If you’re living in the United States as a foreign national, your tax obligations will depend on how the IRS classifies you. Nonresident aliens are taxed differently than resident aliens or US citizens. While resident aliens are subject to taxation on their worldwide income, nonresident aliens are taxed only on income that is effectively connected with a US trade or business or fixed, determinable, annual, or periodic (FDAP) income from US sources.
The classification between resident and nonresident alien is based primarily on the green card test or the substantial presence test. Nonresident status is generally retained by individuals who do not meet either test. For international students, scholars, and certain visa holders, exemptions from the substantial presence test may apply.
Resident Aliens vs. Nonresident Aliens
Resident aliens must report and pay tax on all income, regardless of where it is earned. Income from employment, investments, and businesses conducted both inside and outside the US must be included in the tax return, filed using Form 1040.
Nonresident aliens, on the other hand, are taxed only on specific types of income derived from US sources. They typically file their annual federal tax return using Form 1040-NR. Unlike residents, they may not qualify for standard deductions and some tax credits.
Substantial Presence and the Green Card Tests
To be considered a resident alien for tax purposes, you must meet either the green card test (lawful permanent residency) or the substantial presence test. The substantial presence test evaluates the number of days you have been physically present in the US over a three-year period. Specifically, it requires:
- 31 days during the current calendar year
- 183 days during the three-year period that includes the current year and the two years immediately before that, using a weighted formula
Some individuals, such as F-1 and J-1 visa holders, are exempt from this calculation for a limited time, generally five years for students and two years for teachers and trainees.
US-Source Income for Nonresident Aliens
Only income that originates from sources within the US is subject to tax for nonresident aliens. This includes, but is not limited to:
- Wages earned from employment performed in the US
- Income from self-employment or services rendered within the US
- Rental income from US real estate
- Interest and dividends from US payers
- Royalties and licensing fees for intellectual property used in the US
- Gains from the sale of US real property interests
Determining the source of income is critical because only US-source income is taxable to nonresident aliens. Each category of income has unique rules for determining its source.
Effectively Connected Income vs. FDAP Income
Nonresident aliens must report two types of US-source income: effectively connected income (ECI) and fixed, determinable, annual, or periodic (FDAP) income.
Effectively connected income is generally related to the active conduct of a US trade or business. Examples include wages, salaries, and self-employment income. This type of income is taxed at the same graduated rates that apply to US citizens and residents.
FDAP income includes passive forms of income such as dividends, interest, rents, royalties, and annuities. It is typically subject to a flat 30 percent withholding tax unless a tax treaty provides a lower rate. FDAP income is not connected to the performance of personal services.
Interest Income Rules for Nonresidents
Interest income from US bank deposits is generally exempt from US taxation for nonresident aliens. This includes interest earned from savings accounts, certificates of deposit, and similar financial instruments held with US banks or credit unions.
However, interest earned from other types of debt obligations or investments may be taxable. For example, interest paid by US corporations on corporate bonds or loans may be subject to the 30 percent withholding tax. If a tax treaty exists between the US and your country of residence, a reduced rate may apply, provided you submit Form W-8BEN to the payer.
Dividend Income and Tax Withholding
Dividends paid by US corporations to nonresident aliens are considered FDAP income and are generally subject to a 30 percent withholding tax. If a tax treaty applies, this rate may be reduced. For example, under some treaties, dividend income may be taxed at rates as low as 5 or 15 percent.
To claim a reduced rate, nonresident aliens must provide the payer with Form W-8BEN. The dividend income must still be reported, and the payer will typically issue Form 1042-S, indicating the gross income and the tax withheld.
Capital Gains and Nonresident Aliens
Capital gains are typically realized when you sell or exchange a capital asset, such as stocks, bonds, or real estate, for a profit. For nonresident aliens, the tax treatment of capital gains depends on both the type of asset and the individual’s physical presence in the United States.
If you were present in the US for fewer than 183 days during the tax year, and the gain does not arise from the sale of real property, most capital gains are not subject to US tax. However, if your presence exceeds 183 days, you may be subject to a flat 30 percent tax on your capital gains, unless treaty relief is available.
