Caution: there’s some math here):

1. 31 days during 2014, and
2. 183 days during the 3-year period that includes 2014, 2013, and 2012, counting:
3. All the days you were present in 2014, and
4. 1/3 of the days you were present in 2013, and
5. 1/6 of the days you were present in 2012.

There are also Exempt Individuals, or persons whose days in the United States are not counted toward the Substantial Presence test, not those who are exempt from tax. Exempt Individuals include persons temporarily present in the United States on foreign government related activities (A or G visa holders); teachers or trainees temporarily present in the United States under a J or Q visa; students temporarily present in the United States under an F, J, M or Q visa; and, professional athletes temporarily in the United States to compete in a charitable sports event.

What about Social Security and Medicare Taxes?

If a foreign national works as an employee in the United States, he or she must pay Social Security and Medicare taxes in most cases.  However, there is an exception for Students and Exchange Visitors. The IRS explains that services performed by Nonresident Aliens temporarily in the United States in F, J, M, or Q status are not subject to withholding of Social Security or Medicare taxes from the pay they receive for these services, as long as the services performed are done so to carry out the purpose for which the individual was admitted to the United States. These types of services are quite limited, and include only on-campus work, practical training, and employment due to economic hardship. Moreover, to complicate matters, Social Security and Medicare taxes will be withheld for these nonimmigrant visa holders if they are considered Resident Aliens, i.e. they meet the Substantial Presence Test, even though they remain in nonimmigrant visa status (“F,” “J,” “M,” or “Q”). In addition, services performed by a spouse or minor child of nonimmigrant aliens with the classification of “F-2,” “J-2,” “M-2,” and “Q-3” are covered under Social Security and therefore taxes will be withheld.

Here’s a shorthand explanation that could help simplify matters:

1. In the United States there are Citizens, Permanent Residents, Resident Aliens, and Nonresident Aliens;

2. Permanent Residents and Resident Aliens are generally taxed just like US citizens;
3. Most Nonresident Aliens are not allowed to work, so they don’t pay taxes;
4. Some Nonresident Aliens, e.g. Students and Exchange Visitors, are allowed to work, and if they engage in approved employment related to their visa status must file a return, but will not be subject to Social Security and Medicare withholding;
5. But Nonresident Aliens who meet the Substantial Presence test, even though they are in nonimmigrant status, do pay into Social Security and Medicare.

The last and most important rule of thumb is this: When in doubt, contact an immigration attorney who is familiar with the U.S. Tax Guide for Aliens.   U.S. tax law is very complicated terrain and, just like U.S. immigration law, should not be navigated without proper tools and a guide.