Resident vs Nonresident - Frequently Asked Questions

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Because residents and nonresident aliens are taxed differently, it's important to understand the difference. You're considered a nonresident alien for any period that you're neither a U.S. citizen nor a resident alien for tax purposes. You're considered a resident alien for a calendar year if you meet the green card test or the substantial presence test for the year. This is a list of Frequently Asked Questions we often receive when discussing this topic.

So, Nonresidents do not pay SE tax on their self-employment income but they do have to pay Social Security and Medicare tax through payroll deductions?

Nonresident aliens, in general, are liable for Social Security/Medicare Taxes on wages paid to them for services performed by them in the United States, with certain exceptions based on their nonimmigrant status. Certain nonimmigrants and nonresident aliens are exempt from U.S. Social Security and Medicare taxes. Click here to see who’s exempt:https://www.irs.gov/individuals/international-taxpayers/foreign-student-liability-for-social-security-and-medicare-taxes

If you employee a foreign person, how much tax do you withhold?

In most cases, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%.

People who are filling with ITIN will never be allowed to claim social security benefits, is that right?

Many undocumented immigrants use fake Social Security Numbers (SSN) to get jobs. They pay billions of dollars a year into the Social Security system via FICA tax withholding, but they don’t receive any benefits. Most of the money ends up in the trust funds from which Social Security benefits are paid. If the undocumented immigrant later becomes legal and keeps W2s and evidence of earnings, those work credits will be re-instated to their new SSNs. Once they receive work authorization, they can file a claim for Social Security benefits. Currently the Social Security Administration uses all earnings to determine entitlement to benefits, including the earnings for jobs worked illegally.

Can the IRS deny an ITIN to an individual?

The IRS can grant or deny an ITIN as their discretion. For the most part, an individual who qualifies for an ITIN will be issued one.

My client incorrectly filed Form 1040 instead of 1040NR. How do I amend a tax return?

Use Form 1040X to amend Form 1040NR. Also, use Form 1040X if you should have filed Form 1040, instead of Form 1040NR, or vice versa. To amend Form 1040NR, or to file the correct return, do the following: Enter your name, current address, and social security number (SSN) or individual taxpayer identification number (ITIN) on the front of Form 1040X. Don’t enter any other information on page 1. Also, don’t complete Parts I or II on page 2 of Form 1040X. Enter in Part III the reason why you are filing Form 1040X. Complete a new or corrected return (Form 1040, Form 1040NR, etc.). Across the top of the new or corrected return, write “Amended.” Attach the new or corrected return to the back of Form 1040X. For more information, see Pub. 519, U.S. Tax Guide for Aliens.

Is it common that the IRS requires individuals to mail their original passport for an ITIN application? Why isn't a scanned copy enough?

The IRS wants to ensure that the passport is authentic. The taxpayer can either mail the original passport or visit an IRS taxpayer assistance center to have an IRS agent authenticate it. If the taxpayer visits a Certified Acceptance Agent (CAA), the CAA will authenticate the passport and the CAA will send a copy of the passport to the IRS. Only the CAA can send a copy.

Will an illegal immigrant be deported if they start filing tax returns?

No. The IRS wants everyone to file a tax return regardless of immigration status. An illegal immigrant without a social security number needs to apply for an ITIN. The ITIN will allow him/her to file a tax return. The IRS will not share taxpayer information with other agencies, including Immigration and Customs Enforcement.

When an Illegal immigrant applies for an ITIN, does the IRS notify Immigration and Customs Enforcement (ICE)?

No. The IRS does not share information with other government agencies, including ICE.

If a person is not here legally and has a job, does the ITIN show up on the W-2?

An ITIN does not give authorization for an individual to work. If an illegal immigrant has a job, they are using a Social Security Number (SSN). The W-2 they receive has a Social Security Number. Usually the SSN does not belong to them and they’ve obtained it illegally. They will use this W-2 to file taxes.

How would an undocumented immigrant have a Form W-2 if they are unauthorized to work?

The only way an undocumented immigrant would have a W-2 is if they are working with a fake Social Security Number. Regardless, they need to use this W-2 to apply for an ITIN to file a tax return.

How do unauthorized immigrants have income?

