Nonresident Alien (NRA)

A nonresident alien, often shortened to NRA, is a foreign individual whom the US taxes only on income from US sources rather than on worldwide income. The IRS defines the term on its Nonresident Aliens page: “An alien is any individual who is not a U.S. citizen or U.S. national. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.” For a US company paying a foreign contractor, this status is the starting point that decides what documentation to collect and how, or whether, to withhold.

How NRA Status Is Determined

Alien tax status turns on two tests, set out by the IRS on its Determining Alien Tax Status page.

1. Green card test. A foreign individual who is a lawful permanent resident of the US at any time during the year is a resident alien, regardless of days present.
2. Substantial presence test. A day-count rule. An individual who is physically present in the US for enough weighted days over a three-year period is a resident alien for that year.

An individual who is not a US citizen or US national and who meets neither test is a nonresident alien for that tax year. Meeting either test makes the individual a resident alien instead, taxed like a US citizen on worldwide income.

How a Nonresident Alien Is Taxed

The US taxes a nonresident alien only on US-source income, and it splits that income into two categories. The IRS explains both on the Nonresident Aliens page.

• FDAP income not effectively connected to a US business. US-source income that is fixed, determinable, annual, or periodical “is taxed at a flat 30 percent (or lower treaty rate) and no deductions are allowed against such income.” This is the income reached by nonresident alien withholding.
• Effectively connected income. Income connected with a US trade or business is taxed “at the same rates that apply to U.S. citizens and residents,” after allowable deductions, on a net basis.

A single individual can have both kinds of income in the same year, each taxed under its own rule.

Documentation

A nonresident alien receiving US-source income gives the US payer Form W-8BEN to certify foreign status and claim any reduced withholding under an income tax treaty. By contrast, a foreign individual who meets the green card or substantial presence test is a resident alien and provides Form W-9, the same form a US person uses. The W-8BEN on file is what supports applying a treaty rate, or confirming foreign-source income, instead of the 30 percent default.

Common Pitfalls

• Confusing residence with citizenship. A green card holder is a resident alien even while living abroad, so a US passport is not the only path to resident status.
• Assuming all foreign workers are NRAs. A contractor who spends enough days in the US can meet the substantial presence test and become a resident alien for that year.
• Collecting the wrong form. A nonresident alien gives Form W-8BEN, not Form W-9. Mixing these up leads to the wrong withholding and the wrong year-end reporting.

Related Terms

• Substantial Presence Test: the day-count rule that separates a nonresident alien from a resident alien.
• NRA Withholding: the regime that taxes a nonresident alien’s US-source FDAP income.
• Form W-8BEN: the certificate a nonresident alien individual gives a US payer.

Omnivoo Contract Management checks each foreign contractor’s status and W-8BEN documentation, so US-source payments are sorted by the right tax rules from the first payment onward.