Classifying Aliens as Residents or Nonresidents for Tax Purposes

Purpose of Determination for Tax Purposes

Internal Revenue Service (IRS) rules for taxation depend on whether a person is a US citizen, a resident alien, or a nonresident alien. "Alien" is a general term and for this discussion is a foreign person who is not a US Citizen. An Alien might also be referred to as a "non citizen."

Residency Status

Description

US Citizen

A person born in US and subject to the jurisdiction of the US An individual who obtains naturalization in the US.

Resident Alien

The term applied by the IRS to non citizens residing in the US who:

  • Hold an Alien Registration Receipt Card (Form I-551), commonly known as a "Green Card," representing approval from the US government to remain in the US for an indefinite period of time. Also referred to as a "Permanent Resident."
  • Or meets the Substantial Presence Test (SPT) for tax purposes.

Nonresident Alien

A person who is not a US citizen, Permanent Resident or a Resident Alien meeting the SPT, but who has gained a right from the US government to reside in the US. For employment, authorization to work in the US is required for a nonresident alien.

Resident aliens are generally taxed on their worldwide income, the same as US citizens. Nonresident aliens are generally taxed only on their income from sources within the United States.

Classification of an alien as a resident or nonresident for tax purposes is an important step in determining correct taxation and reporting of the payments. The withholding process depends on this step being properly carried out and while the individual provides the information it is ultimately the responsibility of the RF to accurately make residency determinations. IRS penalties for incorrect withholding can be severe and are the responsibility of the operating location.

Note: In a given tax year, an alien may have been both a resident alien or a nonresident alien for tax purposes. Refer to the "Effects of Changes in Status" section later in this document for more information.

Residency Determination for tax purposes and applicable tax rules

The following table illustrates the impacts of citizenship, immigration and IRS tests on and IRS tax rules applied:

Citizenship / Immigration Status

IRS Residency Test

Official IRS Residency Status for Tax Purposes

Tax Rules treatment under IRS rules

US Citizen

Not Applicable

US Citizen for Tax Purposes

US Citizen

Non US Citizen in US on Visa

Green Card Test - Lawful Permanent Resident

Resident Alien for Tax Purposes

US Citizen

Non US Citizen in US on Visa

Substantial Presence Test (SPT)

Resident Alien for Tax Purposes

US Citizen

Non US Citizen in US on Visa

Does not meet Green Card or SPT

Nonresident Alien for Tax Purposes

Nonresident Alien

When an Alien's Residency Status for Tax Purposes Should be Determined

Residency determination for tax purposes must be done before an employee or fellow is assigned to the Research Foundation (RF) payroll and before an independent contractor, participant stipend recipient, royalty recipient or rent recipient supplier is set up in the RF AP system. Correct determination ensures, in advance, that the person's payments can have the proper tax rules applied and taxed and reported correctly.

Request Information from the Non US Citizen

To make the residency determination for tax purposes you must gather some basic information from the Non US Citizen. The following table provides the RF forms available to gather this information:

Payment Classification

Research Foundation Form

Payroll

Employee

Fellowship

Request for Alien Information for Employees and Fellows (pdf)

 

Request for Alien Information for Employees and Fellows (excel)

Accounts Payable

Independent Contractor

Participant Stipend

Royalty

Rent

 

Accounts Payable System

Request for Alien Information for Miscellaneous Income (pdf)

 

Request for Alien Information for Miscellaneous Income (excel)

PART I of Form: Request for Alien Information and Payroll System Input:

Information gathered in Part I of the "Request for Alien Information for Employee and Fellows" form (pdf) (excel)should be entered into the payroll system on the Non Citizen Residency Special Info. Type (SIT). Data provided on the request form relates to a field in the Non Citizen Residency SIT.

There is no input required for the AP module. See Miscellaneous Income Payments to US Citizens and Resident Aliens and Nonresident Aliens - Payments to Independent Contractors, Participant Stipend Recipients, Royalties Recipients and Rent Recipients for AP process and reporting information.

Part II of the Form: Determining Residency and Payroll System Input:

An alien is considered a resident alien for tax purposes if he or she meets the requirements of:

Green Card Test (also known as Permanent Resident)

"Green card" is the popular term for a card issued to aliens by the US Citizenship and Immigration Service (USCIS), denoting lawful permanent resident status. A lawful permanent resident of the US is defined as a person who has been given the privilege, according to the immigration laws, of residing permanently in the US as an immigrant.

The person will continue to have resident status unless the US government issues the person a final administrative or judicial order of exclusion or deportation. (An administrative or judicial order of exclusion is an order stating that the person may no longer appeal to remain a resident to a higher court of competent jurisdiction.) The formal name of the card is the "Alien Registration Receipt Card," or Form I-551.

If an alien is a lawful permanent resident of the United States at any time during the calendar year, he or she is considered a resident alien for tax purposes; therefore if an alien has a valid green card, the alien is considered a resident alien for tax purposes.

