Nonresident Paycheck Withholding
The substantial presence test determines if a foreign national is treated as nonresident or tax resident for U.S. income tax purposes. Residents are generally taxed that same as U.S. citizens and nonresidents have special withholding rules discussed later.
Determining U.S. tax residency
Following are the general rules and exceptions that apply when determining substantial presence for tax residency.
Green Card test
Under the green card test, the foreign national is treated as a U.S. resident for tax purposes if USCIS issues him/her lawful permanent residency ("green card") at any time during the calendar year.
Substantial presence test
The substantial presence test is comprised of the 31-day test and the 183-day test. The foreign national must be present in the U.S. for at least 31 days during the calendar year, and 183 days during the three-year period that includes the current year and the two preceding years. Below is the calculation for the 183-day test, and the exceptions follow.
All the days present in the U.S. during the current calendar year
+⅓ of the days present in the U.S. in the preceding calendar year
+⅙ of the days present in the U.S. during the second preceding calendar year
= Total days counted for U.S. tax residency
If that total equals 183 days or more an individual becomes a tax resident. Generally, the change is retroactive to the beginning of the year, but exceptions do apply.
Counting days of presence in the U.S.
If the foreign national is present in the U.S. during any part of a day (24-hour period), that day will be counted towards substantial presence. There are some exceptions from counting days.
- Any days the individual regularly commutes to work in the U.S. from a resident in Canada or Mexico
- Any days the individual is in the U.S. for less than 24 hours in transit between two places outside the U.S. (e.g. airline layovers)
- Any days the individual was unable to leave the U.S. because of a medical condition that developed while in the U.S.
- Any days the individual was present in the U.S. as an "exempt individual"
“Exempt Individual" rules
A foreign national is an "exempt individual" and not permitted to count days towards the substantial presence test if he/she is present in the U.S. under an F, J, M, or Q student visa status, or under a J or Q non-student visa status in these two scenarios:
- Students under an F, J, M, or Q status are exempt from counting days for five years.
- Non-student J, and Q visa holders (e.g., teaching, research, trainee, short-term scholar) are exempt from counting days towards substantial presence for two years out of the last six years.
If the individual is present in the U.S. as an exempt individual for any part of a calendar year, it is counted as a full year.
For the purposes of determining exempt individual year for those in a student visa status (e.g., F-1 and J-1 student status), the student is only allowed one five-year exemption period in their lifetime. Those years do not need to be consecutive, but cannot total more than five.
A current J non-student visa holder will not qualify as an exempt individual if he was exempt as a teacher, trainee, non-student or student for any two of the last six calendar years. The exempt individual rule is applicable to the current visa status at the time the test is applied. For those who have previously entered under both student and non-student status, all of the years of exempt individual status, regardless of whether the year was originally applied toward a student or non-student status should be applied to the total exempt years. In no case can the total of exempt years ever exceed five.
Social Security & Medicare (FICA) taxes
Nonresident F-1 & J-1
F-1 & J-1 nonresidents are exempt from FICA taxes as long as they remain a nonresident for tax purposes under the substantial presence test for on campus employment (IRC 3121(b)(19) or if they are authorized for Curricular Practical Training, Optional Practical Training, Academic Training, or Economic Hardship. Once an individual becomes a tax resident, they are subject to FICA taxes unless they meet the U.S. student exemption (below). This exemption does not apply to dependent visas (J-2, F-2).
U.S. student exemption
Social Security and Medicare (FICA) Taxes do not apply to service performed by students employed by a school, college or university where the student is pursuing a course of study in at least half time status. This exemption is available for employees whose primary purpose is a student and services are incident to and for the purpose of pursuing a degree. This exemption is not applicable to full-time employees, teaching positions, or benefits eligible positions.
Refunds for Social Security & Medicare taxes
Please request this refund directly from Northwestern and not from the IRS by contacting your nonresident tax specialist in Payroll/Tax. If you are a nonresident, you can contact us without providing any supporting documentation. If you are requesting a refund under the U.S. student exemption, you will need to include your proof of full-time enrollment from CAESAR and a copy of the paystubs where the taxes were withheld.
If the refund is for a previous year, we will produce a check, a corrected W-2, and a statement that you will not claim this refund from the IRS.
Nonresident students and employees have special withholding instructions on their W-4. IRS Notice 1392 provides special instructions to nonresident W-4s. Once an individual becomes a tax resident these rules no longer apply.
- Line 3: Check the single box regardless of your actual marital status.
- Line 5: Claim zero or one withholding allowance (with a few exceptions).
- Line 6: Write “nonresident alien” or “NRA” on the dotted line.
- Line 7: Do not claim that you are exempt from withholding on line 7 of Form W-4 (even if you meet both of the conditions listed on that line). You do not claim tax treaties using Form W-4.