Tax Requirements When Hiring Non-US Citizens

When adding additional members to your team, you may consider hiring non-US citizens if they are the ideal candidate. In such cases, it’s important to know the differences in tax filing statuses and the requirements of the IRS.

Determine tax status

The first thing that an employer must do is to determine their tax status. Their tax status will be one of three options: an individual who is a US citizen, a US resident alien or a nonresident alien.

Distinguish between resident or nonresident alien

The next step when hiring non-US citizens is to determine whether they are a resident or nonresident alien. An alien is a resident of the United States if he is a green card holder or has passed the substantial presence test. Otherwise, he is a nonresident alien. For tax withholding purposes, Social Security and Medicare, US residents including aliens, are treated as US citizens. When determining federal income tax withholdings, the IRS considers marital status, exemptions and withholding allowances. Employers pay for federal unemployment tax (FUTA) which includes resident aliens.

Additional tax reporting

In general, after hiring non-US citizens, employers must withhold federal income taxes on their wages. However, they may be exempt from withholding or may claim a lower rate. They can only do this if they are residents of a foreign country where the US has an income tax treaty. Unlike residents and citizens, nonresident aliens may claim only single filing status regardless of their marital status. They may also claim one personal exemption for tax withholding purposes.

Nonresident aliens are also subject to Social Security, Medicare and FUTA. If they claim tax treaty benefits in Form 8233, exempt wages are also exempt from Social Security and Medicare. In cases where the foreign country of a nonresident alien has Totalization Agreement with the Social Security Administration, earnings in the US may be exempt from Social Security and Medicare taxes. Nonresident aliens pay taxes similar to Social Security and Medicare to the foreign country where they reside. The benefit of the Totalization Agreement is avoiding double taxation with respect to social security taxes.

Nonresident aliens married to US citizens, as well as resident and nonresident aliens from Canada, Mexico and South Korea follow the same rules for withholding exemptions as US citizens and resident aliens.

Payment & withholding

As for independent contractors, the same rule applies for payment to contractors who are US citizens and resident aliens. You must report payments to citizens and residents on a 1099. These payments are not subject to withholding.

Payments to nonresident aliens however, are subject to 30% withholding. But, like nonresident alien employees, nonresident alien independent contractors may also claim tax treaty benefits by filing Form 8233. They may be exempt from withholding or may claim a lower rate depending on the income tax treaty. Business owners must report all payments to nonresident alien contractors on Form 1042S.  Tax withheld must be deposited timely with the IRS.