Five Key Takeaways from the Nonresident Tax Clinic

Five Key Takeaways from the Nonresident Tax Clinic

by
J1 SummerTaxBack
August 19, 2022
⏱️ 12 minute read

🗂️ Nonresident tax compliance doesn’t have to be overwhelming.
Here are the five essentials—explained in plain English with real-world examples—that every HR, payroll, and international office should know.

In this article, you’ll learn:
✅ The RTS framework to classify nonresident taxation correctly
✅ How nonresidents are taxed (withholding, deductions, scholarships, flat rates)
✅ Who can claim tax treaty benefits (and common mistakes)
✅ Who is exempt from FICA and how to avoid wrongful withholding
✅ Practical scenarios (F-1, J-1) and how to handle them smoothly

1) The three pillars of determination: R-T-S

R – Residency (for tax purposes)
Decide if the person is a resident or nonresident for tax.

• Passing the Substantial Presence Test or holding a Green Card → generally resident.

• F-1/J-1 students are typically nonresidents for their first 5 calendar years.

• Many J-1 categories (interns/trainees, teachers, scholars, physicians, etc.) follow a 2 of the last 6 years nonresident rule.

T – Type of income
Wages, scholarships, royalties, interest, dividends—type drives codes, forms, and rates.

S – Source of income
Nonresidents are generally taxed on US-source income. Quick guide:

• Wages/services: where performed

• Scholarships: residence of payer (with nuances)

• Royalties: place of use

• Interest: residence of payer

• Dividends: place of incorporation

• Real estate/rents/sales: location of property

Example: Martin lectures in the U.S. → US-source. If he teaches from France for the same university, that income is no longer US-source.

2) How are nonresidents taxed?

Federal income tax
Graduate rates 10 %–37 %; most nonresidents pay from the first dollar.

Deductions & credits

• Standard deduction is not available to most nonresidents (common exception: Indian students/trainees).

• Personal exemption is $0.

• Child credits only in limited cases (e.g., certain Canadians, Mexicans, South Koreans, Indians who qualify).

• Scholarships:

  • Qualified (tuition, required fees/books/equipment) → not taxable/reportable.

  • Non-qualified (room/board, travel, stipends) → taxable.

  • Compensatory scholarships tied to services (e.g., TA housing) → treated as wages.

• Common non-employment income (prizes, royalties, dividends): 30 % unless reduced by treaty.

• For certain degree candidates in F/J/M/Q, scholarship withholding may be 14 % if statutory conditions are met.

Panel tip: If an employee fails to provide an SSN or forms, payers may apply 30 % backup withholding. Also, don’t apply the standard deduction by default: most nonresidents don’t qualify (with the India exception noted).

3) Who can claim tax treaty benefits?

The U.S. has numerous treaties that may reduce or eliminate withholding. But eligibility varies:

• Immigration status & tax residency

• Type and source of income

• Nature of payer

• Special clauses (e.g., duration rules for teachers/researchers)

Practice point: Always read the treaty in full, gather the right supporting forms (e.g., Form 8233 when required), and keep records. A treaty mistake can hurt both employer and employee.

4) Who is exempt from FICA?

Many nonresidents are exempt from FICA (Social Security 6.2 % + Medicare 1.45 %).

• Generally, F-1 and J-1 do not pay FICA while nonresident.

• F-2, J-2, H-1B are typically subject to FICA from day one of employment.

• Student FICA Exemption: some tax-resident full-time students working on campus in roles related to study may still be exempt.

• Totalization agreements (≈30 countries): certain workers (e.g., some H-1B) may be exempt with a certificate of coverage from their home country.

5) What if FICA is withheld in error?

The dollar impact can be substantial even at modest wages:

The employer would also have contributed an equal amount in error.

How to fix it:

• Employer: amend Form 941 and refund within the same calendar year when possible.

• Employee: if employer can’t fix it, file a FICA refund claim directly with the IRS with proper documentation.

Real-world scenarios (what good compliance looks like)

Scenario A – F-1 Research Assistant (China)

• Residency: nonresident (year 4 in F-1).

• Income: on-campus wages (study/training).

• Treaty: first $5,000 potentially exempt if requirements met.

• Forms: Form 8233 (exempt income) + W-4 NRA (non-exempt).

• Year-end docs: 1042-S for treaty-exempt income; W-2 if wages exceed treaty.

• FICA/FUTA: exempt as nonresident.

Scenario B – J-1 Physician (France)

• Residency: nonresident (year 1 J-1).

• Income: research/teaching.

• Treaty: potential 24-month research exemption.

• Forms: 8233 (exempt) + W-4 NRA (non-exempt).

• Docs: 1042-S for exempt amounts; W-2 only for non-exempt wages.

• FICA/FUTA: exempt as nonresident.

Scenario C – J-1 Trainee (India)

• Residency: nonresident (year 1 J-1).

• Income: training as researcher.

• Treaty: may use standard deduction and certain credits if eligible.

• Forms: no 8233 needed for that specific benefit; W-4 completed like a resident per treaty mechanics.

• Docs: W-2 with standard deduction applied.

• FICA/FUTA: exempt as nonresident.

Make it simple with J1 SummerTaxBack

We help you:
✅ Determine federal/state residency and income source correctly
✅ Implement treaties with the right paperwork
✅ Spot and fix FICA withheld in error
✅ Prepare and e-file federal & state returns securely
You came to the U.S. to learn and contribute—not to overpay.