Gains from the sale of US real property interests, regardless of your duration of stay, are taxable and subject to specific reporting requirements under the Foreign Investment in Real Property Tax Act (FIRPTA).
Scholarships, Grants, and Fellowship Income
Nonresident students and trainees may receive scholarships or grants while in the US on F-1, J-1, M-1, or Q visas. The portion of a scholarship that covers tuition, required fees, books, and supplies is not considered taxable. However, amounts used for living expenses, travel, and optional equipment are considered taxable income.
If a portion of your scholarship or grant represents compensation for services (such as teaching or research), it is treated as effectively connected income and taxed accordingly. Some tax treaties may exempt scholarship or fellowship income up to a certain amount or for a specific period. Institutions awarding such financial aid typically report it on Form 1042-S.
Compensation for Teaching and Research
Foreign nationals who visit the US to teach or conduct research at a university or educational institution may receive tax-exempt income if their home country has a treaty with the US. These exemptions often apply for a limited number of years and only under specific visa categories, such as J-1.
Even if your teaching or research income is exempt under a tax treaty, it must still be reported on your tax return. In most cases, the university or institution will issue a Form 1042-S, detailing the amount paid and any tax withheld.
Income from Plasma Donation
Nonresident aliens who donate plasma and receive payment for doing so must treat the compensation as taxable income. Plasma donation payments are considered income from services performed and are subject to US income tax rules.
If you receive such payments, you may be issued Form 1099-MISC by the plasma donation center. This form should be used to report the income on Form 1040-NR. While it may not be considered employment, the income is effectively connected with a US trade or business.
Au Pair Income and Tax Filing Obligations
Au pairs working in the United States are compensated by host families and typically perform child care and light housework in exchange for room, board, and wages. The wages received are classified as income for services performed and are taxable for federal income tax purposes.
Although the income is not subject to Social Security and Medicare taxes in most cases, it must be reported on Form 1040-NR. If the au pair does not have taxes withheld throughout the year, they may be required to make estimated tax payments using Form 1040-ES NR. Alternatively, if the host family and au pair agree, income tax withholding can be arranged using Form W-4. To comply with tax filing requirements, au pairs must obtain a Social Security Number or an Individual Taxpayer Identification Number (ITIN).
Social Security and Medicare Exemptions
Foreign students and exchange visitors temporarily present in the US under F-1, J-1, M-1, or Q visas are exempt from Social Security and Medicare taxes on wages paid for services performed that are consistent with the purpose of their visa.
This exemption applies to income earned from authorized employment, such as on-campus jobs or training programs approved by the US Citizenship and Immigration Services. Employers are responsible for ensuring these taxes are not withheld when the exemption applies.
This exemption does not cover employment not related to the academic or exchange program. In such cases, Social Security and Medicare taxes may apply unless a specific exemption or treaty provision states otherwise.
Self-Employment and Freelancing Income
Nonresident aliens who perform freelance or independent contract work while physically present in the United States must report and pay tax on that income. This includes services such as graphic design, writing, consulting, IT support, and other digital or professional services rendered while in the country. This type of income is considered effectively connected with a US trade or business and is taxed at the graduated income tax rates applied to US residents.
Unlike wage earners, freelancers are generally not subject to income tax withholding at the time payment is made, which means you may need to make estimated tax payments during the year using Form 1040-ES NR. The income and related expenses are reported on Schedule C, which must be attached to your Form 1040-NR.
Nonresident aliens are not subject to self-employment tax (Social Security and Medicare) on net earnings from self-employment unless they are residents of countries with totalization agreements that state otherwise. However, you may still owe federal income tax based on your net income.
Online Gig Economy and Platform-Based Work
With the rise of gig economy platforms like ride-sharing, delivery services, home rentals, tutoring, and freelance marketplaces, many nonresident aliens earn money using US-based platforms. If the services are physically performed within the United States, then the income is subject to US tax, even if the client or platform is located outside the country.
