TN Visa Taxes: The Complete Guide

Posted by in Taxes | Updated on November 22, 2022
At a Glance: TN visa holders in the U.S. are liable to pay U.S. taxes. such as Medicare and social security taxes, regardless of their residency status. However, citizens of countries that have signed totalization agreements with the U.S., including Canada, may be exempt from these taxes.

Figuring out your taxes as a TN visa holder is a formidable task. You have to worry about residency status, tax treaties, and totalization agreements, to name just a few special considerations. Calculating your tax burden and submitting all the proper forms requires research, and this article is here to help.

Read on for the most important tax information TN visa holders should be aware of so you can make sure that you file correctly this year.

What is a TN Visa?

TN visas were created after the passage of Nafta, the trade deal between the United States, Canada, and Mexico. To be eligible for a TN visa, you must be either a Mexican or Canadian citizen seeking entry into the United States for the purposes of employment. Common professions eligible for a TN visa include attorneys, accountants, engineers, teachers, and scientists. You can qualify for a TN visa if you are qualified in the relevant field of employment and have a part-time or full-time job offer in the United States. However, the specific eligibility criteria is different for Mexican and Canadian citizens.

The TN visa allows visa holders to stay in the U.S. for up to 3 years, with the option of renewing TN status indefinitely every 3 years.

Do TN Visa Holders Pay Taxes in the U.S.?

Yes, TN visa holders in the U.S. are liable to pay U.S. taxes. TN visa holders are liable for Medicare and social security taxes regardless of their residency status. However, citizens of countries that have signed totalization agreements with the U.S., including Canada, may be exempt from these taxes.

The rules that a TN visa holder must follow for filing their federal taxes will depend on their residency status. Whether a TN visa holder currently living in the U.S. is classified as a nonresident alien or a resident alien will depend on whether they pass the Substantial Presence Test.

Substantial Presence Test

The Substantial Presence Test involves counting the number of days that a visa holder has been residing in the United States. The threshold for being determined a “resident alien,” as opposed to “nonresident alien,” is 183 days of residence in the current calendar year. TN nonimmigrants can apply the Substantial Presence Test by determining which of the two following scenarios they fall into:

  1. If you, the TN nonimmigrant, arrived in the United States on or before July 2nd of the calendar year and stayed in the U.S. through December 31st of that year, then you have been in the country for more than 183 days and are considered a resident alien. As a resident alien, you will be considered a tax resident of the U.S. from the day of your arrival.
  2. If you, the TN nonimmigrant, arrived in the U.S. after July 2nd then you cannot accumulate 183 days of residence and will count as a nonresident alien for that calendar year. If you stay in the U.S., then you will become a resident alien at the beginning of the second calendar year of your stay.

Totalization Agreement

Totalization Agreements are agreements that the United States has with a number of countries that exempt citizens of these countries from U.S. Social Security and Medicare taxes. These agreements prevent citizens of these countries from paying social security taxes in both their home country and the U.S. Since the U.S. has a Totalization Agreement with Canada, Canadian citizens on TN visas do not have to pay Social Security and Medicare taxes, but Mexican citizens are still liable for these taxes.

What TN Visa Taxes Must be Paid?

TN visa holders may be liable for federal income tax, social security and Medicare taxes, and federal unemployment tax, but it depends on relevant treaties and resident status. Read the following section for a detailed breakdown of TN visa taxes.

Federal Income Tax

As explained above, the federal income tax owed by TN visa holders is different for residents and nonresidents.

TN visa holders who are classified as resident aliens according to the rules listed in the above section have the same tax responsibilities as U.S. citizens. TN workers withhold U.S. federal income tax in the same way that U.S. citizens would regarding exemptions, medical status, etc. They also file a W-4 with their employers.

TN workers who are not classified as resident aliens upon arrival have different responsibilities. These TN workers must have wages withheld and file their W-4 according to a specific set of rules for wages earned by nonresident aliens found in Chapter 9 of IRS Publication 15 Circular E Employer’s Tax Guide. After staying in the U.S. long enough to be classified as residents, TN workers will file according to the same rules as residents and U.S. citizens.

Social Security and Medicare

TN workers are generally liable for Social Security and Medicare taxes, though Canadian TN visa holders are exempted due to a Totalization Agreement. Other exceptions include:

  • If the visa holder has a signed agreement with the government of his home country to pay social security taxes to that country
  • If the visa holder is working in a capacity or profession that is not subject to Medicare and Social Security taxes, according to IRS Publication 15 Circular E Employer’s Tax Guide

Federal Unemployment Tax

TN workers are also responsible for the Federal Unemployment Tax, with the only exceptions being individuals employed in a capacity or profession which is exempt from the Federal Unemployment Tax according to the IRS tax guide.

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Reporting Wages for TN Visa Holders

TN visa holders report their wages to the IRS in the same manner as U.S. citizens, using a Form 941 from the employer and a W-2. State and local wages are reported on the W-2 as well. If your wages are exempt from federal income tax due to tax treaties or Totalization Agreements, then these wages are reported on Form 1042 and 1042-S.

Withholding Non-Wage Payments

If a TN worker is nonresident alien and is paid in interest, dividends, royalties, rents, or non-wage compensation, then 30% of these amounts must be withheld for federal income tax. However, if the TN worker is from a country that has a tax treaty with the U.S., then this rate may be different.

If a TN worker is a resident alien, then their non-wage payments are NOT subject to withholding for U.S. federal income taxes. Resident aliens must be careful to report their Individual Tax Identification Number (ITIN) to their employer to ensure that wages are properly reported.

Income Tax Treaties

If a TN worker resided in a country that has an income tax treaty with the U.S. immediately before entering the U.S., then they may be eligible for a reduced income tax rate. However, to qualify for a treaty exemption, the TN worker must be a nonresident alien.

Canada’s tax treaty with the U.S. stipulates that Canadian citizens who are nonresident aliens and who earn less than $10,000 in wages as a TN worker in the U.S. do not have to pay federal income taxes.

U.S. Federal Income Tax Filing Requirements

Nonresident aliens must file either a Form 1040NR or a 1040NR-EZ regardless of their income, along with the typical W-2. The only exceptions to this are:

  • If the aggregate amount of wages the TN worker earned are less than the Personal Exemption Amount for the last year; or
  • If the TN worker’s only source of U.S. income was passive investment income or interest income

Resident aliens must file a Form 1040NR or 1040NR-EZ (along with a W-2) unless their total aggregate income is less than the minimum filing requirements detailed in the IRS Instructions for Form 1040. If the TN worker paid foreign income tax on his foreign income, they may be eligible for the Foreign Tax Credit. Resident aliens are typically not eligible for tax treaty exemptions, though some foreign student, teachers, and researchers are still eligible. See here for a complete guide on tax treaty eligibility.

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Conclusion

As you can see, TN visa taxes are particularly tricky and are subject to various treaty laws, totalization agreements, and residency status. Making sure that you fulfill all of your tax obligations as a TN worker requires thorough research and a methodical approach to filing your taxes. Be careful that you are submitting the proper forms and that the information in them is correct, and your filing should go smoothly. As soon as you know your tax burden, you can budget for the immediate future accordingly.


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