Who Is Required to Pay Taxes in the United States?

The United States tax system determines a tax obligation based on an individual’s or entity’s specific status. While taxes exist at federal, state, and local levels, federal tax law defines who is subject to taxation. The rules for a U.S. citizen abroad differ from those for a foreign national working in the country or a domestic corporation. The Internal Revenue Service (IRS) provides regulations that outline the tax requirements for each category of taxpayer, ensuring those with a connection to the U.S. economy contribute.

Taxation of U.S. Citizens and Resident Aliens

The United States taxes its citizens and resident aliens on their worldwide income, meaning all income is subject to U.S. federal income tax regardless of where it is earned. A U.S. citizen, whether by birth or naturalization, retains this tax obligation even when living abroad. This principle of citizenship-based taxation is a distinct feature of the U.S. tax system.

An individual who is not a U.S. citizen may be classified as a resident alien for tax purposes, subjecting them to the same worldwide income taxation. This status is determined by two IRS tests. The first is the Green Card Test, where an individual holding a Lawful Permanent Resident Card (green card) at any point during the year is considered a U.S. resident alien.

The second method is the Substantial Presence Test, based on physical presence in the United States. To meet this test, an individual must be in the U.S. for at least 31 days during the current tax year and a total of 183 days during a three-year period. This period includes the current year and the two prior years, with the 183-day total calculated by counting all days in the current year, one-third of the days in the first prior year, and one-sixth of the days in the second prior year.

For example, a person in the U.S. for 120 days in the current year, 120 days in the first preceding year, and 120 days in the second preceding year would have a total of 180 days (120 + 40 + 20) and would not meet the test. Certain exemptions apply for:

• Foreign government-related individuals
• Teachers
• Students
• Professional athletes temporarily competing in charitable sports events

Both U.S. citizens and resident aliens report their income on Form 1040.

Taxation of Nonresident Aliens

A nonresident alien is an individual who is not a U.S. citizen and does not meet the Green Card Test or the Substantial Presence Test. Unlike U.S. citizens and residents, nonresident aliens are taxed only on their U.S.-sourced income. The taxation method depends on the nature of the income, which falls into two main categories.

Effectively Connected Income (ECI)

Income effectively connected with a U.S. trade or business is known as Effectively Connected Income (ECI). This category includes salary, wages, and compensation for services performed in the U.S. ECI is taxed at the same graduated rates that apply to U.S. citizens, with 2024 rates ranging from 10% to 37%. Nonresident aliens with ECI must file Form 1040-NR to report this income and are permitted to claim related deductions.

Fixed, Determinable, Annual, or Periodical (FDAP) Income

The second category is Fixed, Determinable, Annual, or Periodical (FDAP) income, which consists of passive income from U.S. sources like interest, dividends, and rents. This income is taxed at a flat 30% rate, unless a lower rate is established by a tax treaty. The tax on FDAP income is collected through withholding at the source, which may satisfy the nonresident alien’s full tax liability without requiring them to file a return.

Tax Obligations of Business Entities

The structure of a business determines how it is taxed. A C corporation is recognized as a separate taxpaying entity from its owners. It files its own tax return, Form 1120, and pays taxes on its profits at the flat 21% corporate income tax rate. This creates a two-tiered system of taxation, as shareholders may also pay tax on dividends received.

In contrast, pass-through entities, including S corporations, partnerships, and most LLCs, do not pay income tax at the entity level. The profits and losses of the business are passed through to the owners. These owners report their share of the business’s income on their personal tax returns and pay tax at their individual rates. The business itself files an informational return, like Form 1065 for partnerships or Form 1120-S for S corporations.

Trusts and estates are another category of taxpayers. If a trust or estate earns income that it does not distribute to its beneficiaries during the tax year, it must pay tax on that retained income. The income is reported on Form 1041, the U.S. Income Tax Return for Estates and Trusts.

Federal Income Tax Filing Thresholds

Being a taxpayer does not automatically mean an individual must file a tax return. The requirement to file is determined by a person’s gross income, filing status, and age. The IRS establishes specific gross income thresholds each year that trigger the filing obligation. For the 2024 tax year, a single individual under age 65 is required to file if their gross income is at least $14,600.

These thresholds are higher for married couples and older individuals. For a single person aged 65 or older, the 2024 filing threshold is $16,550. For married couples filing jointly, the threshold is $29,200 if both spouses are under 65, $30,750 if one spouse is 65 or older, and $32,300 if both are 65 or older.

Other circumstances can necessitate filing a tax return even if the gross income thresholds are not met. An individual must file if they had net earnings from self-employment of at least $400. Individuals who owe special taxes, such as the alternative minimum tax, or who received distributions from a Health Savings Account, must also file. Dependents are subject to a different set of filing rules based on their earned and unearned income.