Nonresident Alien Tax Withholding Explained: A Complete Guide for U.S. Employers

Nonresident Alien Tax Withholding Explained: A Complete Guide for U.S. Employers

📅 Updated: November 2025
⏱️ 6-minute read

🧭 Quick overview

Hiring international employees in the U.S.? Then you’ve probably heard the term “nonresident alien” (NRA) — and you know tax withholding for NRAs can be a bit tricky.

Before you onboard your next J-1, H-1B, or F-1 employee, it’s essential to understand how to determine tax residency and how to properly withhold federal tax. Getting it wrong can lead to penalties — or worse, double taxation for your workers.

Let’s break it down simply 👇

1️⃣ Resident or nonresident? Start with tax status

Before anything else, you must determine if your employee is a resident alien or a nonresident alien for tax purposes.

The IRS uses two main tests to decide:

🟩 The Green Card Test

If your employee has been granted lawful permanent resident status (a Green Card, Form I-551), they are automatically considered a resident alien.

🧮 The Substantial Presence Test (SPT)

This test measures days physically present in the U.S. over a 3-year period.

To pass the SPT, the individual must be present:

  • At least 31 days during the current year, and

  • 183 days total over the current year and the two preceding years, calculated as:

    • All days in the current year

      • 1/3 of days in the previous year

      • 1/6 of days in the year before that

👉 If the person doesn’t meet this test, they remain a nonresident alien for tax purposes.

2️⃣ What is NRA tax withholding?

Once you confirm your employee’s nonresident status, you — the employer — likely become a withholding agent.

🧾 What’s a withholding agent?

Anyone (individual, company, trust, or institution) that pays income to a foreign person subject to U.S. tax is considered a withholding agent.

This means:
✅ You must withhold federal tax on payments to NRAs
✅ You are responsible for reporting and remitting that tax to the IRS

3️⃣ How does nonresident withholding work? 💡

NRAs are generally taxed only on their U.S.-sourced income — wages earned for work performed in the U.S.

The default withholding rate is 30%, unless:

  • A tax treaty between the U.S. and the worker’s home country reduces or eliminates the rate

  • A specific Internal Revenue Code (IRC) section provides a lower rate

⚠️ Important: Most NRAs don’t qualify for standard tax credits or deductions that residents do.

4️⃣ Income subject to NRA withholding 💰

To determine proper withholding, ask these three key questions:

  1. Is the individual a U.S. resident or nonresident for tax purposes?

  2. What type of income are they receiving — wages, scholarship, or royalties?

  3. Is the income U.S.-sourced or foreign-sourced?

If it’s U.S.-sourced and paid to a nonresident alien, up to 30% tax must be withheld.

5️⃣ Chapter 3 of the Internal Revenue Code (IRC) 📚

Chapter 3 governs withholding on payments to nonresident aliens.

Employers must:

  • Withhold income taxes based on information from the employee’s Form W-4

  • Consider factors like filing status and number of allowances

This ensures proper withholding and compliance with IRS regulations.

6️⃣ FICA taxes for nonresident employees 🏦

Here’s where many employers get confused: Social Security and Medicare (FICA) taxes.

Generally, nonresident aliens on F-1, J-1, M-1, or Q visas are exempt from FICA for:

  • 5 years (students on F-1/M-1/J-1)

  • 2 years (teachers/researchers on J/Q visas)

After that period — or once they become tax residents — FICA applies.

❌ FICA exemption does not apply to:

  • Dependents (F-2, J-2, M-2, Q-3)

  • Unauthorized employment

  • Those who change to a non-exempt visa (like H-1B)

  • Anyone whose exemption period has expired

7️⃣ SSN or ITIN requirements 🔢

As the withholding agent, you must ensure each nonresident provides:

  • A Social Security Number (SSN) if performing personal services (employment)

  • An Individual Taxpayer Identification Number (ITIN) if the income is passive (scholarships, grants, dividends, etc.)

No valid SSN or ITIN? You cannot process payroll correctly — and backup withholding may apply.

8️⃣ State tax withholding 🗺️

Not all states tax income — but most do.

These 9 states do not impose income tax:
🏔️ Alaska
🌴 Florida
🎰 Nevada
🏞️ South Dakota
🐴 Texas
🪙 Washington
🤠 Wyoming
🍂 New Hampshire (only taxes investment income)
🎸 Tennessee (only taxes investment income)

In every other state, nonresidents typically pay state income tax on wages earned there — though rates and filing rules vary.

9️⃣ Key employer checklist ✅

Before paying a nonresident employee, make sure you:

  1. Determine tax residency (Green Card or SPT)

  2. Confirm visa type and FICA eligibility

  3. Obtain SSN or ITIN

  4. Apply the correct withholding rate (up to 30%)

  5. Consider treaty benefits

  6. File required forms (W-4, W-8BEN, 1042-S, etc.)

  7. Withhold state tax if applicable

🤝 How J1 Summer Tax Back can help

Handling NRA tax rules can feel overwhelming — especially when you’re balancing payroll, visa categories, and IRS forms.

At J1 Summer Tax Back, we:
✅ Help confirm your workers’ tax residency
✅ Review your withholding and FICA compliance
✅ Prepare and file the correct forms (W-4, 1042-S, etc.)
✅ Assist with FICA refunds if tax was withheld in error

💡 Bottom line:
Withholding the right tax keeps your organization compliant — and your international employees happy. Let’s make sure both happen smoothly.