The US tax system is complex, and it can seem even trickier if you’re neither a US citizen or Green Card holder and you live outside the country but still have US income. If you’re a nonresident alien, you may wonder whether you owe anything to the Internal Revenue System (IRS) . The answer depends on the type of income you earn, where it comes from, and whether any tax treaties apply.
Who is considered a nonresident alien?
The IRS looks at two main tests to decide if you’re a resident or nonresident for tax purposes.
- The Green Card test: If you hold a Green Card, you count as a resident alien.
- The substantial presence test: If you spend a set number of days in the US over three years, you may also be considered a resident, at least for a portion of the year.
If you don’t meet either test, you would be considered a nonresident alien. If you’re a nonresident alien, it generally means you only pay US taxes on certain US-based income.
Do nonresident aliens pay US taxes?
The short answer is typically only on US-source income. For example, as a non-resident alien, if you work remotely for a foreign company while living outside the US, that income won’t be taxed in the US. On the other hand, if you have a rental property or a business registered in any US state, the rent you collect or the business income is taxable in the US.
Types of income that usually trigger US tax include:
- Wages from a US job or contract.
- Business income tied to activities inside the US.
- Rental income from property located in the US.
- Profits from selling US real estate.
- Some dividends or interest from US banks or investments.
So while you don’t owe tax on every dollar you earn worldwide, you can’t assume you’re completely outside the IRS system either.
What income is exempt from US tax?
Not all income in the US gets taxed. For instance, most interest from US bank accounts is exempt for nonresident aliens. Certain scholarships or fellowships may also be exempt, depending on how you use the funds.
Another consideration is whether your country has a tax treaty with the US. Treaties can reduce or sometimes eliminate tax on dividends, pensions, and royalties. In some cases, you may qualify for a zero rate.
How much tax do nonresident aliens pay?
It depends on whether the IRS considers your income “effectively connected” or “fixed and determinable.” Here’s the practical breakdown:
- Effectively connected income (ECI): Active income like wages or business earnings is taxed using the same graduated rates as US citizens, from 10% up to 37%.
- Fixed, determinable, annual, or periodic income (FDAP): Passive income like dividends, royalties, or rents not tied to business activity. FDAP is typically taxed at a flat 30% rate, unless a treaty lowers it.
This means your US tax bill can vary significantly, depending on how your income is classified and where you live.
Do nonresident aliens need to file a tax return?
If you earned US-source income, you’ll likely need to file Form 1040-NR, which is the tax return designed for nonresidents. Filing allows you to report your income, claim deductions, and apply treaty benefits.
You’ll need to file if:
- You worked in the US and had wages subject to tax.
- You received taxable scholarships or fellowships.
- You collected rent from US property.
- You want to claim a refund for tax withheld in excess of what you owe.
If your only US income was wages with correct tax withheld, you may not be required to file. Still, many people file anyway to get refunds or treaty benefits they would otherwise miss.
What about Social Security and Medicare taxes?
Wages earned inside the US normally face Social Security and Medicare taxes. However, certain visas like F-1 or J-1 (for students, teachers and cultural programs) may exempt you for a limited time. If your employer mistakenly withholds these taxes, you may be able to request a refund.
How do tax treaties help nonresident aliens?
The US has tax treaties with more than 60 countries, and they often reduce or even remove US taxes on dividends, pensions, royalties, or other income.
To claim these benefits, you usually need to file specific IRS forms, such as Form W-8BEN. If you don’t, the IRS requires the full 30% withholding tax, even if the treaty says otherwise.
What happens if a nonresident alien doesn’t file?
Ignoring a filing requirement can create big problems. The IRS may charge penalties, interest, and deny refunds. You could also lose treaty benefits you were entitled to. In serious cases, it may affect visa applications or future entry into the US.
Withholding agents report payments directly to the IRS, so unpaid tax rarely goes unnoticed.
How to file US taxes as a nonresident alien
- Confirm whether you qualify as a nonresident alien using the Green Card and substantial presence tests.
- Identify all your US-source income.
- Check whether your home country has a treaty with the US..
- Apply for an Individual Taxpayer Identification Number (ITIN) using Form W-7.
- Complete Form 1040-NR to report income and claim treaty benefits.
- Attach required forms like W-8BEN or 8843 if needed.
- File by April 15 if you had US wages, or June 15 if you didn’t.
Common misconceptions about nonresident alien taxes
A few myths create unnecessary confusion:
- Nonresident aliens pay tax on worldwide income. Not true – only US-source income is taxable.
- Nonresident aliens never need to file. Not true – you must file to avoid penalties or claim refunds.
- Scholarships are always tax-free. Not necessarily true – they may be taxable if used for living expenses.
- You can ignore US tax if you live abroad. Not always true – US-source income is always subject to US rules.
Why professional help makes sense
Tax rules for nonresident aliens are strict and mistakes can be expensive. Professional guidance helps ensure you don’t overpay or miss treaty benefits. Many people file on their own and later discover they could have saved significantly with the right advice. The upfront cost of help often pays for itself in reduced taxes or refunds.
US-source income triggers tax obligations even if you’re not a US resident, citizens or Green Card holder. The exact amount depends on the type of income and whether a tax treaty applies. Filing correctly with the right forms ensures you meet your obligations without overpaying.
With the right knowledge and planning, you can stay compliant while protecting your income. If you’re unsure about your situation, we can help.
Vincenzo Villamena, CPA is the founder and CEO of Online Taxman. He has extensive experience in both tax preparation and advising clients in accounting and financial transactions.
At Online Taxman, Vincenzo oversees corporate and individual filings. He specializes in offshore structuring for US entrepreneurs abroad and US real estate transactions by foreign nationals and funds.
Vincenzo loves to travel and is fluent in Spanish, Portuguese, and Italian. Vincenzo currently lives in Rio De Janeiro, Brazil.
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