Taxation Implications for Foreign Nationals Working in the United States, in a Nutshell – PART 1

Today’s global workforce is evolving, and many American companies with international employees find they often need assistance in comprehending the tax implications pertinent to the foreign nationals who work for them. The U.S. imposes taxes on worldwide income for all individuals deemed to be “residents,” whereas nonresidents are taxed only on their U.S. source income, but under what conditions is an inpatriate (inpat) considered a resident for U.S. tax purposes?

Tax rules provide several options to help make that distinction, including the Substantial Presence Test, which delineates two parameters in determining resident/nonresident status:

1. 31 consecutive days of stay in the initial year of the U.S. assignment; and the
2. 183 Days Test, wherein the total of physically present days is calculated as follows: 
   a. Total days in the current year, plus
   b. 1/3 of the days in the preceding year, plus
   c. 1/6 of the days in the year preceding that one

Visa status may also impact residency determination. Holders of some visas, including the J and F type, are automatically considered nonresidents, so it’s important to know which visa your inpats are holding to avoid double taxation of income. Also, once an individual obtains a green card, they are treated as a U.S. resident.

Of course, there are exceptions. The Treaty Tie Breaker Provision states that even if a taxpayer meets the Substantial Presence Test, certain international tax treaties treat the taxpayer as a nonresidents if he or she can establish a domicile of origin. Each country has its own unique tax treaty with the United States; understanding their various nuances can reduce tax liability for inpats. 

Also, just because a foreign national meets the Substantial Presence Test, he or she is not necessarily a U.S. tax resident. There are exceptions and elections available. If the taxpayer’s U.S. presence in previous years is already known, an advisor can prepare possible scenarios to determine the best tax position and may be able to suggest the best timing of arrival for their U.S. assignments.