Income Taxes and FICA Withholding Exemption(s) for Foreign Workers
Both incomes could be subject to tax in the US. A resident alien is someone who meets the “green card” test, or substantial presence test (an average of 183 days presence within a three year period). If neither of those tests are met, the individual is a non-resident alien.
There are exceptions to counting the number of days for the substantial presence test for individuals and their families related to: foreign government-related individuals; teachers and trainees; students; and professional athletes. Also, an income tax treaty may override the substantial presence test and treat an individual as a non-resident when the substantial presence test has been met. In addition, the Closer Connection to a foreign country can be claimed to treat an individual as a non-resident. Since resident aliens are subject to U.S. federal income tax on their worldwide income, “qualifying” as a non-resident may be beneficial.
Whether a person is considered a resident or non-resident alien for income tax purposes, income earned in the United States is generally subject to taxation in the US, as well as federal (and state) income tax, Social Security and Medicare (FICA) withholding taxes.
Exceptions from Withholding: Federal Income Tax
Business Visitor Exception: Income earned by nonresident aliens may be exempt from withholding under the business visitor exception. Under this rule, compensation received by an NRA for personal services performed in the U.S. will not be considered income from sources within the U.S. (and therefore not subject to withholding) if: (1) the services are performed by an NRA who is temporarily present in the U.S. for 90 days or less during the taxable year; (2) the compensation does not exceed $3,000 in the aggregate; and (3) the services are performed for an office or place of business maintained in a foreign country or in a U.S. possession by a U.S. citizen, a U.S. resident, a U.S. domestic partnership, or a U.S. domestic corporation.
Tax Treaties: Nonresident aliens who are exempt from U.S. tax under a treaty may avoid withholding by giving dated, signed, and sworn statements, in duplicate, to their employers for the tax year. Statements must identify the tax year involved, the applicable wages, the countries of residence, the treaty provision under which exemption from FITW is claimed, and the facts relied on as proof that treaty requirements are met.
Exceptions from Withholding: Federal Social Security and Medicare Tax
Totalization agreements: Non-resident aliens working in the United States may be covered by totalization agreement which exempts them from US social security and Medicare tax. The taxpayer must provide a statement (government issued) to the employer stating the exemption from FICA taxes due to totalization agreement between the US and their country of residence.
Foreign Students (and researchers): Nonresident aliens temporarily in the United States as nonimmigrants with F, J, M or Q visas are exempt from social security and Medicare tax if their work carries out the purpose for which they were admitted to the United States.
Agricultural workers: Service performed by foreign agricultural workers lawfully admitted to the United States on a temporary basis is exempt from social security and Medicare taxes.
Conclusion
Just because you are a nonresident earning US source income does not mean you are subject to U.S. federal income tax, as well as FICA taxes. Your facts will dictate your tax liabilities, so if you currently spend time in the U.S. or plan to, please reach out to Withum’s International Tax experts who can assist you with all of your tax planning needs and considerations.
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