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Employers Must Withhold FICA Taxes for Aliens who Change Visa Status to H-1B

Issue Title:

Employers Must Withhold FICA Taxes for Aliens who Change Visa Status to H-1B

Description:

Under IRC Section 3121(b)(19) payees in a F-1, J-1, M-1, Q-1 or Q-2 non-immigrant visa status are not subject to FICA. The FICA tax exemption becomes inapplicable when a payee changes to H-1B non-immigrant status. Typically, the H-1B change of status becomes effective on October 1st of each year. An employer must start withholding FICA taxes on the effective date of the H-1B status change.

IRC Section and Treasury Regulation:

  • IRC Section 3121(b)(19)
  • Treas. Reg. 31.3121(b)(19)-1

Resources:

Analysis:

The H-1B visa is a non-immigrant visa classification issued to an alien individual who will be employed temporarily in the United States in a specialty occupation, including architecture, engineering, medicine and health, education, accounting, law, theology, and the arts. There are no FICA tax exclusions  for H-1B employees working for a United States employer for services performed in the United States. After determining whether the H-1B employee is a non-resident alien or a resident alien, federal income tax is withheld accordingly.

Employers are required to include applicable wages paid to H-1B employees on Form 941, Employer’s Quarterly Federal Tax Return, Form W-2, Wage and Tax Statement, and Form 940, Annual Federal Unemployment Tax Return.

For FICA (social security and Medicare) and FUTA taxes, an H-1B employee is treated the same as a U.S. citizen when providing services to a U.S. employer within the United States. The exemption allowed by IRC section 3121(b)(19) does not apply to H-1B non-immigrant status.

For income tax withholding purposes the tax residency of the alien individual must be determined. For tax residency, an individual with an H-1B visa is either a resident alien or a non-resident alien. Tax residency of alien individuals is determined using the lawful permanent residence test (“green card”) or the substantial presence test (I.R.C. section 7701(b)(1)). An alien who does not qualify under either test is generally treated as a non-resident alien for federal income, employment, and excise tax purposes (but not estate and gift tax purposes). How an alien individual determines their tax residency status under these tests is outlined in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities and Publication 519, U.S. Tax Guide for Aliens.

A resident alien for income tax purposes is treated the same as a U.S. citizen and can complete the Form W-4 just like a U.S. citizen. (IRC Section 7701(a)(30)).

A non-resident alien is subject to special rules for income tax withholding. A non-resident alien must complete a Form W-4, Employee's Withholding Allowance Certificate, using Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens unless there is  a treaty exemption that applies to them. A non-resident alien will file a Form 8233, Exemption from Withholding on Compensation for Independent (& Certain Dependent) Personal Service of a Nonresident Alien Individual, with the employer to claim a treaty exemption.

Note: Income tax treaties provide some exemptions from U.S. federal income taxes, but do not generally provide exemptions for FICA/FUTA taxes. 

Non-resident aliens cannot claim the standard deduction. The benefits of the standard deduction are included in the existing wage withholding tables published in Publication 15, Circular E, Employer’s Tax Guide. Employers are instructed to add an additional amount to a non-resident alien’s wages. The employer determines the amount to be withheld by increasing the amount of wages paid by the additional amount (found in section 9 of Publication 15) before application of the income tax withholding tables. The additional amount is added to wages solely for calculating income tax withholding on the wages of the nonresident alien employee. The additional amount should not be included in any box on the employee's Form W-2 and does not increase the income tax liability of the employee. Also, the additional amount is  not considered in determining the social security, Medicare, or FUTA tax liability of the employer or the employee.

Wages paid to nonresident aliens are subject to income tax withholding, except for those wages that are exempt from U.S. income tax under an income tax treaty. The employer is required to file a Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, with the Service and provide to the individual and the Service a Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, for those wages exempt from withholding.

Issue Indicators/Audit Tips:

  • Review Forms W-2 for no social security and Medicare wages
  • Request evidence and documentation that supports the employee FICA exception
  • Request a listing of alien employees
  • Review visas?

Industry information:

International Employment Tax