Navigating US taxes as an international worker: A beginner's guide

The allure of bright lights, big cities, and high paychecks draws many international workers to the US. But the journey takes work. Foreign nationals intending to work in the US are promptly greeted with the neverending bureaucracy of US immigration. And just when you think the nightmare is over after receiving your work authorization, the wonders of administrative duties come sneaking back up in the form of taxes. You may think as a non-US citizen that you don’t have to pay taxes to the Internal Revenue Service (IRS), but that’s a common misconception.

The complexity of the US tax system can cause panic for nonimmigrant visa holders. If you’re physically working in the US on a nonimmigrant work visa such as the H-1B or L-1 visa, then you’re probably a resident alien for US tax purposes. This status matters as it determines what US taxes you will pay. So, what else do you need to know about taxes as an international worker? Let’s dive in.

Do you need to pay US taxes?

All US citizens and permanent residents (green card holders) must pay US taxes and file a US tax return whether they live in the US or not. In general, the controlling principle is that US tax resident aliens are taxed like US citizens.

Salary requirements

One needs to earn a certain threshold to be required to file a tax return: $12,950 for a single filer, or a combined income of $25,900 if filing jointly with your spouse. However, considering the minimum salary requirement for the H-1B visa is $60,000 annually, you will likely surpass that amount.

Resident or nonresident alien

There is a Substantial Presence Test you need to follow in order to determine if you are a resident or nonresident alien. Simply put, to pass the Substantial Presence Test, you must be physically present in the US for a minimum of 183 days over three years and include at least 31 days in the current calendar year. Note that it’s possible to spend 183 days in the US without having enough days in the right time frame for them to count. The more days you’ve spent in the US in recent months, the better your odds are of being a resident alien.

Why is this important? Resident and nonresident aliens are taxed in different ways. For example, resident aliens are taxed on their worldwide income, which must be reported on their US tax returns. In contrast, nonresident aliens are taxed based on the source of income and whether or not it’s connected with a US trade or business.

First-year US resident

In some cases, you may override the result of the Substantial Presence Test by making the First-Year Choice to be treated as a US tax resident for at least part of your arrival year. This will be important to follow if you’ve just arrived in the US, as you will be taxed as a dual-status alien for the current year.

Back to the basics: US taxation

Once you’ve determined your residence and what best suits your case, it’s important to know the basics, says Peter N. Riefstahl, CPA, a tax professional with over seven years of experience and owner of On My Way to CPA, a CPA tax preparation service. Riefstahl is here to help break down the basics for those fresh off the boat.

What is a US tax return?

A US tax return is an annual filing comprised of various forms depending on your status, such as married or single, explains Riefstahl. Your tax return reports income, expenses, and other pertinent tax information. They allow taxpayers to calculate their tax liability, schedule tax payments, or request refunds in cases of overpayment. These must be filed with federal, state, and possibly local tax authorities.

The timeframe for submitting a tax return starts October 15th for individuals. “Contrary to popular belief,” adds Riefstahl. “Everyone fixates on the April 15th deadline because that’s actually the date when tax payments are due.” So make sure you don’t find yourself just starting this process on April 14 or you really need to file an extension.

Federal taxes

The federal government has a graduated set of tax brackets of 10%, 12%, 22%, and 24%, explains Riefstahl, and the amount of the dollars in each bracket is how much is taxed at that particular bracket. “Those brackets move around based on your filing status: a single head of household, married filing jointly, or single.”

To better understand the tax system when it comes to having a balance due or a refund, Riefstahl gives us an analogy: “It’s like getting a candy bar from the vending machine. If the candy bar costs $2 and you put $5 in, just like if your tax liability is $2 and you withhold $5, you’re going to get that $3 back. If you don’t put enough in, if you only put $1 in, you still owe that extra dollar.”

Depending on where you live, you might be required to submit up to three different tax returns: federal, state, and local.

State and local taxes

Each state is different, explains Riefstahl. “Not every state has income taxes. Currently, people in seven states [Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming] don’t file individual income tax returns.” States have their own adjustments, too, like federal taxes, where you can subtract certain expenses from your gross income, lowering the total amount you will be taxed on. Each state is also different in how they conform to federal changes. Riefstahl gives an example of Covid-era changes. “These last few years, with all the stimulus payments and unemployment in 2020 being non-taxable for federal purposes, states treated these things differently. So you need to know what the state rules,” he explains.

If your state does tax income, you must file a state return with your federal tax return, says Riefstahl. “Each state is a little bit different on what numbers they grab, but the federal needs to be done and correct before you file your state return,” explains Riefstahl.

Local taxes depend on the state and whether you have a local filing, so verify what taxes are in your city or county. Riefstahl says local taxes are typically for small businesses or self-employed individuals, but you should still check your local regulations. They will be filed along with your federal and state taxes. Be sure to clarify the rules where you reside.

