The first task for employers is to determine which foreign national employees are resident aliens (who are taxed like U.S. citizens) and which are nonresident aliens (who are taxed under special rules). Resident aliens include foreign national employees who are green-card holders and nonimmigrants (and illegal aliens) who are substantially present in the U.S. as defined by §7701(b) of the Internal Revenue Code (IRC).
Nonimmigrants are resident aliens if they are present for at least 31 days in the current calendar year and their U.S. days over three calendar years equal or exceed 183 days based on a 183-day substantial presence formula. Nonimmigrants whose presence in the U.S. fails to satisfy the 183-day substantial presence test are nonresident aliens.
The 183-day substantial presence formula considers:
- All of the countable U.S. days in the current calendar year
- Plus 1/3 of the countable U.S. days in the prior year
- Plus 1/6 of the countable U.S. days in the year before the prior year
Partial U.S. days do count, but not all U.S. days count for substantial presence purposes. For example, days commuting from a residence in Canada or Mexico to work in the U.S. (provided they satisfy the regulatory definition of commuting days) and days spent as an exempt (from counting days) individual do not count.
Exempt (from counting days) individuals do not count U.S. days for specified periods varying by immigration status. Foreign-government Related Employees (A-status Diplomats and G-status International Organization Employees) do not count their U.S. days without limitation. Unmarried dependents who are 21 or older and no longer living in the primary visaholder’s residence must count U.S. days. Students do not count their U.S. days for five calendar years, which can include exempt-from-counting calendar years since 1985 regardless of the number of years in between. Teachers and Trainees do not count U.S. days for two out of the current seven calendar years (four out of seven if all of their remuneration is paid by a foreign employer).
Teachers and Trainees include J exchange visitors in any of the exchange visitor categories except Student (collectively called Nonstudents) and Student Intern, and Q-1 Cultural Visitors, but do not include H-1B or H-3 status individuals who are teachers or trainees based on their respective immigration documents.
Exempt individuals must identify calendar years during prior visits in F, J, M or Q status when they were exempt to determine if they have exceeded the calendar-years limitation based on their current status. These residency status determinations can be complicated since some prior calendar years in F, J, M or Q status might have been as resident aliens and other years might have been as nonresident aliens because of the application of the substantial presence rules during the prior visits.
Substantial Presence Exceptions
There are substantial presence test exceptions under the Code such as the “closer connection exception,” which can allow eligible individuals to remain nonresident aliens longer. Procedures for these exceptions for tax return (but not withholding) purposes are described in IRS Publication 519, U.S. Tax Guide for Aliens.
There is also an exception that allows resident alien employees who have remained tax resident in a treaty country (called dual residents) to claim nonresidency status under a treaty residency tiebreaker rule. This claim must be supported by facts on Form 8833. This exception would work only for individuals who spend substantial periods of time in both countries because of the conditions the individual must meet.
Some nonresident employees may be eligible to elect to be treated as resident aliens for tax return and wage withholding purposes. Nonresidents married to a U.S. citizen or resident spouse may elect with their spouse to be treated as resident aliens. Students and business apprentices from Barbados, Jamaica and Hungary may elect under the Student/Trainee Article of the applicable treaty to be treated as resident aliens. (The new treaty with Hungary will eliminate this exception when it becomes effective.)
Residency Start and End Dates
An individual’s residency start date is retroactive to his or her first countable U.S. day in the calendar year that he or she becomes a resident alien. An individual’s residency end date is deemed to be December 31 of his or her last year of residency. For tax return purposes, departing individuals may choose an earlier end date (typically the last day of physical presence) under the closer connection exception described in Publication 519. No procedures have been provided for this exception for withholding purposes.
Dual residents might be able to use a tax treaty tiebreaker rule to choose a later residency start date or an earlier residency end date, documenting the facts supporting the claim on Form 8833 for tax return purposes (no form or procedures are specified for withholding purposes).