Examples include:
- Driving for ride-hailing services while in the US
- Delivering food or packages within a US city
- Renting property through short-term rental platforms
- Tutoring students online while located in the US
- Performing design or programming services while residing in the US
If you are a nonresident alien engaging in gig work within the US, your earnings are considered effectively connected income and should be reported on Form 1040-NR. You may also be issued a Form 1099-NEC or Form 1099-K depending on the platform and payment thresholds.
Royalties from Intellectual Property Use
Royalties are payments received for the use of intellectual property such as patents, copyrights, trademarks, and franchises. When the intellectual property is used in the United States, the royalty income is considered US-source income and is generally subject to a 30 percent withholding tax for nonresident aliens.
However, many countries have tax treaties with the US that provide for a reduced tax rate or complete exemption on royalty income. To benefit from a treaty, the royalty recipient must file Form W-8BEN with the US payer of the royalty.
Royalties that are effectively connected with a US business, such as those resulting from active licensing operations managed from within the country, are taxed at graduated rates. These royalties should be reported on Form 1040-NR along with supporting documentation.
Income from Renting Out US Property
Rental income from real estate located in the United States is considered US-source income. Nonresident aliens who own and rent out property in the US must report that income to the IRS, regardless of whether they manage the property themselves or hire a property manager.
There are two tax options for nonresident landlords:
- Net Election Method (Effectively Connected Income): If the nonresident elects to treat the rental income as effectively connected with a US trade or business, they may deduct expenses such as mortgage interest, property taxes, insurance, repairs, and depreciation. This income is then taxed at graduated rates.
- Gross Rental Method (FDAP Income): If no election is made, the gross rental income is taxed at a flat 30 percent with no deductions allowed. In this case, the payer or property manager may be required to withhold tax from the payments and report it using Form 1042-S.
To make the next election, file a statement with your first Form 1040-NR tax return declaring that you are making the election under Section 871(d) of the Internal Revenue Code.
Real Estate Sales and FIRPTA Withholding
If a nonresident alien sells US real property, the gain from the sale is taxable under the Foreign Investment in Real Property Tax Act (FIRPTA). Under FIRPTA, the buyer is required to withhold 15 percent of the gross sale price and remit it to the IRS.
This withheld amount is not the final tax but a prepayment. The seller must file Form 1040-NR to report the actual gain or loss from the sale and determine the final tax due. If the actual tax is less than the amount withheld, a refund may be requested. The seller can also apply for a reduced withholding certificate before the sale by filing Form 8288-B with the IRS.
Gains from real estate sales are taxed at capital gains rates, and losses may be deductible if the property was used for business or rental purposes. Personal-use property does not qualify for loss deductions.
Gambling and Lottery Winnings
Winnings from gambling activities in the United States, including casino games, lotteries, and betting, are considered US-source income and are generally taxable for nonresident aliens. Gambling winnings are usually subject to a flat 30 percent withholding tax, and the payer may issue Form 1042-S to report the income and tax withheld.
However, the tax treatment of gambling income depends on whether a tax treaty between the US and your home country provides an exemption or reduced rate. Some treaties exempt gambling winnings from taxation entirely. Form W-8BEN must be submitted to claim treaty benefits. Losses from gambling are not deductible for nonresident aliens, and gambling winnings must be reported on Form 1040-NR, even if no tax was withheld.
Prizes, Awards, and Honoraria
Nonresident aliens who receive prizes or awards in the US, such as academic or artistic honors, contest winnings, or speaking engagement honoraria, must report that income. These payments are typically considered FDAP income and are subject to 30 percent withholding unless treaty relief applies.
Such payments may be reported on Form 1042-S by the awarding institution or sponsor. If the event occurred in the United States or the work was performed on US soil, the income is deemed US-source. Whether or not the payment is classified as compensation for services may affect the applicable tax rate and treatment.
Income from Digital Assets and Cryptocurrencies
Nonresident aliens who trade digital assets or cryptocurrencies while in the US or through US-based platforms may generate income that is taxable. Capital gains from the sale of cryptocurrencies are generally not taxed for nonresident aliens who are in the US for less than 183 days during the year.
However, if the cryptocurrency transaction occurs as part of a trade or business conducted in the US, or if the holder exceeds the substantial presence threshold, tax obligations may arise. Digital asset transactions must be reported if they result in income or gain, and records should be kept to support cost basis and holding periods.
