Tax Requirements When Hiring Non-US Citizens

Discover the 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. As businesses broaden their operations on a global scale, hiring non-US citizens has become increasingly common, given the vast talent pool, diversity, and opportunities that a business gets access to. In such cases, it’s important to know the differences in tax filing statuses and the requirements of the IRS.

Determine tax status when hiring non-US citizens

The first thing that an employer must do is to determine the employee’s 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 and 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 a 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. Depending on the income tax treaty, they may be exempt from withholding or may claim a lower rate. Business owners must report all payments to nonresident alien contractors on Form 1042S. Tax withheld must be deposited timely with the IRS.

If you have any questions about hiring non-US citizens and the associated tax obligations, schedule a consultation with Cleer’s expert tax accountants to discuss them further. You can also email Customer Success at hello@cleer.tax.

Author Bio
David McKeegan
David McKeegan, the founder of Cleer.Tax is both an MBA and Enrolled Agent. As an entrepreneur and small business owner himself, he really understands the pain points that company owners and founders have in regards to tax compliance and having clean financial statements. What really differentiates David is his ability to distill complicated tax matters into layman’s terms, making the advice actionable and accessible to all.
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