Understanding US tax residency rules is critical for individuals, foreign nationals, startups, multinational companies, and global investors with any form of economic connection to the United States. The US follows one of the most complex tax residency frameworks globally, and misclassification can lead to double taxation, IRS penalties, and audit exposure.
Unlike many countries that rely solely on physical presence or domicile, the United States determines tax residency based on citizenship, immigration status, presence tests, and entity structure. This applies not only to individuals but also to companies, partnerships, and foreign-controlled entities operating or earning income in the US.
This comprehensive guide explains US tax residency rules for individuals and companies, including the IRS Substantial Presence Test, corporate residency concepts, tax obligations, exceptions, and compliance requirements.
What Is US Tax Residency?
US tax residency determines how and on what income a person or company is taxed by the Internal Revenue Service (IRS).
- US tax residents are generally taxed on their worldwide income
- Non-residents are taxed only on US-sourced income
Correctly identifying residency status is the foundation of US tax compliance, affecting:
- Income tax
- Reporting obligations
- Treaty benefits
- Withholding taxes
- Audit risk
US Tax Residency Rules for Individuals
The IRS classifies individuals into two broad categories:
- US Tax Residents
- Nonresident Aliens (NRAs)
An individual is considered a US tax resident if they meet any one of the following conditions.
1. US Citizenship Test
US citizens are automatically considered US tax residents, regardless of where they live.
Key Points:
- Citizenship-based taxation is unique to the US
- Applies even if the citizen:
- Lives abroad permanently
- Has no US income
- Requires annual filing of:
- Form 1040
- FBAR
- FATCA disclosures (Form 8938)
Failure to comply may result in severe penalties, even when no tax is due.
2. Green Card Test (Lawful Permanent Residents)
Individuals holding a US Green Card are treated as US tax residents from the date it is issued until it is:
- Formally surrendered, or
- Administratively revoked
Important Notes:
- Residency applies even if you live outside the US
- Temporary absence does not end tax residency
- Dual-status returns may apply in the year of entry or exit
3. IRS Substantial Presence Test (SPT)
For non-citizens and non–Green Card holders, the Substantial Presence Test (SPT) is the most critical rule.
Purpose of the SPT
The test determines whether a foreign national has spent sufficient time in the US to be treated as a tax resident.
How the Substantial Presence Test Works
You are considered a US tax resident under the SPT if:
- You were present in the US for at least 31 days in the current year AND
- You were present in the US for 183 weighted days over 3 years, calculated as:
| Year | Days Counted |
|---|---|
| Current year | 100% of days |
| First preceding year | 1/3 of days |
| Second preceding year | 1/6 of days |
Example Calculation
If an individual was present:
- 120 days in 2026
- 120 days in 2025
- 120 days in 2024
Calculation:
- 2026: 120 × 1 = 120
- 2025: 120 × 1/3 = 40
- 2024: 120 × 1/6 = 20
Total = 180 days → Not a US tax resident
If the total reaches 183 days or more, the individual becomes a US tax resident.
What Counts as a “Day of Presence”?
A day counts if you are physically present in the US at any time during the day, including:
- Partial days
- Arrival and departure days
- Medical stays (with limited exceptions)
Exempt Individuals Under the Substantial Presence Test
Certain visa holders may be temporarily exempt from counting days under the SPT:
- F-1 students (first 5 calendar years)
- J-1 teachers/trainees (first 2 years)
- Teachers, diplomats, and government officials
- Professional athletes competing in charitable events
Exempt individuals must file Form 8843 annually to claim exemption.
Closer Connection Exception
Even if you meet the Substantial Presence Test, you may avoid US tax residency by claiming the Closer Connection Exception, provided:
- You were present in the US for less than 183 days in the current year
- You maintained:
- A tax home outside the US
- Strong personal, economic, and social ties to another country
This exception is claimed using Form 8840.
Dual-Status Individuals
In some years, individuals may be treated as:
- Non-resident for part of the year
- Resident for the remaining part
This commonly occurs during:
- Immigration entry
- Green Card issuance
- Final departure from the US
Dual-status taxpayers face complex filing rules and limited deductions.
US Tax Residency Rules for Companies
Unlike individuals, companies are not subject to the Substantial Presence Test. Corporate tax residency is determined by the place of incorporation and the business activity nexus.
1. Domestic Corporations (US Companies)
A company is considered a US tax resident if it is:
- Incorporated in any US state, or
- Formed under US federal law
Tax Treatment:
- Subject to US federal corporate tax
- Taxed on worldwide income
- Required to file Form 1120
Current federal corporate tax rate: 21%
2. Foreign Companies Doing Business in the US
A foreign company may become subject to US taxation even if it is not incorporated in the US.