Mining or staking income from US servers, if effectively connected with a US business, is subject to tax and should be reported as such. Similarly, compensation in cryptocurrency for services rendered while in the US is considered taxable income.
US Income from Foreign-Owned Partnerships
Foreign nationals who are partners in a partnership that conducts business in the United States must report their share of the partnership’s effectively connected income. This applies even if the income is not distributed.
The partnership itself is required to withhold tax on the foreign partner’s share of income and issue a Schedule K-1, showing the allocation. The partner must report this income on Form 1040-NR and may receive Form 8805, showing the tax withheld. Failure to file Form 1040-NR or pay taxes on partnership income may result in penalties, so it is critical for nonresident partners to track their shares of income and deductions properly.
Inheritances and Gifts from US Sources
Nonresident aliens who receive inheritances or gifts from US persons are generally not subject to US income tax on those amounts. However, large gifts from US persons may require the donor to file Form 709, and recipients of large gifts from foreign sources may be required to file Form 3520.
Income derived from property received by gift or inheritance, such as rental income or dividends, is subject to normal tax rules applicable to nonresidents. If you receive a trust distribution from a US trust, special rules may apply, particularly concerning income accumulation and foreign grantor trust rules. Trust beneficiaries may be issued a Schedule K-1 or Form 1042-S depending on the trust’s tax classification.
Withholding Obligations and Reporting Requirements
Many types of income paid to nonresident aliens are subject to withholding at the source. The payer or withholding agent is typically responsible for applying the appropriate tax rate and submitting the tax to the IRS. Forms commonly used for reporting include:
- Form 1042-S: Used to report US-source income paid to nonresidents and the tax withheld
- Form 1099 series: Used for payments made to contractors, prize winners, and others
- Form W-8BEN: Used by nonresidents to claim treaty benefits and certify foreign status
It is essential to provide the correct withholding form to the payer in a timely manner to ensure proper tax treatment. Withholding agents who fail to comply with IRS rules may face penalties.
Tax Identification Numbers and Filing Obligations
To file a US tax return or claim treaty benefits, nonresident aliens must have a valid Taxpayer Identification Number (TIN), which may be a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). If you are not eligible for an SSN, you must apply for an ITIN using Form W-7.
When filing Form 1040-NR, all income from US sources must be accurately reported. If you worked for multiple employers, earned freelance income, or had various types of US investments, you must ensure all forms such as W-2, 1099-MISC, and 1042-S are included with your tax return. Estimated payments may be necessary if sufficient tax was not withheld during the year. Failure to pay required tax can result in interest, penalties, and potential visa implications.
Fellowship and Grant Income: What’s Taxable?
Fellowships and grants often support academic work, research, or training programs. If you are a nonresident alien receiving such funds, it’s crucial to understand what portion is subject to tax.
If the fellowship or grant covers only tuition, fees, books, supplies, and equipment required for courses, this portion is usually not taxable. However, any amount that covers other expenses—such as room and board, travel, or stipends for personal use—is considered taxable income.
For example, a nonresident alien on an F-1 or J-1 visa who receives a $25,000 grant with $10,000 allocated for tuition and $15,000 for living expenses must report the latter amount as taxable. Depending on the treaty between your home country and the US, some or all of this amount may be exempt.
Income from Self-Employment
Nonresident aliens may occasionally engage in self-employment activities, such as freelancing, consulting, or online work. If the income is earned while physically present in the US, it is generally considered US-sourced and subject to tax.
The income must be reported on Form 1040-NR and is subject to the same graduated tax rates as employment income. However, unlike residents, nonresidents typically do not pay self-employment tax (Social Security and Medicare) unless they reside in the US under specific visa categories for long periods.
If you’re on a visa that restricts work authorization (such as F-1 without proper authorization), earning self-employment income could also jeopardize your immigration status, regardless of tax implications.
Income from Real Property
Income earned by a nonresident alien from renting out real estate located in the US is subject to taxation. There are two main ways this income may be taxed:
- Effectively connected income (ECI): If the rental activity constitutes a trade or business, the income is taxed on a net basis at graduated rates. You may deduct related expenses such as mortgage interest, repairs, and depreciation.