Anyone can have income. If they sell strawberries in the street corner or clean someone’s house. An undocumented immigrant can start a business and have millions of dollars of income. Either way, they need to apply for an ITIN and file a tax return.

If someone is in the U.S. on B1 / B2 visa, only stayed 10 days for the past 3 years and received $10,000 consulting fees from a U.S. company, does he need to file a tax return and pay income tax?

Yes, anyone who has U.S. source income must pay tax on that income. This individual is not a U.S. resident, so they need to file Form 1040 NR.

Can a tax treaty keep an alien in nonresident status for tax purposes?

Yes, this is possible but for only a certain period. It depends on the country and the treaty. See Publication 901 for more information.

If an ITIN client has a W-2 with a fake social security number, can they still receive tax credits?

The ITIN holder may be eligible for the Child Tax Credit if their qualifying dependents have real Social Security Numbers issued by the Social Security Administration. Make sure they actually earned the income stated on the W-2.

Does qualification of substantial presence need to be re-qualified each year?

Yes, the taxpayer may be a resident one year and a nonresident the next.

When does a nonresident alien become a resident?

A nonresident alien becomes a resident when they meet either the green card test or the substantial presence test.

Why should you file Form 8843 if you don’t have any income?

You want to file Form 8843 so the days of presence in the current year are excluded from the calculation of the substantial presence test. You may have income the next year and not excluding the days this year may cause you to meet the substantial presence test next year.

Can a resident alien ITIN holder receive the Earned Income Tax Credit?

No. To qualify for the Earned Income Tax Credit, both taxpayers (if married) and their qualifying children must have social security numbers issued by the social security administration.

Aren't days here under an H-1B excluded from days counted for substantial presence?

An individual in the U.S. on an H-1B visa is not an exempt individual and cannot exclude days of presence for the purpose of thesubstantial presence test.

If an undocumented immigrant arrives in the U.S. and begins working in September, is it correct that they would file a 1040NR along with their W-7 for their first year here?

Yes, that is correct. The undocumented immigrant needs to be in the U.S. long enough to meet the substantial presence test before they become residents and file Form 1040. They can, however, choose to be treated as resident the first year and file Form 1040. Either way, they must submit Form W-7 to apply for an ITIN.

Does an undocumented immigrant using a fake social security number pay Social Security and Medicare tax?

Yes. FICA tax is withheld from the employee. Most of the money ends up in the trust funds from which Social Security benefits are paid. If the undocumented immigrant later becomes legal and keeps W2s and evidence of earnings, those work credits will be re-instated to their new SSNs. Once they receive work authorization, they can file a claim for Social Security benefits.

Can you please provide us the exact name of the training regarding the Nonresident Visa Holders? Is it "Exempt Nonimmigrants and Nonresident Aliens"?

Yes. You can view the training here: https://vimeo.com/303121973

If my software doesn’t allow me to file a tax return with an ITIN, what do I do?

If your software doesn’t allow you to file a tax return because the ITIN holder is reporting a W-2 with a Social Security Number, you must mail in the tax return.

A client has an ITIN and his children are U.S. citizen, when he files his tax return can he claim these children to get the Child Tax Credit and Earned Income Tax Credit?

An ITIN taxpayer is not able to claim the Earned Income Tax Credit even if the children are U.S. citizens with Social Security Numbers. An ITIN taxpayer is able to claim the Child Tax Credit only if the children are U.S. citizens with Social Security Numbers.

Are nonresident aliens subject to backup withholding?

Generally, backup withholding applies only to U.S. citizens, resident aliens and not to nonresident aliens. However, if the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld.

If there is no SSN or ITIN, then how is withholding reported to IRS?

To report backup withholding on Form 945, there must be an ITIN or SSN.

Is a Person with Income from Puerto Rico Required to File a U.S. Federal Income Tax Return?

If you're a bona fide resident of Puerto Rico during the entire tax year, you generally aren't required to file a U.S. federal income tax return if your only income is from sources within Puerto Rico. However, if you also have income from sources outside of Puerto Rico, including from U.S. sources, you're required to file a U.S. federal income tax return if such amount is above the U.S. filing threshold. Nevertheless, a bona fide resident of Puerto Rico with a U.S. filing obligation, generally won't report Puerto Rican source income on a U.S. income tax return.

Why should a sole proprietor become an LLC?

