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.
Key Takeaways for Tax Requirements For Hiring Non-US Citizens
- You need to understand why it is essential for a non-US citizen to pay their taxes.
- You have to make sure that you know the mandatory withholding of taxes.
- Work on tax status whether you are a resident alien or nonresident alien.
- Resident or nonresident aliens must be aware of all federal taxes on their income.
- All non-US citizen employees must complete employment eligibility verification.
Why Hire Non-US Citizens?
When you hire full-time non-US Outlander employees, you typically create a long-term corporate relationship. But in exchange for a daily work schedule, you are required to pay the tax from your salary and create control of how work is executed. You are also responsible for following the nation’s laws, offering specific worker insurance and benefits, and paying employer salary taxes. Therefore, it is important for you to comply with the tax requirements in order to meet the criteria for hiring non-residents.
However, recruiting freelancers and contractors offers more flexibility. You don’t need to worry as you don’t have to hire them for an extended period and aren’t responsible for their income taxes and benefits.
While there are benefits to hiring recruiters, there are also some restrictions. Though you can instruct the task’s result, the Internal Revenue Service (IRS) guidelines state that hiring companies can’t control the contractor’s work.
Exceptions to Mandatory Withholding of Tax on Non-US Citizens:
An Outlander’s tax responsibilities are abstruse. A significant difference exists between how US citizens and Non-Citizens are taxed. Non-citizen are only taxed for their US source salary.
Here are some tax requirements for them:
Aliens (Non-US Citizens) Tax Requirements
- Identify all foreigners on the organization’s payroll.
- Divide the foreigners into two groups: Resident Aliens and Nonresident Aliens.
- Treat resident aliens the same as United States Citizens
- Treat nonresidents as mentioned in the employer’s tax guide, Chapter 9 of Publication 15 and Publication 515.
The alien worker’s service is available in the US for a total not exceeding a taxable year of 90 days.
Determine Tax Status
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. If you are not a non-citizen alien and tied up in a business, you have to pay tax on the sum of your trades or business earnings after certain deductions on the same that are required for US citizens. If you are not engaged in trade, the tax payment from US source income is fixed or periodically tolled at a lower treaty tax rate, and no deductions are allowed against it.
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.
Resident Alien
The resident aliens are mostly taxed on their worldwide turnovers, the same as US nationals. To be categorized as a resident alien, the person has to meet one of two assessments:
- Green Card: According to immigration legislation, a non-US resident alien can become a permanent US resident at any time if they have been given the benefit of residing as an immigrant. This mainly happens when the Bureau of Citizenship and Immigration Services issues a green card to an individual.
- Substantial Presence: A nonresident is categorized as a resident alien for tax requirement if they were present in the United States for 31 days during the current year and 183 days in three years.
Nonresident Alien
If an individual does not meet the Substantial Presence or Green Card Test, then that individual is categorized as a nonresident alien.
- A J-1 or F-1 visa is generally for a nonresident alien.
- They are taxed only on their US income
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.
Can Cleer Tax Help Me Identify Tax Requirements when Hiring Non-US Citizens?
Absolutely! At Cleer Tax, our dedicated team is committed to addressing the distinct requirements of your business.
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. If you have further questions or need assistance, feel free to contact us.
