Overview

Federal withholding for nonresident aliens applies when a foreign individual who is not a U.S. resident earns income that is treated as U.S.-source. That includes wages for services performed physically in the United States, and certain passive payments (interest, dividends, royalties) sourced to the U.S. Employers and payers must withhold, deposit, and report taxes under different rules than for U.S. residents. See IRS Publication 515 and Publication 519 for full legal guidance (IRS Pub. 515; IRS Pub. 519).

In my practice advising international employees and small employers, the most common mistakes are: (1) misclassifying the worker (employee vs. independent contractor), (2) using the wrong form (W-4 vs. W-8BEN or Form 8233), and (3) overlooking treaty-based exemptions.

Who is a “nonresident alien” for tax purposes?

The IRS defines a nonresident alien as someone who is neither a U.S. citizen nor a resident alien for tax purposes. Residency is determined either by the green card test or the substantial presence test (counting days of physical presence). If the individual fails those tests, they are generally a nonresident alien and taxed on U.S.-source income only (see IRS Publication 519).

Important distinction: a nonresident alien who is physically inside the U.S. and performs work here creates U.S.-source earned income (wages) and is generally subject to federal income tax withholding just like a resident employee.

How is U.S. source income determined for services?

  • Compensation for services performed in the United States is U.S.-source (wages or contractor payments).
  • Compensation for services performed outside the United States is foreign-source, even if paid by a U.S. company.

This sourcing rule matters: a French consultant physically in Paris who works for a U.S. client typically has foreign-source income and no U.S. wage withholding; a Canadian consultant sitting in Boston providing the same services has U.S.-source income and is subject to withholding.

(Authority: IRS Publication 519 — U.S. Tax Guide for Aliens.)

Which types of withholding apply?

  1. Wage withholding (employees)
  • Employers must withhold federal income tax on wages paid to nonresident alien employees. Nonresident aliens should complete Form W-4, but special IRS rules apply (for example, many nonresident aliens are instructed in Pub. 519 to claim “Single” filing status and cannot use certain personal allowances). Employers should consult IRS Pub. 515 for the correct withholding procedure.
  • Social Security and Medicare (FICA) withholding generally applies to employees unless an exception applies (e.g., certain nonimmigrant visa categories such as F-1, J-1, M-1, Q-1/2 may be exempt for a limited time). Check IRS guidance and Social Security Administration rules for specific visa exceptions.
  1. Withholding on independent contractor and passive payments (FDAP)
  • Fixed, determinable, annual, or periodic (FDAP) income—such as interest, dividends, royalties, and some contractor payments—may be subject to a flat 30% withholding on gross U.S.-source amounts unless a reduced treaty rate or exemption applies. Payers use Form W-8BEN (or W-8BEN-E for entities) to document treaty claims and reduce withholding.
  • For independent personal services paid to nonresident aliens who claim a treaty exemption for personal services, the individual may use Form 8233 to claim exemption from withholding on compensation for independent personal services.
  1. Reporting forms to know

Tax treaties and reduced rates

Many countries have tax treaties with the United States that lower or eliminate U.S. tax on specific types of income (often for limited time periods or for certain categories of income like teachers, researchers, students, or business profits). To get treaty benefits:

  • For wages (employees), the treaty exemption is generally claimed on Form 8233 or on the tax return; employers may need the documentation to withhold correctly.
  • For FDAP payments (nonemployee), use Form W-8BEN to claim the treaty rate with the payer.

Always verify your treaty position against the actual treaty text and IRS treaty tables; pub. 901 (U.S. Tax Treaties) and relevant IRS treaty pages provide the latest information.

In practice, I’ve seen clients reduce withholding from 30% to 0–15% for treaty-covered royalties or dependent personal services by timely submitting W-8BEN or Form 8233 to the payer.

Employer and payer responsibilities

  • Identify the recipient’s status (employee vs. independent contractor) and residency.
  • Collect the correct form (W-4 for employees; W-8BEN or Form 8233 for nonemployees).
  • Apply withholding rules in Pub. 515 and follow deposit and reporting requirements (Form 941, Form 1042 and 1042‑S as applicable).
  • Keep documentation: treaty claims should be supported by the appropriate forms and retained per IRS recordkeeping rules.

Failure to withhold when required may expose employers and payers to liability for the tax, penalties, and interest.

Common scenarios and what happens in each

  • Nonresident alien employee physically working in the U.S.: employer withholds federal income tax (treat W-4 per Pub. 519/Pub. 515) and usually FICA unless exempt. Employee files Form 1040‑NR for final tax computation and refund claims.

  • Nonresident alien contractor in the U.S.: payer may withhold 30% on gross payments unless the contractor provides Form 8233 (if claiming treaty benefits for personal services) or the payer accepts a valid W-8BEN claiming a reduced treaty rate.

  • Foreign national working remotely from the U.S. for a foreign company: income for services performed in the U.S. remains U.S.-source. The payer (foreign employer) may not be set up to withhold U.S. taxes, which can create complications — the worker may need to make estimated tax payments or request the foreign payer withhold in the U.S. Employer noncompliance does not remove the worker’s filing obligation.

How to get a refund or correct over‑withholding

If too much tax was withheld, a nonresident alien can claim a refund by filing Form 1040‑NR for the relevant tax year. Form 1042‑S recipients use the amounts reported there to reconcile withholding. If withholding was not done but tax is owed, the taxpayer must either pay estimated taxes or settle when filing Form 1040‑NR.

Practical checklist for nonresident aliens working in the U.S.

  • Establish tax residency status (green card or substantial presence test).
  • Determine whether your income is U.S.-source (where services are performed).
  • Provide the correct documentation to your payer (W-4 for employees; Form 8233 or W-8BEN for contractors and passive payments).
  • Review tax treaty provisions that might lower or eliminate withholding.
  • Keep copies of all forms received (W-2, 1042‑S, W-8BEN, 8233).
  • File Form 1040‑NR by the deadline to reconcile withholding and claim refunds.
  • Consult a tax professional if your situation involves multiple countries, dual-status years, or unusual treaty positions.

Common mistakes to avoid

  • Assuming “paid by a foreign company” means no U.S. tax — if services are performed in the U.S., the income is generally taxable here.
  • Using a W-8BEN for an employee relationship — employees should complete Form W-4.
  • Waiting until tax season to fix incorrect withholding — correcting withholding earlier prevents cash-flow issues.

Where to find authoritative guidance

Final notes and disclaimer

This article explains common federal withholding rules that apply to nonresident aliens performing work in the United States as of 2025. Tax rules can change; always verify with IRS publications or consult a qualified tax advisor for your specific facts and visa circumstances. This content is educational and not individualized tax advice.

Additional reading on FinHelp:

(For step-by-step help, consider working with a CPA or international tax specialist.)