In short, yes.
Even though they may not be citizens, nonresidents (foreign nationals, or those who have not passed the green card test or the substantial presence test) and residents alike must file tax returns if they have been engaged in trade or business in the United States during the year.
Tax Differences for Citizens, Residents, and Nonresidents
Residents and green card holders are generally taxed the same way U.S. citizens are, meaning that all income—wages, interest, income from rental properties, etc.—must be reported on their tax returns, while non-residents normally only have to pay taxes on U.S.-sourced income, though some foreign income may be subject to U.S. taxes as well. Like U.S. citizens, residents who are on active military duty outside the U.S. are allowed an automatic two-month extension on tax returns, and can claim the same exemptions.
Nonresidents are also subject to two different tax rates—one for effectively connected income such as wages (ECI) and one for fixed or determinable, annual or periodic income, such as rents or interest (FDAP). FDAP income is taxed at a flat 30% rate, while ECI is taxed on the same graduated rates as it is for a U.S. citizen.
Citizens, residents, and nonresidents alike who file their federal tax return have a Taxpayer Identification Number, or TIN. Examples of TINs are Social Security Numbers, Employer Identification Numbers, and Individual Taxpayer Identification Numbers (ITINs). ITINs are tax-processing numbers only available for certain residents, nonresidents, and their dependents. Those who use an ITIN are exempt from claiming earned income tax credit.
Are There Any Exceptions?
Depending on their home country, nonresidents may be exempt from paying taxes, or may be taxed at a reduced rate. Students, or those who are in the United States under an F, J, M, or Q visa, are also exempt, as are their spouses and unmarried children under 21 years of age (as long as their nonimmigrant status is dependent on the student’s).
Foreign nationals who are in the U.S. for government-related reasons, such as foreign diplomats or full-time employees of international organizations, are also exempt from U.S. income tax. This includes any dependent immediate family.
What About Undocumented Immigrants?
This may surprise you, but undocumented immigrants pay U.S. taxes as well.
In 2013, at least 11.2 million undocumented immigrants were living in the United States. Collectively, they paid an estimated $10.6 billion in state and local taxes, averaging 6.4% of their income. A 2017 report by the Institute on Taxation and Economic Policy revealed that undocumented immigrants paid an estimated $11.74 billion in state and local taxes, and nationally pay an average of 8% of their income. To compare, the top 1% of taxpayers pay 5.4% of their income.
Undocumented immigrants pay sales and excise taxes when they purchase goods and services or pay for utilities. They also pay property taxes indirectly as renters, or directly as homeowners. As many as half of undocumented immigrants pay income taxes, despite not being of legal status. Between 50% and 75% of undocumented immigrant households file taxes using ITINs, while many who do not file have taxes deducted from their paychecks regardless.
Undocumented immigrants make up 5% of the labor force of most states’ populations. Should undocumented immigrants be allowed to work in the U.S. legally, their state and local tax contributions may be increased by an estimated $2.18 billion a year. Legalizing undocumented workers could potentially boost their state and local tax contributions, presuming that they would gain increased bargaining power with employers, boosted wages, and fully participate in federal, state, and local taxes. Their income tax rate would increase from 8% to 8.6%, more in line with the incomes of local residents.
At a time when many states are facing revenue shortages, the fiscal impact of foreign nationals cannot be ignored. If your business requires assistance in gaining visas for skilled and unskilled workers, Pollack, Pollack, Isaac & DeCicco, LLP, offers a consultation with our experienced NY employment immigration attorneys. Please call us at 212-203-4795 or contact us online to set up a meeting.