Key Concepts:
- Effectively Connected Income (ECI)
- Permanent Establishment (PE)
- Withholding tax obligations
Effectively Connected Income (ECI)
Foreign companies are taxed on income that is:
- Connected to a US trade or business
- Generated from:
- US offices
- Employees
- Warehouses
- Sales operations
ECI is taxed at graduated corporate tax rates, similar to US companies.
Permanent Establishment (PE)
Under US tax treaties, a foreign company is taxable only if it has a Permanent Establishment, such as:
- Branch
- Factory
- Office
- Dependent agent
Treaty benefits can significantly reduce tax exposure if structured correctly.
Controlled Foreign Corporations (CFCs)
A Controlled Foreign Corporation is a non-US company where:
- US shareholders own more than 50%
- Ownership is measured by vote or value
CFC rules require US owners to report:
- Subpart F income
- GILTI (Global Intangible Low-Taxed Income)
These rules prevent offshore profit shifting and require careful tax planning.
Partnerships and Pass-Through Entities
Tax residency for partnerships depends on:
- Place of formation
- Location of business activities
- Residency of partners
Foreign partners may be subject to:
- Withholding under IRC §1446
- Mandatory US tax filings
Tax Residency vs Immigration Status
It is important to note:
- Tax residency ≠ immigration residency
- You may be a tax resident without lawful immigration status
- Or a non-resident for tax purposes, despite holding a valid visa
IRS rules operate independently of USCIS.
Tax Treaties and Residency Tie-Breaker Rules
The US has tax treaties with over 60 countries to prevent double taxation.
When dual residency arises, treaties apply tie-breaker rules based on:
- Permanent home
- Centre of vital interests
- Habitual abode
- Nationality
Treaty positions must be disclosed using Form 8833.
Common Compliance Mistakes to Avoid
- Miscounting days under the SPT
- Ignoring treaty benefits
- Failing to file FBAR or FATCA forms
- Incorrectly classifying company income
- Missing withholding obligations
These errors often trigger IRS audits and penalties.
Penalties for Non-Compliance
Failure to comply with US tax residency rules may result in:
- Late filing penalties
- Accuracy-related penalties
- FBAR penalties (up to USD 10,000 per violation)
- Criminal exposure in severe cases
How Professional Advisors Help
US tax residency rules are high-risk and detail-intensive. Professional advisors assist with:
- Residency determination
- Treaty analysis
- Structuring cross-border operations
- IRS compliance and audit defence
- Multi-country tax optimisation
Final Thoughts
US tax residency rules for individuals and companies are among the most complex globally, with far-reaching consequences. Whether you are:
- A foreign national visiting the US
- An expat entrepreneur
- A multinational company expanding operations
- A startup with US investors
Correct classification, planning, and compliance are non-negotiable.
Early professional guidance can prevent costly tax exposure, penalties, and reputational risk.
Need Help with US Tax Residency or IRS Compliance?
Ease to Compliance provides end-to-end advisory support for US tax residency determination, IRS Substantial Presence Test analysis, cross-border tax structuring, and end-to-end IRS compliance for individuals and companies worldwide.
Our experienced international tax professionals help you identify residency risks, optimise tax exposure, claim treaty benefits, and ensure accurate IRS filings—reducing penalties, audits, and compliance gaps.
Contact us today to get expert guidance and ensure your US tax obligations are handled correctly, efficiently, and in full compliance with IRS regulations.
FAQs – US Tax Residency Rules for Individuals & Companies
Q1. Can remote work for a US company trigger US tax residency?
Answer: Remote work alone does not create US tax residency, but physical presence in the US while working may trigger the Substantial Presence Test.
Q2. Does holding US investments make a foreign individual a US tax resident?
Answer: No, owning US stocks, real estate, or mutual funds does not create tax residency without meeting IRS residency tests.
Q3. Are short-term business travellers required to file US tax returns?
Answer: Yes, even non-residents may need to file a US tax return if they earn US-sourced income during business visits.
Q4. Can US tax residency change multiple times in different years?
Answer: Yes, an individual’s US tax residency can change annually based on physical presence, visa status, and treaty claims.
Q5. Do US tax residency rules apply differently to digital and online businesses?
Answer: While incorporation determines residency, digital businesses may still face US tax obligations due to economic nexus and ECI rules.
