As a non-resident of the United States, you are still required to file a U.S. tax return if you have an income from sources in the U.S. This is generally the case for those who are self-employed, own a company and have worked as an independent contractor in the U.S., as well as those who have received income from investments, rental properties, or other sources.
In this article, we will provide an overview of Form 1040NR – the tax return form for non-residents of the United States. We’ll discuss who must file this form, what type of income is reportable, and how to file your return. So whether you’re a non-resident just starting to file U.S. taxes or you’ve been doing it for years, this article will give you the information you need to get started.
What is Form 1040NR, and why do I need to file it?
Form 1040NR is the tax return form for non-residents of the United States. This form reports your income from U.S. sources and any taxes you may owe. If you are a non-resident and have earned income from sources in the U.S., you must file Form 1040NR. Also, if you are engaged in any U.S. trade or business, even if you have no income, you must file form 1040NR.
Who needs to be considered a non-resident?
If you are not a U.S. citizen, you are considered a non-resident for tax purposes unless you meet one of the following criteria:
– You are a lawful permanent resident of the United States (also known as a “green card” holder).
– You have met the substantial presence test for the current year. To meet this test, you must have been physically present in the United States for at least 31 days during the current year, and you must have been present for at least 183 days during the 3-year period that includes the current year and the two years immediately before that.
If you are not a U.S. citizen and do not meet the above criteria, you are considered a non-resident for tax purposes. You must file Form 1040NR to report your income from U.S. sources.
What types of income are taxable on Form 1040NR?
If you are a non-resident for tax purposes, you will only be taxed on your income from U.S. sources. This includes, but is not limited to:
- Wages, salaries, tips, and other forms of compensation earned from working in the United States
- Interest and dividends from U.S. banks, corporations, and other financial institutions
- Rental income from property located in the United States
- Gains from the sale of property located in the United States.
- Self-employed income
- U.S. Source business or trade-related income.
How do I report expenses on Form 1040NR?
If you have any expenses related to the income you report on Form 1040NR, you need to itemize your deductions to claim them. This includes deductions for, but is not limited to:
- Business related expenses
- Advertisement and consulting expenses
- Legal and Professional fees
- Taxes and Licensing
- Rental property expenses, including utilities, management fees, insurance,
- Interest and taxes paid on U.S. property – Charitable donations to U.S. charities
What if I also have income from a foreign country?
If you also have income from a foreign country, you will need to file Form 1040NR to report your U.S. source income, and you will also need to file a separate tax return in your home country to inform your foreign income. You might need to use a foreign tax credit or special tax treatment if there is a tax treaty between your home country and the U.S.
What is the deadline for filing Form 1040NR?
The deadline for filing Form 1040NR is 15, the day of the 4th month after your tax year ends. However, if you are a non-resident for tax purposes and have income from U.S. sources, you may be required to make estimated tax payments throughout the year to avoid penalties. If you did not receive wages as an employee subject to U.S. income tax withholding, file Form 1040-NR by the 15th day of the 6th month after your tax year ends. A return for the 2021 calendar year is due by June 15,
What happens if I don’t file Form 1040NR or file it late?
If you don’t file Form 1040NR by the due date, you may have to pay a late-filing penalty. The penalty is 5% of the unpaid tax for each month or part of a month that the return is late, up to 25%. If you file more than 60 days after the due date, the minimum penalty is $435 or 100% of the unpaid tax, whichever is smaller.
You may also have to pay interest on the unpaid tax.
The IRS can take collection actions against you if you don’t pay your taxes.
What is Form 5472, and who needs to file it?
If you are a non-resident for tax purposes and you own or are a shareholder in a U.S. corporation or an LLC of more than 25%, you will need to file Form 5472 to report your ownership stake in the company.
You will also need to file Form 5472 if you are a non-resident for tax purposes and you engage in any of the following transactions with a U.S. corporation:
- Sell, exchange, or otherwise dispose of stock in the corporation
- Acquire stock in the corporation in exchange for money, property, or services – Make a loan to the corporation
- Extend or renew a loan to the corporation
- Make a direct or indirect investment in the corporation
- Receive any type of distribution from the corporation.
Form 5472 is due on the same date as your tax return and must be filed by post or fax.
How do I file Form 5472?
To file Form 5472, you will need to have the following information:
– Your name, address, and country of citizenship
– The name, address, and EIN of the U.S. corporation
– A description of the transactions you engaged in with the corporation
– The date of each transaction
– The amount of money or fair market value of property or services exchanged in each transaction.
You will also need to attach a statement to Form 5472 that provides details about your ownership stake in the corporation and the names and addresses of any other shareholders.
What are the penalties for not filing Form 5472?
If you don’t file Form 5472 on time, you could be severely penalized. The failure-to-file liability for this form is $25,000, and if the IRS determines that you’ve intentionally failed to file Form 5472, that penalty increases to $25,000.
Plus, every month the failure continues, you’ll be charged an extra $25,000. This begins 90 days after the IRS notifies you of the failure, and there’s no
maximum penalty amount. So make sure you stay on top of your tax obligations and file all the required forms on time!
I’m a startup founder. Do I need to pay taxes on my equity compensation?
If you are a startup founder and receive equity compensation, you may be subject to taxes on that income. The amount of tax you will owe depends on the type of equity compensation you receive and the value of the shares at the time they are vested.
You will not owe any taxes if you receive stock options until you exercise those options and purchase the shares. At that point, you will be subject to taxes on the difference between the exercise price and the fair market value of the shares at the time of purchase.
If you receive restricted stock units (RSUs), you will not owe any taxes until the shares vest. However, at that point, you will be subject to taxes on the fair market value of the shares at the time they vest.
If you receive stock grants, you will owe taxes on the fair market value of the shares when granted.
Do I need to file a state tax return in addition to my federal return?
If you are not a resident of the United States, you are not required to file a state tax return. However, if you have income from sources within a particular state, you may be required to file a non-resident return for that state.
For example, if you are a Canadian citizen and sell goods to customers in California, you must file a non-resident return for California.
If you are unsure whether you need to file a state tax return, you should consult a tax advisor.
We hope this guide has helped you better understand Form 1040NR and your filing obligations as a non-resident alien. If you have any additional questions about your tax liability or need help preparing your return, we recommend speaking with a qualified tax professional. Failing to file Form 1040NR or filing it late can result in significant penalties, so be sure to take care of your taxes on time. Good luck!
This article is for informational purposes only and does not constitute tax advice. For specific information about your situation, please contact a qualified tax advisor.