- Fixed or determinable, annual or periodical (FDAP) income: If the rental activity does not rise to the level of a trade or business, the income is taxed at a flat 30% rate on the gross amount, unless reduced by a tax treaty.
To elect ECI treatment, file Form W-8ECI with the payer and attach a statement to your 1040-NR return.
Gambling Winnings and Losses
Gambling winnings from US sources are taxable to nonresident aliens. This includes prizes from casinos, lotteries, game shows, and online gaming platforms. Winnings are generally subject to a 30% withholding rate.
Some countries have tax treaties with the US that may exempt gambling winnings from tax. To claim this benefit, the nonresident alien must provide a valid taxpayer identification number and the appropriate treaty reference. Losses from gambling are not deductible for nonresident aliens, unlike for residents who may deduct losses up to the amount of their winnings.
Royalties and Licensing Fees
If a nonresident alien receives royalties or licensing fees for intellectual property used in the US—such as books, music, or patented technology—this income is taxable at a 30% rate unless reduced by a tax treaty.
Royalties from outside the US are generally not taxed unless the license or rights were exercised in the US. It’s important to determine the source of royalty income based on where the intellectual property is used, not where the agreement is signed or where the payment originates.
U.S. Source Annuities and Pensions
Pensions and annuities derived from US sources are also subject to taxation. A portion of each payment is considered a return of your investment in the contract and is not taxable, while the rest represents taxable income.
The tax rate varies based on whether the payment is considered effectively connected income. In general, pension income is taxed at a 30% flat rate unless a treaty provides an exemption or reduced rate. Some countries allow retirees to claim full exemption under treaty provisions, provided they submit required documentation.
Inheritances and Gifts
Nonresident aliens receiving inheritances or gifts from US persons typically do not pay income tax on those amounts. However, if the asset generates income—like dividends, interest, or rental income—those earnings may be taxable.
While the recipient of a gift is not subject to tax, the giver may have reporting obligations under IRS rules if the value exceeds certain thresholds. For inheritances, the estate of the deceased may be responsible for estate tax before distribution.
Discharge of Indebtedness
If a loan or debt is forgiven, the IRS generally considers it taxable income. For nonresident aliens, cancellation of US debt can trigger tax obligations, especially if the forgiven debt is connected to business activities or personal loans.
For example, if you receive a student loan forgiveness while residing in the US, the forgiven amount may be considered US-source income. However, certain exceptions may apply, particularly for educational loan forgiveness programs that meet strict requirements.
Participation in the Gig Economy
Participation in ride-sharing, delivery services, or freelance platforms such as Uber, DoorDash, or Upwork may be considered taxable income for nonresident aliens. If the services are rendered while physically present in the US, the income is considered US-source and must be reported.
This income is generally subject to regular income tax but may be excluded from self-employment tax depending on visa status. Still, it’s important to track all income and report it accurately on your tax return.
Tax Residency Changes and Mid-Year Transitions
Some nonresident aliens may become residents for tax purposes partway through the year due to the Substantial Presence Test. In these cases, the tax year is split into two parts:
- The nonresident portion, where only US-source income is taxable
- The resident portion, where worldwide income is reportable
Form 1040-NR is filed for the nonresident period, and Form 1040 is filed for the resident portion, often combined as a dual-status return. Accurate record-keeping is critical in such transitions to ensure compliance and avoid double taxation.
Income Exemptions and the Importance of Tax Treaties
Many nonresident aliens can reduce their US tax liability by applying provisions from income tax treaties between the US and their home countries. Treaties may provide reduced withholding rates or complete exemptions for certain income types, such as:
- Interest
- Dividends
- Royalties
- Capital gains
- Teaching and research income
- Pensions and annuities
To claim treaty benefits, you must file the appropriate forms, typically Form W-8BEN or Form 8233, with the income payer. Failure to submit the correct documentation may result in full withholding at the default rates. It’s also important to understand that not all treaties provide the same benefits. Each treaty is negotiated separately, so you should consult the treaty provisions specific to your home country.