Many small businesses are organized as limited liability companies, or LLCs, because an LLC offers the same liability protection as a corporation, but with a less rigid structure and fewer administrative requirements. Click here for more info:https://www.nerdwallet.com/blog/small-business/starting-successful-llc/

If a U.S. citizen marries a nonresident alien, how does the income of the alien from foreign country get reported on the tax return?

If, at the end of your tax year, you are married and one spouse is a U.S. citizen or a resident alien and the other is a nonresident alien, you can choose to treat the nonresident as a U.S. resident. Report all world-wide income on the 1040. Click here for more information: https://www.irs.gov/individuals/international-taxpayers/nonresident-alien-spouse

Do student visa holders have special tax implications?

Yes. Please review this video for more information: https://vimeo.com/303121973

If an ITIN taxpayer pays Social Security and Medicare tax, are they eligible to receive those credits if they become legal in the future?

If the undocumented immigrant later becomes legal and keeps W2s and evidence of earnings, those work credits will be re-instated to their new SSNs. Once they receive work authorization, they can file a claim for Social Security benefits.

If an ITIN holder has a Schedule C and is doing business in the U.S., do they have to pay self-employment tax?

Yes, they must pay SE tax.

If a nonresident does not have a working visa, can they start their own business and file Schedule C?

Yes. Anyone can start a business as a sole proprietor regardless of immigration status. They must file Schedule C to report all income and expenses. If they do not have a Social Security Number, they must apply for an ITIN.

Does a taxpayer need a TIN to file Form 8843?

No, they do not need a TIN. Make sure to fill out the form completely so the IRS can confirm the taxpayer’s identity.

If you have a green card, what form do you file?

If you have a green card, you are considered a resident alien and you must file Form 1040.

Can an undocumented immigrant claim dependents?

Yes. The undocumented immigrant must have an ITIN to file a tax return. They can claim dependents if they provide over 50% of their support and live with them.

If a taxpayer has a Form 1042-S, how do you report this?

Report the income and withholding on the Form 1040.

A client and his wife have been filing a 1040 for years as married filed jointly. She left him and went back to Mexico. They are still technically married. Can he file MFJ or should he file as Single?

Since they are still married, they can file Married Filing Jointly. They must report all world-wide income, including income earned by the wife in Mexico. Now, if he did not live with her the last six months of the year and he doesn’t expect to get back with her, he can file Single.

Does a resident alien with an ITIN who files a Schedule C, pay self-employment tax?

Yes, they must pay self-employment tax.

How do we handle students from other countries with student visas? As resident aliens?

It depends. Most visa holders are issued nonimmigrant visas which means that they are expected to return to their country of origin. As a result, they are not given permanent residency status or green cards. Without a green card, the only way you can be a resident alien (for tax purposes) is if you elect to be one or meet the substantial presence test. Most visa holders are nonresidents until they meet the substantial presence test.

How are spouses of international students handled? Do they have the same exemption as the student spouse?

The spouse of a visa holder may have special visa. For example, a student can have a J-1 visa and the spouse can have a J-2 visa.

When an undocumented immigrant files a tax return, does the IRS send their information to the Department of Homeland Security? This would be a serious concern for immigrants. How are filers convinced that the government won't try and track them down to deport?

The IRS does not share private taxpayer information with immigration enforcement agencies. Section 6103 of the Internal Revenue Code states that the IRS is not authorized to release taxpayer information to other government agencies except for providing information to the Treasury Department for investigations that pertain to tax administration, or under a court order related to a non-tax criminal investigation arises often during legislative debates.

Does an undocumented immigrant applying for an ITIN risk getting deported?

The ITIN is not an immigration-enforcement tool. The ITIN is designed to facilitate tax payment. Per Section 6103 of the Internal Revenue Code, the IRS does not share applicants’ private information with immigration enforcement agencies.

Does a green card automatically result in a social security number being issued?

U.S. Citizenship and Immigration Services (USCIS) grants a person a permanent resident card, commonly called a "Green Card." A social security number is issued by the Social Security Administration. Usually a permanent resident with a green card is issued a social security number giving them authorization to work.

What form does a nonresident alien need to fill out if they are not required to pay taxes in the U.S.?

