Even if you aren’t a resident of the United States, you may still need to pay U.S. taxes if you have US-sourced income or a U.S.-based company. However, determining if you qualify as a non-resident and if you actually owe taxes isn’t always easy.
If you qualify as a non-resident who generates US-sourced income, you will most likely need to file Form 1040-NR. In this post, we look at determining if you are a U.S. non-resident for taxation purposes and everything you need to know about filing taxes as a non-resident.
Key Takeaways
- Form 1040-NR is often required for nonresident aliens who are engaged in a trade or business in the United States or otherwise earned income from U.S. sources.
- A nonresident alien is somebody who is not American and lives abroad but who earns taxable income in the U.S.
- In most cases, nonresident aliens are non-U.S. citizens who do not pass the green card or substantial residency test.
What is Form 1040-NR Used For?
Nonresident aliens use Form 1040-NR to file a U.S. tax return. Specifically, the following individuals or entities may need to file Form 1040-NR:
- A nonresident alien engaged in a trade or business in the United States
- A representative of a deceased person who would have had to file Form 1040-NR
- A representative of an estate or trust that had to file Form 1040-NR
Where Can I Find the Latest Version of Form 1040-NR?
You can find the latest version of Form 1040-NR and instructions on completing Form 1040-NR on the IRS website.
Am I a Non-Resident Alien?
Determining if you are a non-resident alien isn’t always easy, but there are two key factors laid out by the IRS to help determine if you are a non-resident alien.
If you answer “no” to either of the following questions, then you qualify as a non-resident alien:
- Are you a U.S. Citizen or a U.S. National?
- Do I pass the green card test or the substantial presence test?
The latter question is the more difficult one to answer. Below, we detail the requirements for the green card and substantial presence tests.
The Green Card Test
If you pass the green card test, or, in other words, have a green card, you do not qualify as a non-resident alien. Having a green card, also known as Form I-551, means that you are considered a resident for tax purposes. You continue to have resident status under this test unless the status is taken away or abandoned.
Substantial Presence Test
Passing the substantial presence test also means you do not qualify as a non-resident alien. To meet this test, you must be physically present in the United States for at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the two 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.
Certain limited exceptions allow you to meet one of these two tests and remain a non-resident alien. For example, suppose you qualify as a resident of a country with an income tax treaty with the United States. In that case, you can claim a lower U.S. tax liability by invoking that treaty. For a list of tax treaties, visit the IRS Website.
Categorizing Taxable Income for Non-Resident Aliens
A nonresident alien’s income subject to U.S. income tax must be divided into two categories.
- Effectively connected income (ECI) is earned in the U.S. from operating a business in the U.S. or is personal service income earned in the U.S. (such as wages or self-employment income).
- Not effectively connected income (NECI) is for fixed, determinable, annual, or periodic (FDAP) income. FDAP income is passive income that includes interest, dividends, rents, or royalties. It is taxed at a flat 30% rate unless a tax treaty specifies a lower rate.
Nonresident aliens must file and pay any tax due on either of these two categories of income using Form 1040-NR, U.S. Nonresident Alien Tax Return.
Who Should File Form 1040-NR?
Several categories of taxpayers may have to file an annual Form 1040-NR. You must file Form 1040-NR if you qualify as a non-resident alien and the following conditions apply to you.
Engaged in Trade or Business in the US
If you were a nonresident alien engaged in a trade or business in the United States during the tax year, you should file Form 1040-NR. You must file even if you have no income from your business in the U.S., have no U.S.-sourced income, or your income is exempt from taxation thanks to a tax treaty between the United States and your country of residence.
If you have no gross income for the tax year, you will only need to complete Schedule OI (Other Income) of Form 1040-NR. Instead of completing the other schedules, you’ll simply attach a list of the exclusions you claim and the amount of each.
Receiving Income for U.S. Sources
If you were a nonresident alien who received income from U.S. sources (which is reportable on Schedule NEC, lines 1 through 12), not all of the U.S. tax you owed was withheld. Schedule NEC is used to report income that is not effectively connected.
Owing Special Taxes
In this instance, “special taxes” are defined as the following:
- Alternative minimum tax is a minimum amount of taxes that tax-payers once a certain income is reached, regardless of deductions and credits.
- Tax on an IRA or other tax‐favored account (if you are filing a return only because you owe this tax, you can file Form 5329 by itself)
- Household employment taxes (if you are filing a return only because you owe these taxes, you can file Schedule H (Form 1040) by itself)
- Social Security and Medicare tax that was not previously withheld from your wages or tips
- Write‐in taxes or recapture taxes, including the first-time homebuyer credit, uncollected social security and Medicare or RRTA tax on tips you reported to your employer or on group‐term life insurance, and additional taxes on health savings accounts (HSAs)
Receiving Distributions from a Tax-Advantaged Health Savings Account
If you’ve received distributions from a Health Savings Account (HSA), Archer Medical Savings Account (MSA), or Medicare Advantage MSA, then you must file Form 1040-NR. This includes distributions from a savings account or an investment account tied to your medical account.
