Overview

Nonresident business owners—individuals who are not U.S. citizens or U.S. residents but earn income from U.S. sources—face a distinct set of tax rules. These rules determine which U.S. income is taxable, which returns to file, and what withholding or estimated payments are required. Getting the basics right avoids penalties, preserves treaty benefits, and can improve after-tax results. In my practice advising international entrepreneurs, early clarity on residency, sourcing, and withholding reduces surprises at filing time.

Quick compliance checklist

  • Confirm your alien status under the Green Card and Substantial Presence tests (see IRS Publication 519).
  • Identify which income is U.S.-source (business receipts, services performed in the U.S., U.S. rents, etc.).
  • Determine the correct return: commonly Form 1040-NR (U.S. Nonresident Alien Income Tax Return).
  • Check withholding rules and whether you must make estimated tax payments (Form 1040-ES (NR)).
  • Evaluate tax treaties and whether Form 8833 is required to disclose treaty positions.
  • Obtain tax IDs: ITIN or SSN for individuals; EIN for U.S. business entities.
  • Keep accurate records of income, expenses, and days present in the U.S.

Residency and why it matters

The IRS treats taxation differently for U.S. residents and nonresidents. Two primary tests determine residency:

  • Green Card test: you are a U.S. resident for tax purposes if you are a lawful permanent resident at any time during the year.
  • Substantial Presence test: you meet this test if you are physically present in the U.S. for 31 days in the current year and 183 days over a three-year weighted formula (current year + 1/3 of prior year days + 1/6 of second prior year days).

If you do not meet either test, you are generally a nonresident alien and file under nonresident rules. For authoritative guidance, see IRS Publication 519: U.S. Tax Guide for Aliens (IRS.gov).

Sourcing: which income is taxable to nonresidents

Nonresident aliens are taxed on:

  • U.S.-source income that is effectively connected with a U.S. trade or business (ECI). This typically includes business profits from a U.S. trade or business, compensation for services performed in the U.S., and rental income from U.S. real property.
  • Certain fixed or determinable annual or periodical (FDAP) income from U.S. sources (interest, dividends, royalties) that may be subject to flat withholding tax.

The determination whether business income is “effectively connected” depends on the facts—where services are performed, where contracts are executed, and the business’s level of activity in the U.S. (see IRS: Foreign Persons and U.S. Taxes).

Key forms you’re likely to encounter

  • Form 1040-NR: U.S. Nonresident Alien Income Tax Return — primary filing vehicle for nonresident individual taxpayers with U.S. source income. (FinHelp has a dedicated page on Form 1040-NR.)
  • Form 1040-ES (NR): Estimated tax for nonresident individuals who expect to owe tax not fully covered by withholding.
  • Form 8833: Treaty-Based Return Position Disclosure — used to disclose treaty positions that reduce U.S. tax.
  • Form 8233: for claiming exemption from withholding on compensation for independent personal services under certain tax treaties.
  • Form W-8BEN / W-8ECI: certificates nonresidents provide to payers to claim reduced withholding or certify foreign status.

Also note business-related returns and withholding returns (for example, Forms 1042/1042-S for payments to foreign persons) apply in many cross-border situations.

Deadlines and payment timing

  • Filing: Form 1040-NR is generally due April 15 if you received wages subject to U.S. withholding; if you did not receive wages subject to withholding, the due date is typically June 15. Always confirm current IRS guidance for the tax year you are filing (see IRS nonresident pages and Publication 519).
  • Estimated tax payments: If you expect tax not covered by withholding, pay estimated tax on the standard quarterly schedule (April, June, September, January) using Form 1040-ES (NR).

In my experience, missing the first estimated payment is a common source of penalties for small foreign-owned businesses that underestimate U.S. withholding obligations.

Withholding: what payers may be required to do

U.S. payers generally must withhold on certain payments to foreign persons:

  • FDAP payments (dividends, fixed interest, royalties) may be subject to a 30% withholding tax unless a treaty or other exception applies.
  • Compensation for services performed in the U.S. often triggers wage withholding similar to wage withholding for residents.

