Leta Collie, CPA
Manager, Technical Tax Services
For many foreign students, working in the United States can be an important part of their learning experience. With a little guidance, you can easily integrate these students into your workforce and payroll. A previous article referenced the various types of foreign student and cultural exchange visitor visas. This article will explain common tax issues encountered when hiring foreign students, although it is not intended to be relied upon as legal advice.
All foreign employees must be authorized to work by either federal regulation or by US Citizenship and Immigration Services (USCIS). For F-1 and M-1 students, the Designated School Official at the student’s university will help the student secure work authorization. For J-1 visa holders, work authorization is allowed by federal regulation. To comply, the sponsoring employer of a J-1 visitor must issue the J-1 visitor a Form DS-2019 Certificate of Eligibility before entry into the US and employment. To learn more about becoming a J-1 sponsoring employer, please visit the US Department of State’s website.
After work authorization is secured, the F-1, M-1, J-1 or Q-1 employee should obtain a Social Security number in order for the employer to comply with wage reporting requirements. To apply for an SSN, the employee must complete an application for Social Security card. Additionally, the employee must present documents evidencing work-authorized immigration status, age, and identity at a local Social Security office, as well as the Form I-20 or Form DS-2019.
Nonresident Alien versus Resident Alien and Tax Issues
The tax issues an employer faces when hiring a foreign student or exchange visitor (“trainee”) as an employee are usually determined by whether the foreign person is a nonresident or resident alien.
Nonresident alien employees are not subject to FICA and FUTA taxes, but are subject to federal and state income tax withholding, and SUTA, depending on the state. Resident aliens are generally taxed the same as US citizens, so a resident alien is subject to FICA withholding, FUTA and SUTA tax, and federal and state income tax withholding.
How can you know if a student is a nonresident alien or a resident alien? This information is not shown on the student’s visa, and the best way to find out is simply to ask. There are some differences in how long a foreign person is considered a nonresident alien, depending on whether the foreign person is a “student” or “trainee.” A student can have an F-1, J-1, M-1 or Q-1 visa, and is a nonresident alien for any part of the first five calendar years they are studying in the US, so most university student employees will fall into this category. A trainee will have either a J-1 or Q-1 visa, and is a nonresident alien for any part of three of the past six calendar years.
After the F, J, M or Q visa-holder student has been in the United States for more than any part of five calendar years if a student or three of the past six as a trainee, the visa-holder may meet the substantial presence test and be a resident alien for tax purposes.
Spouses and Dependents of Students and Exchange Visitors May Have Different Withholding Obligations
Note that nonresident alien spouses and dependents of students do not receive the same exemption from FICA and FUTA and taxes that nonresident alien students and exchange visitors receive. The spouse or dependent of an F-1, J-1, M-1 or Q-1 visa holder will have an F-2, J-2, M-2 or Q-2 visa, respectively. These individuals must receive USCIS work authorization, and FICA and FUTA must be withheld, even if the employee is a nonresident alien.