Businesses run by non-residents of the United States are no rarity – nearly 20% of existing businesses in the country were started by an immigrant. Although the system is somewhat complicated by matters of citizenship, the fact is that non-residents of the United States still must pay taxes on their businesses and their income. A non-resident alien is classified as an alien who has not passed a green card test or a substantial presence test.
Legal immigrants who are permanent residents of the United States are assigned the label of “resident alien,” whereas immigrants who do not permanently reside in the United States are labeled “non-resident aliens.” Despite the immigration status of non-resident aliens, they are still subject to the United States tax law, and their income is still taxed in the same manner as resident aliens and United States citizens. Therefore, tax returns must be filed by non-resident alien individuals operating a business in the US.
ECI and FDAP
Income made by a non-resident alien is separated into two distinct classes: effectively connected income (ECI) and fixed, determinable, annual, periodical income (FDAP).
Effectively connected income covers all income that is directly tied to business activities conducted in the United States; this income must be incorporated into the gross income of the non-resident alien claiming EPI. Because of the beneficial policy of effectively connected income, this is a more difficult status to claim on tax returns. A US taxpayer identification number, or TIN, must be included on the W-8ECI form, which is a withholding certificate that a non-resident business owner must file to claim EPI. Deductions and credits can be claimed on effectively connected income, in which case a non-resident alien must file an income tax return by the due date of April 15th in a manner truthfully corroborated by tangible data points.
Fixed, determinable, annual, periodical income covers all income that is not categorized under EPI, which means that it covers a vast array of incomes including interest, rent, salary, premiums, dividends, and much more. All passive income, such as gains from investments, is categorized as FDAP income. FDAP income is not subject to deductions.
How to File Tax Returns
Non-resident aliens will have to file United States income taxes every year on April 15th. Extensions on filing taxes can be made through Form 4868, which will automatically grant an extension; this form must be filed by April 15th, the date upon which the income tax was due to be filed.
The forms that must be filed for income tax returns fall under two categories:
- Form 1040-NR, U.S. Non-resident Alien Income Tax Return, or
- Form 1040-NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents
The rules and regulations clearly elucidated on the first of the two forms, Form 1040-NR, will explain whether or not a non-resident alien is permitted to submit the second of the two forms, which is more specific and only relevant to those for whom the correct circumstances apply.