Nonresident business owners should ensure correct W-8 forms are on file with payers and consider whether to register for an EIN or obtain an ITIN to prevent backup withholding or processing delays.

For background on how withholding rules affect nonresidents, see FinHelp’s article “How Federal Withholding Rules Affect Nonresident Aliens“.

Deductions, credits, and limitations

Nonresidents have a narrower set of deductions and credits than residents. Key points:

  • Deductions are generally limited to those connected with effectively connected income (business expenses, cost of goods sold, etc.).
  • Standard deduction is not available to most nonresident aliens (exceptions exist for residents of India due to treaty provisions).
  • Certain itemized deductions (mortgage interest, charitable contributions to U.S. organizations) may be available if connected to U.S. income.

Because rules are complex and fact-specific, I routinely see businesses miss allowable ECI deductions because they were uncertain whether expenses were sufficiently connected to U.S. income.

Tax treaties and Form 8833

The U.S. has income tax treaties with many countries that can reduce or exempt certain types of income from U.S. taxation. If you rely on a treaty position to reduce tax, you may need to file Form 8833 to disclose that position (and maintain supporting documentation). Treaties vary by country and by type of income—review the treaty text and IRS treaty tables before filing. (Reference: IRS tax treaty resources.)

ITINs, EINs, and identity paperwork

  • ITIN (Individual Taxpayer Identification Number): Issued by the IRS for individuals who need a U.S. tax ID but are not eligible for an SSN. Required to file Form 1040-NR if you do not have an SSN.
  • EIN (Employer Identification Number): Nonresident-owned businesses operating or withholding in the U.S. commonly need an EIN.

Apply early—ITIN and EIN processing can take time, and delays can push back filing or withholding compliance.

State tax considerations

State tax rules differ and may tax nonresidents on income sourced to that state (for example, services performed in the state or sales connected to a state). Even if you pay federal tax as a nonresident, you may also have state filing obligations. Check state revenue department rules where you conduct business.

Recordkeeping and documentation

Keep clear records for at least three to seven years of:

  • Contracts and invoices showing where services were performed.
  • Bank statements and receipts tying income to U.S. customers or property.
  • Travel logs documenting days present in the U.S. (essential for the Substantial Presence test).
  • Treaty documentation and correspondence with payers about withholding.

In audits or treaty claims, the quality of documentation often determines whether an expense is allowed or a withholding position is respected.

Common mistakes I see in practice

  • Treating all foreign-sourced income as outside U.S. tax—some income for nonresidents is U.S.-source and taxable.
  • Failing to provide W-8 forms to payers, leading to full 30% withholding.
  • Missing estimated tax payments and accruing penalties.
  • Assuming all deductions allowed to residents are available to nonresidents.

Penalties and enforcement

Late filing, underpayment of estimated taxes, and failure to withhold can trigger penalties and interest. The IRS can also assess penalties under information-reporting and backup withholding rules. Consult the current IRS penalty guidance and, if you receive a notice, respond promptly.

Practical steps to get started (starter timeline)

  1. Determine residency status and document days present in the U.S.
  2. Classify income as U.S.-source or foreign-source.
  3. Register for an ITIN/EIN if needed.
  4. File required W-8 forms and confirm withholding rates with payers.
  5. Prepare and file Form 1040-NR (or other required returns) by the applicable due date.
  6. Make estimated tax payments if you expect a balance due.
  7. Keep records and consult a tax professional experienced in nonresident and international tax.

When to hire help

If you have cross-border contracts, U.S. employees, property in the U.S., or treaty questions, work with a CPA or tax attorney who specializes in international taxation. In my experience, early adviser engagement—before large contracts are signed or payroll is set up—saves money and reduces filing headaches.

Selected authoritative resources

Related FinHelp articles

Professional disclaimer

This article is educational and does not replace personalized tax advice. Tax laws change and each situation is unique—consult a qualified tax professional for guidance tailored to your facts and the tax year in question.