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As an HR manager, it's important to understand the payroll tax implications for employees on student visas (F-1, J-1, M-1) versus on work visas (H-1B, H-1B1, L-1A/B, EB3, TN) status and keep the payroll department updated on different statuses and the change of status.
Payroll tax withholdings for employees starting on a US student visa (F-1, J-1, M-1):
Substantial Presence Test: A foreign national on an F-1 visa is typically considered to have a "nonresident" status for tax purposes for the first five calendar years in the US. If they have accrued more than five years in the US, they meet the substantial presence test and are thus considered to have the "resident" status.
Social Security and Medicare Taxes (FICA): Generally, nonresident foreign nationals with F-1 visa status are exempt from FICA taxes.
Federal Income Taxes: The employee is subject to federal withholdings irrespective of whether they are resident or non-resident for tax purposes.
Payroll tax withholdings for employees transitioning from a student visa to a work visa
Employers should deduct the following taxes for employees transitioning from F-1, J-1 or M-1 visa to work visa statuses (H-1B, H-1B1, TN, E-3 and L-1 visas):
Social Security and Medicare Taxes (FICA): Upon transitioning to H-1B visa status, the employee will be subject to FICA taxes unless a totalization agreement exists between the United States and their home country, which may exempt them from these taxes.
Federal Income Taxes: Once the employee switches to H-1B visa status, they will be considered a non-resident or a resident foreign national for tax purposes, depending on their substantial presence in the United States.
Payroll tax withholdings for employees directly starting on a work visa (H-1B, H-1B1, E-3, TN, L-1A, or L-1B visa):
If an employee is coming to the United States for the first time and will start a job on a work visa, they are generally not considered a resident alien for tax purposes in their first year.
According to IRS regulations, a new arrival to the United States is typically classified as a nonresident alien for the first calendar year of their stay if they do not meet the substantial presence test (see below) during that year. In most cases, individuals on a work visa will not meet the substantial presence test in their initial year because they have not been physically present in the United States long enough.
Social Security and Medicare Taxes (FICA): As a nonresident, the foreign national employee will not be subjected to FICA taxes for the first year of their presence in the US.
Federal Income Taxes: As a nonresident alien, the employee would generally be subject to U.S. federal income tax on their U.S.-source income and certain other types of income. Their foreign income would not typically be subject to U.S. federal income tax.
Substantial presence test for employees on work visas: an individual is considered a resident foreign national for tax purposes if they meet the following criteria:
They have been physically present in the United States for at least 31 days during the current year, and
The sum of the days present in the current year, plus one-third of the days present in the preceding year, plus one-sixth of the days present in the second preceding year, equals 183 days or more.
State and Local Taxes
State and local tax withholding requirements may vary depending on the jurisdiction. Employers should review the specific regulations of our state and local tax authorities to determine the appropriate tax withholding obligations for the employee.
Other Recommendations:
To ensure a smooth transition and proper tax compliance, it's recommended to take the following steps:
Update Payroll Systems: Please update the employee's tax withholding information in your payroll systems to reflect their change in visa status and adjust the appropriate tax withholdings accordingly.
Notify Employee: Inform the employee about the change in tax withholdings resulting from their transition to H-1B visa status. Advise them to consult with a qualified tax professional to understand the impact on their personal tax situation and assist them in filing the necessary tax forms, if required.
Seek Professional Guidance: Consider consulting with a tax specialist or an immigration attorney to ensure compliance with the updated tax regulations and to address any specific questions or concerns related to this transition.
Content in this publication is not intended as legal advice, nor should it be relied on as such. For additional information on the issues discussed, consult a WayLit-affiliated attorney or another qualified professional.