Nonresident aliens are required to pay tax on all U.S. source income. They need to file Form 1040-NR

What about F-1 Visa holders who are done with school, Employer has hired them and is working on getting them an H-1B Visa. Are they still excluded if they have not exceeded their time frame?

If they are students, they are exempt from paying social security and Medicare tax for 5 years. If they are not students, they are exempt for 3 years. Once their status changes from F-1 to H-1B, they are no longer exempt. Teachers, trainees, and researchers in H-1b status are liable for social security/Medicare taxes from the first day of U.S. employment, regardless of whether they are nonresident or resident aliens, and regardless of whether their wages may or may not be exempt from federal income taxes under an income tax treaty. Click here for more information:https://www.irs.gov/individuals/international-taxpayers/foreign-student-liability-for-social-security-and-medicare-taxes

If an individual meets the substantial presence test, are they subject to the ACA penalty?

To be subject to the individual mandate of the Affordable Care Act, you must be lawfully present in the U.S. If you meet the substantial presence test, you will become resident alien for tax purposes; however, it does not make you lawfully present. If you are not lawfully present, you are not subject to the ACA penalty for not having health insurance.

What if you can’t leave the country because you are in jail? Can you exempt those days on Form 8843?

An exempt individual can exclude days from the calculation of the substantial presence test. Exempt individuals are teachers, trainees, students, professional athletes, and other visa holders. An incarcerated individual is not an exempt individual. Please see Form 8843 for more information.

Can a nonresident who has rental property in a single member LLC, get an ITIN and report the rental income? He is married and lives in Peru.

The nonresident can apply for an ITIN with Form 1040NR. He will report the rental income on Schedule E which will be attached to Form 1040NR.

Can an individual use an ITIN to work?

An ITIN does not authorize an individual to work. The ITIN is for tax reporting purposes only.

What is the filing requirement for nonresidents in 2018?

Table 1 on page 2 of Publication 501 shows you who needs to file.

My client is married to a Bolivia citizen, she has an ITIN but does not stay in us for more than a couple months at a time. I have been filing a joint return. Is that correct?

Yes, that is correct.

What is a mixed-status family?

A mixed-status family is a household with members who have different immigration statuses. Some are lawful permanent residents, some are U.S. citizens, some are DACA recipients, and others are undocumented illegal immigrants. Check out this video to learn more: https://vimeo.com/307139985

Can contractors use the ITIN for undocumented immigrants on a 1099-Misc?

Yes. Before a company hires a contractor, the company must ask for the SSN or ITIN of the contractor. Without an SSN or ITIN, they will not be able to issue a 1099 to that individual and will not be able to deduct that labor expense.

Is there a federal law that would prohibit me from preparing an undocumented immigrant tax return?

Helping an individual meet their tax filing obligation is not against the law. Make sure to file accurately and follow due diligence.

Can you file a 1040NR without a social security or ITIN?

If you are an individual filing a 1040NR, you must have a social security number or an ITIN. If you are an estate or trust, you must have an EIN.

If an individual does not have a social security number or an ITIN, how do you file their tax return?

If the individual does not have an SSN, they must apply for an ITIN.

When does the residency start for green card holder?

If you meet the green card test at any time during a calendar year, but do not meet the substantial presence test for that year, your residency starting date is the first day in the calendar year on which you are present in the United States as a lawful permanent resident (the date on which the United States Citizenship and Immigration Services (USCIS) has officially approved your petition to become an Immigrant).

Can we file a tax return for an illegal immigrant who uses someone else's social security number listed in their W2?

Yes, just make sure the individual earned that income. Ask for paystubs or deposits to prove it. The illegal immigrant needs to apply for an ITIN. Include the ITIN on the Form 1040.

If an ITIN holder is reporting W-2 income with a fake social security number, isn’t that misleading and illegal?

If the individual actually earned the income and he can prove it, it is not misleading or illegal. Ask for paystubs or deposits to prove they earned the income. The IRS wants you to report all income earned or received even if you earn it by breaking the law and using a fake social security number.

If one spouse is a U.S. citizen and the other is a nonresident, do they need to file Married Filing Jointly?

You may elect to include or not include your nonresident spouse in your tax return. Click here for more information:https://www.irs.gov/individuals/international-taxpayers/nonresident-alien-spouse