Request for Alien Information Form Entry

Payroll System Entry

If the individual meets the requirements of the Green Card Test, in the HR module of the RF Oracle business system, proceed with the steps below. Refer to Job Aid - Quick Table - Residency Payroll System Entry.

Accounts Payable System Entry

If the individual meets the requirements of the Green Card Test, the following key item must be entered in the AP module of the RF Oracle business system, proceed with the step below. Refer to Job Aid - Quick Table - Residency AP System Entry.

Substantial Presence Test (SPT)

A person may be considered a resident alien for tax purposes if he or she meets the substantial presence test for the calendar year. To meet this test, the person must be both physically present and not considered an "exempt individual" (refer to these definitions later in this section ) in the United States at least:

  1. 31 days during the calendar year in question and
  2. 183 days during the 3-year period (also known as the "look back period") that includes the calendar year in question and the
    2 years immediately before it, counting:
    1. all the days the person was present in the current calendar year in question,
    2. 1/3 of the days the person was present in the year immediately prior to the current year, and
    3. 1/6 of the days the person was present in the year before.

Frequency - The Substantial Presence test should be performed:

Definition of "Physical Presence"

As a general rule, a person will be treated as "physically present" in the US for each day that he or she is in this country at any time during a 24-hour day.

There are several exceptions to this rule that should not be counted for the purposes of the substantial presence test. The exceptions are as follows:

Definition of "Exempt Individual"

The following circumstances qualify as exempt individual status:

  1. A person temporarily present in the US as a foreign government related person.
  2. A teacher or trainee, temporarily present in the US under a J-1 visa (other than a student), who substantially
    complies with the requirements of the visa.

    Note: A J-1 visa teacher or trainee will not be an exempt individual if he or she was exempt as a teacher, trainee, or student for
    any two of the last six calendar years. Presence in the United States during any part of a particular year is considered presence
    in the US for that entire calendar year and against the exempt individual status.

  3. A student, temporarily present in the United States under an F-1, J-1, or M-1 visa, who substantially complies with
    the requirements of the visa.

    Note: An F-1, J-1, or M-1 visa-holder student will not be treated as an exempt individual if he or she has enjoyed that status (including
    Optional Practical Training time for F-1 Visa) for any part of more than five calendar years. Again, presence in the United States during
    any part of a particular year is considered presence in the US for that entire calendar year and against the exempt individual status.

  4. A professional athlete temporarily in the US to compete in a charitable sports event. Important for residency evaluation
    rules: Any prior visits to the US must also be considered. In many cases the visa status may have been different in
    prior visits. Apply the rules against the current visa status but "exempt individual" status for an individual in whole can
    not exceed five years.

    Substantial Presence Test Process Diagram

Example of Substantial Presence Test

A United Kingdom citizen (who is not an "exempt individual" and is "physically present" as defined in the previous sections) arrived in the US on August 31, 2006 and stayed in the country for the remainder of the year, or 123 days. This satisfies the first part of the test, the 31-day requirement.

In the prior two years, he was in the US for 150 days in 2005, and for 72 days in 2004.

To determine whether the second part of the test is satisfied, the following calculation must be made:

123 days (= total for 2006)

+50 days (= 1/3 x 150 days in 2005)

+12 days (= 1/6 x 72 days in 2004)

185 days

The total for the three-year look back period meets the second part of the test, the 183-day requirement.

Therefore, the person is considered a resident alien for tax purpose for 2007.

The "Residency Change" date was at the end of December 2006 from a nonresident alien to a resident alien for tax purposes. Therefore, the individual was a resident alien starting in 2007. The interesting point of this example is that the individual did not stay continuously in the country over the past three years. Instead, he was in the country for only portions of the look back period years. You would also need to know information on those previous visits because there may have been days exempt form the SPT. For the example, we treated all days of the SPT as the individual was not in exempt individual status.

If the individual had been an "exempt individual" to the SPT, you would not start counting days toward the SPT until January of the calendar year after the exempt individual status expires.

Using the same details to the example, assume the individual has had an F-1 student visa all along and first entered the US in 2004. The exempt individual status from the SPT would be for 2004, 2005, 2006, 2007 and 2008 (F-1 therefore 5 years). Starting January 1, 2009 the individual would no longer be exempt from the SPT and you would start counting days towards the SPT. If the individual stayed in the US, he would meet the SPT in the beginning of July 2009. The 183 total is roughly half a calendar year.

Request for Alien Information Form Entry:

Payroll System Entry

If the individual meets the SPT, in the HR module of the RF Oracle business system, proceed with the steps below. Refer to Job Aid - Quick Table - Payroll System Entry.

Accounts Payable System Entry

If the individual meets the requirements of the Substantial Presence Test, the following key item must be entered in the AP module of the RF Oracle business system, proceed with the step below. Refer to Job Aid - Quick Table - Residency AP System Entry.

