IRS APPROVED ERO SERVING ALL 50 STATES
RAPID REFUNDS - TAX REFUND LOANS - VERY LOW FEES
OVER 15 YEARS EXPERIENCE
IRS APPROVED ERO SERVING ALL 50 STATES
RAPID REFUNDS - TAX REFUND LOANS - VERY LOW FEES
OVER 15 YEARS EXPERIENCE
Taxation of Alien Individuals by Immigration Status H-1B
H-1B Status (Specialty Occupations and Teachers)
The H-1B status permits a qualified nonimmigrant alien, i.e., an alien who is not a lawful permanent resident (also known as a “green card holder”), to reside in the United States to perform services in a specialty occupation (including teaching), services of exceptional merit and ability relating to a Department of Defense cooperative research and development project, or services as a fashion model of distinguished merit or ability.
Note, however, aliens may reside in the United States for purposes of teaching under several different immigration status classifications, including H-1B status and J-1 status. It is important to distinguish between H-1B status and J-1 status because the tax consequences under each status are significantly different.
For more information about the H-1B immigration status, visit the U.S. Citizenship and Immigration Services (“USCIS”) website (www.uscis.gov).
I. Tax Residency Status
Although the tax residency rules are based on the immigration laws concerning immigrant and nonimmigrant aliens, the tax rules define residency for tax purposes in a way that is very different from U.S. immigration law. For tax purposes, there are two types of aliens: resident and nonresident aliens. Resident aliens are taxed in the same manner as U.S. citizens on their worldwide income, and nonresident aliens (with certain narrowly defined exceptions) are taxed only on income which is derived from sources within the United States and/or income that is effectively connected with a U.S. trade or business.
Generally, an alien in H-1B status (hereafter referred to as “H-1B alien”) will be treated as a U.S. resident for federal income tax purposes if he or she meets the Substantial Presence Test. The test is applied on a calendar year-by-calendar year basis (January 1 – December 31). Under certain circumstances, an H-1B alien who fails to meet the Substantial Presence Test may be able to choose to be treated as a U.S. resident for the tax year. For more information on this choice, refer to the discussions on “First-Year Choice” and “Nonresident Spouse Treated as a Resident” in Publication 519, U.S. Tax Guide for Aliens.
A. The Substantial Presence Test
The Substantial Presence Test is a mechanical test based on counting a nonimmigrant alien’s days of physical presence in the United States under a 3-year “look-back” formula. For purposes of this 183-day test, any part of a day that a nonimmigrant alien is physically present in the United States is counted as a day of presence.
There are exceptions to this rule where certain days of physical presence in the United States do not count, including days a nonimmigrant is an “exempt individual.” However, the rules allowing an “exempt individual” to exclude U.S. days of presence do not apply to H-1B aliens.
Unless some other exception applies, an H-1B alien must count every day of physical presence in the United States for purposes of the Substantial Presence Test.
Generally, an H-1B alien who spends 122 days in the United States in each year of the 3-year period will meet the Substantial Presence Test for the current calendar year and be considered a U.S. resident. For details on the 3-year look-back formula refer to Substantial Presence Test.
The “closer connection” exception to the Substantial Presence Test:
An H-1B alien who otherwise meets the Substantial Presence Test can nevertheless be treated as a nonresident for U.S. income tax purposes by satisfying the “closer connection” exception to the Substantial Presence Test. See Conditions for a Closer Connection to a Foreign Country.
If an H-1B alien meets the Substantial Presence Test, he or she should be aware of the rules for determining the official starting and ending date of their period of residency in the United States. For details on these rules, refer to Residency Starting and Ending Dates.
The following are two common scenarios that illustrate the determination of an H1-B alien’s U.S. tax residency status:
1. The H1-B alien arrives in the United States on or before July 2 of Year 1 and remains in the United States through December 31 of Year one (1). The H1-B alien will have been present in the United States for at least 183 days, thus meeting the Substantial Presence Test for Year one (1). The H1-B alien’s residency starting date will be the date of his or her first arrival (Date Of Admittances) into the United States during Year one (1).
2. The H1-B alien arrives in the United States on July 3 of Year 1 and remains in the United States through December 31 of Year 1. The H-1B alien was not present in the United States in either of the two immediately preceding calendar years. The H1-B alien will not have been present in the United States for at least 183 days during the 3-year period that includes Year 1 and the two preceding calendar years. The H-1B alien would have only been present in the United States for 182 days, thus failing to meet the Substantial Presence Test for Year 1.