Withholding Tax Responsibilities
Withholding tax is the method by which the IRS ensures tax compliance from nonresident aliens. Payors of US-source income—such as employers, universities, or financial institutions—are generally required to withhold tax before issuing payments.
- Wages: Subject to graduated rates based on Form W-4 submitted by the employee
- Investment income: Typically withheld at 30% unless reduced by treaty
- Scholarships: Withheld at 14% if recipient has a TIN, otherwise 30%
These withholding obligations apply to individuals and organizations. For example, a host family employing an au pair may need to withhold and remit income tax depending on the arrangement.
Reporting Requirements and Forms
Nonresident aliens must comply with several IRS reporting obligations to stay in good standing. These may include:
- Form 1040-NR: Annual income tax return for nonresident aliens
- Form 8843: Statement for exempt individuals claiming nonresident status
- Form W-8BEN: Certificate of foreign status to claim tax treaty benefits
- Form 1099-MISC and 1042-S: Issued to report various types of income
- Form 8233: Claim for exemption from withholding on compensation for services
It is essential to file all applicable forms on time. Late or incorrect filings can result in penalties, loss of treaty benefits, or increased withholding in future years.
Importance of Maintaining Tax Records
Accurate documentation is essential for demonstrating compliance and substantiating deductions or treaty claims. Nonresident aliens should maintain the following records for at least three years:
- Tax returns and supporting forms
- Visa and immigration documents
- Income statements from employers or payers
- Receipts for deductible expenses
- Copies of filed forms, such as Form W-8BEN or Form 8233
Having these documents organized will help you if you are audited or need to amend your return.
Common Mistakes to Avoid
Many nonresident aliens make avoidable mistakes when filing US taxes. Some of the most frequent issues include:
- Filing the wrong tax form (e.g., using Form 1040 instead of 1040-NR)
- Ignoring tax treaty provisions or failing to claim benefits
- Failing to report all taxable income from US sources
- Assuming that income from online work is not taxable
- Missing filing deadlines or failing to submit required forms
These mistakes can result in penalties, missed deductions, or even jeopardize your immigration status. Awareness and proper guidance can prevent these complications.
Special Considerations for Digital Nomads
With remote work becoming more popular, digital nomads must understand how their physical presence in the US affects tax obligations. Nonresident aliens working online while staying temporarily in the US may generate US-source income if the services are performed while in the country.
It doesn’t matter where the client is based. The source of income for services is generally determined by where the services are physically performed. Therefore, digital nomads working from a US location are likely liable for US taxes on that income.
Visa compliance is also an issue, as many visas prohibit work for a foreign employer while in the US, even remotely. Violating these terms can have immigration consequences beyond taxation.
Conclusion
Understanding the US tax obligations for nonresident aliens is essential for maintaining compliance and avoiding potential penalties. Whether you are an international student, temporary worker, academic professional, or au pair, recognizing the types of income that are taxable, the forms required for filing, and the exemptions available under tax treaties can significantly affect your tax liability.
Nonresident aliens are generally taxed only on income from US sources. This includes wages, investment income, and other earnings effectively connected with a US trade or business. However, the tax treatment of income can vary depending on your visa status, the number of days you are physically present in the country, and whether a relevant tax treaty between your home country and the United States applies.
Throughout this series, we explored the distinctions between resident and nonresident tax treatment, outlined how specific forms of income such as capital gains, dividends, scholarships, and service-related compensation are handled, and discussed the importance of proper reporting. We also examined common income types that are exempt from US taxation and explained the role of key tax forms like Form 1040-NR, Form W-8BEN, and Form 8843.
It is especially important for nonresident aliens to know their residency status for tax purposes, understand what qualifies as effectively connected income, and ensure timely submission of all required tax documentation. Filing accurately and in compliance with IRS regulations not only keeps you on the right side of the law but can also help maximize any allowable tax benefits.
As tax laws can be complex and frequently change, staying informed and, where necessary, seeking professional assistance can make a significant difference in fulfilling your tax responsibilities correctly. With the right knowledge and preparation, nonresident aliens can navigate the US tax system more confidently and focus on their academic, professional, or cultural exchange goals in the United States.