Nonresident Aliens

If the individual does not qualify as a permanent resident under the Green Card Test or a resident alien under the Substantial Presence Test, the individual is considered a nonresident alien for tax purposes.

Request for Alien Information Form Entry

If the individual is a Permanent Resident, "exempt individual," or does not meet the SPT , the individual or campus representative checks the "Nonresident Alien" box in the "Test Results" section.

Payroll System Entry

If the individual is a nonresident alien for tax purposes, in the HR module of the RF Oracle business system, proceed with the steps below. Refer to Job Aid - Quick Table - Payroll System Entry.

Accounts Payable System Entry

If the individual is a nonresident alien for tax purposes, the following key items must be entered in the AP module of the RF Oracle business system, proceed with the step below. Refer to Job Aid - Quick Table - Residency AP System Entry.

Effects of Changes in Status - Tax rules

An alien may have been a nonresident alien and a resident alien for tax purposes during the same tax year. This usually occurs for the year the person arrives in or departs from the US It is the alien's obligation to
notify the RF of any changes in residency status. When a person's status changes, review and update appropriately the Nationality field on the People Form and/or Non-Citizen Visa and Residency Info SIT, and the Residency Detail / Residency status field off the Federal Tax Rule form.

Payroll System

Review and update appropriately data in the Nationality field on the People From and/or Non-Citizen Visa and Residency Info SIT, and the Residency Detail / Residency status field off the Federal Tax Rule form..

Accounts Payable System

Review and update the supplier records to reflect the appropriate reporting rules (1099-MISC vs 1042-S)

Monitoring and tracking the status of all aliens throughout the year is important for compliance with federal tax regulations and to ensure that required information is available and accurate for year-end tax statement processing. Refer to How to Monitor Residency Determination for Tax Purposes.

When an alien's status changes, immediate adjustments may need to be made to the person's withholding, and new IRS and state tax may be required.

When an Alien Becomes a Resident Alien for Tax Purposes during the Calendar Year

If there is an indication that an alien will become a permanent resident or resident alien during the calendar year, review the individual tax implications and begin withholding applicable taxes immediately. The date the individual becomes a resident alien is the "Residency Change" date. Different tax and reporting rules go into effect immediately and must be applied. Income tax withholding rules are applicable to the residency status of the individual at the date of payment.

SS and Medicare taxes are only applicable to employees. Therefore, see the following section on employee residency changes during the year. Social Security and Medicare taxes are based on the "Residency Starting date." The Residency Starting date is important for SS and Medicare withholding rules. The Residency Starting date is the beginning date for activity in a calendar year. Therefore, SS and Medicare taxes may be applicable retroactively to the beginning of activity in a calendar year even though the Residency Change date is later in a calendar year.

When an Alien Employee Becomes a Resident Alien for Tax Purposes during the Calendar Year

As mentioned in the previous section income taxes are based on residency status at time of payment. SS and Medicare tax withholdings for employees could be retroactive. Year end review of the employee residency status for tax purposes is important. When evaluating the residency status for tax purposes for an employee for the new year, if there is any indication that the employee will become a resident alien for tax purposes during the calendar year, you must ensure the record is coded to withhold SS and Medicare taxes at the beginning of the calendar year. This ensures taxes are withheld appropriately starting at the beginning of the year activity. Refer to Social Security and Medicare Taxation.

If the appropriate SS and Medicare taxes are not withheld for any portion of the year, operating locations must attempt to recover the taxes from the alien, retroactively for the period withholdings were missed. The operating location should not pay the withholding amount for the alien, because the IRS views taxes paid by an employer for an employee as additional income for that person because the taxes were not directly withheld from the employee.

Additional Forms

Arrival/Departure Record (I-94)

Operating locations may obtain a copy of or review the alien's Arrival/Departure Record (I-94) to support the alien's visa or NAFTA status and the period of authorized stay. An I-94 record is given to each alien to complete upon his or her admission to the US

The alien is required to keep this document in his or her possession as documentation of the visa or NAFTA status under which the alien was admitted and the period of the authorized stay in the US.

Refer to "NAFTA and Visa Status" for more information on visa and NAFTA requirements for independent contractors.

I-20 and DS-2019

Aliens who hold an F-1 or J-1 visa will have a "DS" (duration of status) indicated on the I-94 as the period of authorized stay. Operating locations may obtain or review the following forms to determine the period of authorized stay (refer to Forms, Employee: Personnel Administration for sample forms of DS-2019 and I-20a):

If the alien holds

then locations may obtain . . .

an F-1 visa

Form I-20, " Certificate of Eligibility for Nonimmigrant (F-1) Student Status - For Academic and Language Students"

The period of authorized stay is listed on line 5.

a J-1 visa

Form DS-2019 (pink form), "Certificate of Eligibility for Exchange Visitor (J-1) Status"

The period of authorization stay is listed on line 3.

Change History

 

 

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