The difference between 1099, W-4, W-2, and 1040

These are three of the most common tax forms for determining how much tax is withheld. Typically there are two types of earners under American tax law. There are independent contractors and employees, explains Riefstahl. If you are an independent contractor, then you file a 1099 form. However, work visa holders, like H1B, are only allowed to work for their employer sponsors, so they are not allowed to conduct independent contract work, such as freelancing or Uber driving. That leaves us with the W-2 and W-4 forms.

W-4

Riefstahl explains that the W-4 is completed upon employment with your HR representative. This is just one document you will fill out on your first day, like an I-9 for background checks, but the W-4 is related to your tax withholdings. “People get so frustrated with this form,” he says. “It’s supposed to give you an idea of how much money the federal government will withhold from your income,” he adds.

One area of frustration is determining the number of people you claim, for example, the number of kids (dependants in tax terms) you have or if you’re married. “You are supposed to withhold the amount of this number by stating it on your W-4,” says Riefstahl. He explains that the more you claim, the less money you will be withheld from your paycheck to your tax payments. This has to do with credits you can take on taxes withheld. “For example, you get tax credits for having children and adult dependants.” The hope is that by the correct amount of dependents on the W-4, you’re withholding less, your weekly paycheck is more, and you won’t owe as much come April 15th.

However, Riefstahl says many different types of income impact your taxable income for the year, hence the frustration with the W-4. “Interest dividends, if you buy and sell stocks, and rental property, for example.” They can affect your withholds but can’t be counted in the W-4. He also adds that there’s no penalty for choosing the wrong number; you just might owe more or get money back when you file.

W-2

Every employer who pays remuneration must file a W-2 for each employee. A W-2 reports employees’ annual wages, Social Security tax, Medicare tax, retirement plans, and Employer ID Number (EIN). The form is sent to you by the end of January from your employer, and you will use this to fill out your tax return form 1040.

1040

The 1040 form is your standard tax return for individuals or couples. It comprises income—whether from your job, investments, interest, dividends, sales of stock, et cetera, explains Riefstahl. This is one of the official documents that US taxpayers use to file their annual income tax returns. However, Riefstahl warns that various schedules and other attachments go along with it, so it is a little confusing at times.

Additional tips for filing US taxes as an international worker

Tax treaties

The US has tax treaties with many countries, but they all vary. The IRS website has a detailed section explaining each treaty by county. Be mindful that you will always have to pay your taxes in the US if you are a resident for tax purposes, but these treaties help with potentially being double taxed by your home country on the same income.

Record keeping

Record keeping is always going to be your best friend, says Riefstahl. “Even if you were to totally screw things up and not file anything, and the IRS comes after you years later, at least you’ve got all the records in place.” He suggests tracking how many days you are in and out of the US because this can affect your tax filing, like with the Substantial Presence Test.

Look at your pay stub

Each pay stub will show how much federal tax is withheld for that pay period and the total up to that point in the year. Riefstahl gives us an example: “If on my very first pay stub in January, I have $200 withheld, I know I get paid every two weeks, and there are 26 pay periods in the year, I will have $5,200 sent to the IRS for my tax liability.” Your paychecks are like a gateway into your withholds.

Use a tax calculator

But how do you know you’re withholding enough so you don’t owe in April? “Go jump on an online tax calculator and compare it to your pay stubs,” suggests Riefstahl. Doing a little bit of homework might save you money in the end.

Independent research

Riefstahl does say it’s essential to do your research, but he also warns that “Bob’s bargain billboard doesn’t hold the same weight as the IRS.” He suggests finding a lawyer’s office or an accountant’s website that hopefully will be a little more trustworthy than someone’s blog, “but still, you can’t beat the IRS.” They have all the instructions and explanations on their website. “I’m not saying this is going to be fun reading; you probably don’t want to dive in at 9pm, but it’s comprehensible.” Another good resource is Publication 519, a tax guide for foreign nationals working in the US.

Hire someone or pay for a service

Hiring a tax preparer doesn’t come cheap as it depends on your situation and complications that come up during filling, explains Riefstahl. He suggests you find someone who understands your particular case, such as foreign earned income and foreign residency. He stresses that finding someone who knows what they are doing is important.

You could pay for services like TurboTax, which are much cheaper than hiring a tax preparer, “but it’s not the same as having a tax professional,” says Riefstahl. “There are better questions you’ll be asked and better dialogue you’ll get from someone actually doing the work for you. But TurboTax does a decent job.” He also mentions free services like the Volunteer Income Tax Assistance (VITA), where you can sit with a volunteer and they will help you prepare your returns for free.

Don’t be discouraged!

Doing your taxes for the first time in the US will be challenging, but there are ways to ease the pay. Conducting diligent research and reaching out to a professional when needed is essential. You may only need to use a preparer your first year because you learn more the following year. But please don’t be discouraged from doing your taxes because there are penalties for late filing and underpayment. You don’t want to pay interest and penalties for not completing your US taxes. Good luck!

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