Nonresident Alien: Definition & Overview

KEY TAKEAWAYS

• A nonresident alien is someone who is a noncitizen of the U.S. and hasn’t passed their substantial presence or Green Card test. 
• The only way a nonresident alien pays taxes is if the income they earn is from a business or trade in the U.S.
• Whether or not someone is classified as a nonresident alien can have different tax implications.
• To qualify as a resident alien by meeting the substantial presence test, someone must be physically present in the United States (U.S.) on at least:
  • 31 days during the current year, and
  • 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
    • All the days you were present in the current year, and
    • 1/3 of the days you were present in the first year before the current year, and
    • 1/6 of the days you were present in the second year before the current year.

What Is a Nonresident Alien?

A nonresident alien is a term given to someone that is not a citizen of the United States. They’re considered a nonresident because they have not passed the substantial presence test or the Green Card test. These rules are determined by the Internal Revenue Service (IRS).

Any nonresident aliens in the U.S. are required to pay their share of taxes on the income they earn in the country. Some of the most common examples of nonresident aliens are international students, teachers, and people who need specific medical treatment that are living temporarily in the United States. Basically, foreign nationals are going to get classified as either nonresident or resident aliens depending on whether they meet the substantial presence test.

Qualifications of a Nonresident Alien

Qualifying as a nonresident alien means that you haven’t passed the substantial presence test or the Green Card test, but you earn some type of income from within the U.S. If a person has been in the U.S. for long enough, they could meet the criteria for the substantial presence test to become a resident alien. 

For a nonresident alien to classify as a taxpayer, the IRS takes into consideration how much time they have spent in the U.S. This will help determine their federal income tax return, income tax withholding, and social security.

Resident Alien vs. Nonresident Alien 

A foreign national will get classified as either a nonresident or resident alien. Nonresident aliens are considered noncitizens of the U.S. because they either don’t qualify for a Green Card or haven’t spent enough time in the country. 

For tax purposes, a resident alien works in the opposite way. They are either a U.S. citizen, have met the substantial presence test, or have their Green Card. The specific details are all outlined by the IRS in Publication 519, U.S. Tax Guide for Aliens. 

Nonresident aliens still earn an income from a business in the U.S. and are therefore considered to be taxpayers. However, the way that taxes work for nonresident aliens works a little differently compared to resident aliens.

Tax Filings for a Nonresident Alien 

Resident aliens pay taxes on all ordinary income the same way as permanent citizens. For nonresident aliens, however, there are specific circumstances as to whether or not they are subject to taxation. 

In this case, any earned income gets taxed based solely on if it is connected with a business or trade in the U.S. Some common examples of taxable income include commissions, wages, and salaries. 

It can also include various types of business income and investment income. These income streams get taxed the same as a U.S. resident or a U.S. citizen. On the flip side, any earned income not from a U.S. business or trade gets taxed at a flat rate of 30%.

Nonresident aliens must submit the appropriate tax filings for income-generating activities in the U.S. A few other income sources could include:

• Royalties from extracting natural resources 
• Rent payments for U.S.-owned properties 

If you’re a nonresident alien you’re going to file Form 1040NR. If you’re a nonresident alien with no dependents, you’re going to file Form 1040NR-EZ. 

Example of a Nonresident Alien 

An example of a nonresident alien is a professor that only has taught at a college or university for one semester but is from another country. So for tax purposes, if the professor arrives at the beginning of the school year in August and leaves at the end of the semester in December, even though they would have resided in the United States for over 31 days in the current year, they are still not meeting the part of substantial presence test that requires over 183 days of residence in United State over the 3-year period.

If the professor doesn’t return again then they won’t need to worry about any changes to their tax status. But, if they happen to come back each year to teach the same class they can accumulate time in the U.S. 

Accumulating more than 183 days in the U.S. in a three-year period and meeting the detailed calculation requirement within each of those three years means the professor would meet the requirements for resident alien tax status.

Summary

Nonresident aliens are people who have dealings in the U.S. but don’t have their Green Card or meet the substantial presence test. They also typically earn an income from a business or trade based in the U.S.

There are different tax implications for nonresident aliens compared to resident aliens. For example, resident aliens pay tax on all earned income similarly to permanent citizens. Non-resident aliens only pay taxes for earned income from a U.S.-based business.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.