Self-Employment Income over $400
If you earned at least $400 in self-employment income and are a resident of a country with whom the United States has an international social security agreement, then you must file Form 1040-NR. For a list of countries with social security agreements, visit the Social Security website.
Made Payments for Marketplace Coverage
If advance payments of a health coverage tax credit or premium tax credit for Marketplace coverage were made for you, your spouse, or a dependent, you will need to file Form 1040-NR. If you need to file for this reason, you should have received either Form 1099-H or Form 1095-A reporting the payments made.
Filing for a Deceased Individual
Unfortunately, the death of an individual that you are representing for tax purposes doesn’t get you out of filing. If you are the representative, executor, or administrator for a deceased person who would have had to file, you must file Form 1040-NR for them.
Representing an Estate
If you represent an estate or trust that has to file Form 1040-NR, you may find it helpful to refer to Form 1041 and its instructions when completing Form 1040-NR. Refer to the Instructions for Form 1040 only as necessary.
If you are filing Form 1040-NR for a foreign trust, you may have to file Form 3520‐A, Annual Information Return of Foreign Trust With a U.S. Owner, on or before the 15th day of the 3rd month after the end of the trust’s tax year.
Holding a Qualified Investment
If you made a qualified investment in a qualified opportunity fund (QOF) at any time during the year, You must file your return with Form 8997 attached.
Dual Resident Tax Payer Treated as a Non-Resident
If you are a dual-resident taxpayer and you would like to be treated as a non-resident of the United States for the purposes of figuring your income tax liability, you should file Form 1040-NR. You may need to file your return with the attached Form 8833.
Form 1040-NR Filing Deadline
If you were an employee and received wages subject to U.S. income tax withholding, you must file Form 1040-NR by the 15th day of the 4th month after the end of the tax year (15 April).
If you did not receive wages as an employee subject to U.S. income tax withholding, file Form 1040-NR by the 15th day of the 6th month after the end of the tax year (15 June).
If a tax deadline falls on a weekend or U.S. Holiday, the due date is pushed to the following business day. If you aren’t able to meet the filing deadline, consider filing an extension.
IRS Form 1040-NR Penalties and Interest
If you miss the deadline to file Form 1040-NR, you may be subject to the failure-to-file penalty and the failure-to-pay penalty. Combined, these penalties impose a fine of 5% of your unpaid taxes for each month the taxes remain unfiled and unpaid. The maximum penalty is 25% of your total unpaid taxes.
Where To File Form 1040-NR
You can either file Form 1040-NR by mail or online. Filing online is usually much quicker because you don’t have to wait for your form to physically arrive at the IRS by mail.
How to E-file Form 1040-NR
If you e-file your return, you don’t need to mail it. You can electronically file (e-file) your Form 1040-NR at IRS.gov.
How to file Form 1040-NR by mail
If you mail your U.S. tax return, filing instructions and addresses are below.
If you are not enclosing a payment, mail Form 1040-NR to:
Department of the Treasury
Internal Revenue Service
Austin, TX 73301-0215
U.S.A.
If enclosing a payment, mail Form 1040-NR to:
Internal Revenue Service
P.O. Box 1303
Charlotte, NC 28201-1303
U.S.A.
How Long Does it Take to Prepare Form 1040-NR?
Depending on the complexity of your tax situation, preparing Form 1040-NR can take anywhere from an hour to a week or more. This includes the amount and types of income you earned, the deductions you plan to claim, and more.
According to the IRS instructions for this form, the average time required to prepare it is about eight hours. However, a foreign person who tries to file Form 1040-NR without the help of a U.S. tax professional is likely to take much longer because of the need to study the instructions and the difficulty of understanding the language of the U.S. tax system.
Can Cleer Help Me File Form 1040-NR?
Filing IRS Form 1040-NR and navigating U.S. tax matters as a nonresident alien can be complex, especially for individuals unfamiliar with IRS rules and requirements. For that reason, individuals and families who need to file these returns may want to consider hiring a tax professional with extensive experience and knowledge in preparing and filing non-resident tax returns.
We’ve got you covered! Cleer can help you with filing Form 1040-NR. At Cleer Tax, our dedicated team is committed to addressing the distinct requirements of your business.
We provide comprehensive tax advisory services tailored to your specific needs, covering every aspect of compliance and optimization – including helping you reduce tax liability wherever possible. Our goal is to ensure that you capitalize on every available opportunity, leaving no stone unturned when maximizing your tax benefits and minimizing any potential liabilities.
Cleer provides Corporate Income Tax Packages encompassing federal and state income tax filings for a hassle-free experience. We also offer monthly bookkeeping packages, which include your monthly statements. If you need help getting up to date on your books, we also offer support for companies that have fallen behind on their bookkeeping with our bookkeeping catch-up package.
If you need any help reducing your tax liability, schedule a consultation, or feel free to contact us.
