How Taxes Work in the US for Foreign Employees?
Many global professionals wish to relocate to the US in search of better opportunities. Unfortunately, although you can make a lot of money in North America, a big chunk of your earnings will go on taxes. The country’s system is rather convoluted, taking into account visa type, income source, and residency status.
In other words, your potential monthly profits will likely be significantly different from what locals take home. Among other things, you must understand how the IRS (Internal Revenue Service) works and classifies foreign workers. For example, you might have to pay taxes in both your country and the US, or you might have to cover only local taxes.
Having a better understanding of the legislation will help you complete tax returns, avoid penalties, and maximize benefits under diplomatic treaties.
Determining Your Tax Status
Before you can do anything else, you must inquire how you’re classified by the IRS. Basically, foreign workers can either be taxed as resident or nonresident aliens. The agency uses two unique tests to determine the employees’ status.
- You can apply for a green card test if you have lawful permanent residence in the country. In that regard, any person who holds the card will be treated as a resident for tax purposes.
- The other method is the substantial presence test, which evaluates the total number of days a person has been present in the country in the last three years. If the total goes over a specific threshold, the government will consider you a resident for tax purposes.
Differentiating between the two categories is vital because it can help you save a lot of money. Resident aliens follow the same rules as the US citizens, while nonresidents have to cover only certain types of income.
How Are Foreigners Taxed in the US?
Foreign workers in the US are primarily responsible for paying taxes from US-earned sources. This includes wages and salaries, as well as bonuses. As a resident alien, you’ll have to submit a worldwide income report to the IRS for taxation purposes. In other words, you’ll also have to report any earnings you’ve made from foreign properties, stock investments, and businesses.
The situation is much less convoluted for nonresident aliens. They are mainly obliged to pay taxes on the money they’ve made working in the country. Besides that, they can also be taxed on specific US investment income and business profits.
It is also worth mentioning that foreigners must cover state taxes, which can vary significantly depending on where you live. Employers often withhold federal income taxes from employee salaries through the payroll system. Understanding these differences is vital as it will ensure better reporting and compliance with the applicable local laws.
Federal Income Tax and Payroll Withholding
The majority of foreign workers receive their pay via a unified payroll system used by Americans as well. Their employers are responsible for withholding federal income tax from each salary and sending it straight to the IRS. The amount of money employers have to withhold depends on several factors, including:
- Filing status
- Income level
- Residency classification
- Withholding allowances
Each foreign worker should fill out a W-4 form when starting a new position. That way, their managers can determine how much money they should withhold. Besides federal income tax, resident aliens should also cover Medicare and Social Security, otherwise referred to as FICA taxes. They are vital for foreigners who plan to retire in the States.
Keep in mind that taxes are not enforced on everyone. For example, people on J-1 and F-1 visas don’t have to worry about these expenditures. As mentioned, the eligibility varies based on the length of stay and visa status.
Differences Between Federal and State Taxes
On top of federal tax obligations, foreigners must consider state and local taxes. The great thing about America is that every state can establish its own policies. So, the amount of money you have to pay will vary significantly from New York to Houston and Los Angeles.
There are also progressive income taxes in certain states, which resemble federal taxes. Some parts of the country charge flat income tax rates, while others don’t have any taxes whatsoever. As for the local governing bodies, they can impose municipal taxes or similar expenditures.
When paying taxes, foreigners must file a state tax return if they earn within that particular state. This rule applies to everyone, even to workers who are classified as nonresidents at the federal level.
If you’re planning to work in the US, you should check with your contacts about these rules. For example, you can ask your future employer about the taxation system. Similarly, if you’re a medical professional, you can ask your international nursing agency for some clarification beforehand.
Tax Treaties Between the U.S. and Other Countries
A thing worth noting is that the US has tax agreements with more than 60 countries. Besides preventing double taxation, these regulations offer other forms of protection for foreigners. This is why America has long been considered a go-to destination for freelancers, seasonal workers, and immigrants
Under these agreements, foreigners may reduce or eliminate certain US taxes. These benefits most commonly apply to:
- Salary and wages
- Student stipends
- Research and teaching income
- Investment income
Whether or not you’re eligible depends on your country of origin. To get the most out of these benefits, you should submit the suitable IRS forms and disclose the treaty position during the tax return process. We recommend that you hire a tax advisor to lower your obligations as much as possible.
Reducing Your Taxes
The US taxation system is quite convoluted. Besides the federal taxes, which are rather straightforward, you must also consider state taxes and other obligations. It is critical that you inquire about different types of taxes throughout the country, as it might affect where you’ll sign your next worker contract.
