SOLE PROPRIETORS, INVESTORS
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PERSONAL SERVICE INCOME

Employee

Wages and other compensation paid to a nonresident alien for services performed as an employee are usually subject to graduated withholding at the same rates as resident aliens and U.S. citizens. Therefore, your compensation, unless it is specifically excluded from the term “wages” by law, or is exempt from tax by treaty, is subject to graduated withholding. If you work as an employee in the United States, you must pay social security and Medicare taxes in most cases.

 

Independent Contractors

If there is no employee–employer relationship between you and the person for whom you perform services or labor in the United States, your compensation is subject to the 30% (or lower treaty) rate of withholding. This rule applies regardless of your place of residence, the place where the contract for service was made, or the place of payment.

 

Self-Employment Tax

 

Self-employment tax is the social security and Medicare taxes for individuals who are self-employed. Nonresident aliens are not subject to self-employment tax unless an international social security agreement in effect determines that they are covered under the U.S. social security system.

 

Reporting Income

 

Nonresident aliens must report each item of income that is taxable. This includes both income that is effectively connected with a trade or business in the United States (subject to graduated tax rates) and income from U.S. sources that is not effectively connected (subject to a flat 30% tax rate or lower tax treaty rate).

You can claim the tax withheld during the year as a payment against your U.S. tax. You claim it on Form 1040NR. The tax withheld reduces any tax you owe with Form 1040NR.

State Issues

Generally, a state authority also requires tax payments or/and withholding on payments made to nonresidents for income received from state sources. Please note that state tax rules are complicated and every state has its own set of rules. When state tax rules are not followed, there are penalties and interest imposed.