Although the H1-B alien is not a U.S. resident alien for Year 1, if he or she is present in the United States for at least 122 days during the succeeding calendar year (Year 2), the individual will qualify as a U.S. resident alien under the Substantial Presence Test in Year 2 and each succeeding calendar year that he or she is present in the United States for 122 days or more. The H1-B alien’s U.S. residency starting date in Year 2 will be the date of his or her first physical presence in the United States during Year 2.
For more fact scenarios illustrating the determination of an H-1B alien’s U.S. tax residency status, see Example 8 under Alien Residency Examples.
B. H1B Interaction with Tax Treaties
An H1-B alien who is a U.S. resident alien under the Substantial Presence Test and who is also a resident of his or her home country under that country’s internal tax laws, is known as a “dual resident taxpayer.”
United States income tax treaties contain “tie-breaker rules” that apply to determine a single country of residence for purposes of applying the income tax treaty and calculating income tax liability in situations where an individual would otherwise be treated as a resident of both the United States and the other country, resulting in potential double taxation.
H1-B aliens who claim treatment as residents of another country under the “tie-breaker rules” of a U.S. income tax treaty are treated as nonresident aliens for purposes of calculating their U.S. income tax liability and must file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). However, for purposes other than calculating their income tax liability (including for purposes of certain information reporting),
H-1B aliens are treated as resident aliens under the Internal Revenue Code. For example, in determining whether a foreign corporation is a controlled foreign corporation under Section 957 of the Internal Revenue Code, an H-1B alien is still considered a U.S. resident (i.e., a U.S. person).
H-1B aliens who are residents of the United States under the “tie-breaker rules” of a U.S. income tax treaty will be treated as U.S. residents for purposes of the tax treaty and will be subject to the “saving clause” in the treaty, resulting in the unavailability of certain benefits under the applicable tax treaty. However, a tax treaty provision may have an exception to the saving clause, which allows an H-1B alien to continue to claim certain treaty benefits even after becoming a U.S. resident alien for tax purposes.
II. Withholding Taxes on H1-B Visa Holders
A. Federal income taxes on wages
If an H1-B alien is not a U.S. resident alien under the rules described above under “Tax Residency Status,” he or she is a nonresident alien for U.S. tax purposes. The H-1B alien’s employer must withhold on the alien’s wages following the special rules in Chapter 9 of Publication 15, (Circular E), Employer’s Tax Guide. The H1-B visa holder should file a Form W-4, Employee’s Withholding Allowance Certificate, according to those same rules.
If the H1-B alien is a U.S. resident alien, the employer must withhold U.S. federal income tax on the employee’s wages in the same manner as one would withhold on wages paid to a U.S. citizen in the same situation (i.e., with the same marital status and number of exemptions). The H1-B alien should file a Form W-4.
If the H1-B alien elects to be treated as U.S. resident alien, his or her Form W-4 should have the following annotation written across the top: “Employee has elected or will elect to be treated as a U.S. resident alien under IRC 6013(g) or (h).”
Please refer to paragraph E, Withholding under Income Tax Treaties, below for more information regarding applicable treaty provisions effects on withholding. Please refer to Publication 15 for more information regarding employer withholding of U.S. federal incomes taxes on wages.
B. Social Security and Medicare taxes on wages
An H1-B alien who is paid wages in exchange for personal services performed within the United States is liable for U.S. Social Security and Medicare taxes on such wages, regardless of whether he or she is a U.S. resident alien or nonresident alien, unless he or she is engaged in a type of employment that under U.S. law is not subject to U.S. Social Security and Medicare taxes. Please refer to Publication 15 for more information.
However, if an H-1B alien is from a country with which the United States has entered into a Totalization Agreement, he or she may claim an exemption from U.S. Social Security taxes and Medicare taxes by securing a Certificate of Coverage from the social security agency of his or her home country and presenting such Certificate of Coverage to his or her employer in the United States, according to the procedures set forth in Revenue Procedures 80-56, 84-54, and Revenue Ruling 92-9. An alternate procedure is provided in these revenue procedures for an alien who is unable to secure a Certificate of Coverage from his or her home country. For more information, see Social Security/Medicare and Self-Employment Tax Liability of Foreign Students, Scholars, Teachers, Researchers, and Trainees.The United States does not have a a Totalization Agreement with the Philippines.
The wages paid to an H-1B alien in exchange for personal services performed within the United States are subject to U.S. federal unemployment tax (FUTA tax), regardless of whether the employee is a U.S. resident or nonresident alien, unless he or she is engaged in a type of employment which under U.S. law is not subject to FUTA tax. FUTA tax is paid by the employer and is not withheld from the H-1B alien’s wages. Please refer to Publication 15, (Circular E), Employer’s Tax Guide.
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