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TN Visa Taxes: The Complete Guide
At a Glance
- TN visas for Mexican and Canadian citizens allow employment in the U.S., covering professions like attorneys, accountants, engineers, teachers, and scientists.
- The visa permits a maximum 3-year stay, with indefinite renewal options.
- TN visa holders are subject to U.S. taxes, including Medicare and social security taxes, based on residency determined by the Substantial Presence Test.
- Tax obligations include filing federal income tax, social security and Medicare taxes, and federal unemployment tax, with exceptions based on treaties and resident status.
Tax filing for TN visa holders can be complex, involving residency status, tax treaties, and totalization agreements. It’s crucial to understand these factors to accurately calculate taxes and submit the correct forms. This article provides essential tax information to ensure TN visa holders file correctly.
What is a TN Visa?
TN visas, established under NAFTA, are for Mexican or Canadian citizens working in the U.S. in certain professions like law, accounting, engineering, teaching, and science. Eligibility requires qualification in a relevant field and a job offer in the U.S., though criteria vary for Mexicans and Canadians. The visa permits up to 3 years of U.S. stay, renewable indefinitely every 3 years. For detailed eligibility, refer to USCIS guidelines.
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:
- 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.
- 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 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.
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.
- Why Was No Federal Income Tax Withheld From My Paycheck?
- Why Do I Owe Taxes?
- Why Do I Owe State Taxes?
- Are You Exempt from Federal Withholding?
- How to File Taxes With No Income
- Can You File Taxes Without a W2?
- H1B Taxes: Everything You Need to Know
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.
TN Visa Taxes FAQ
Below, you will find some common questions about TN visa taxes in the U.S. and their answers.
Do TN visa holders pay U.S. taxes?
Yes, TN visa holders are subject to U.S. tax laws and must file U.S. tax returns on income earned in the United States.
What is the tax residency status of a TN visa holder?
Tax residency depends on the substantial presence test. If a TN visa holder meets this test, they are considered a resident alien for tax purposes; otherwise, they are a non-resident alien.
Can TN visa holders avail themselves of tax treaty benefits?
Yes, Canada and Mexico have tax treaties with the U.S. that may offer certain benefits or exemptions to TN visa holders.
Are TN visa holders required to pay state taxes?
This depends on the state in which they reside and work. Some states have no income tax, while others tax residents on all income earned.
How do TN visa holders file their tax returns?
TN visa holders file federal tax returns using Form 1040 or 1040NR, depending on their residency status. State tax returns may also be required.
Is foreign income taxable for TN visa holders?
For resident aliens, worldwide income is taxable. Non-resident aliens are taxed only on their U.S. sourced income.
What tax deductions and credits can TN visa holders claim?
Deductions and credits depend on tax residency status. Resident aliens have more options, similar to U.S. citizens.
Are Social Security and Medicare taxes applicable to TN visa holders?
Yes, TN visa holders typically contribute to Social Security and Medicare if they are employed in the U.S.
What happens if a TN visa holder fails to file a tax return?
Failure to file can result in penalties and interest charges. It’s important to file returns and pay taxes on time.
Can TN visa holders seek tax assistance?
Yes, they are advised to consult with a tax professional, especially those familiar with international tax law and TN visa specifics, to ensure compliance and maximize benefits.