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Tax Benefits Vary Among Types of U.S. Visas

May 11, 2022, 1:06 AM

While many types of U.S. visas related to temporary employment do not come with tax benefits, others, such as those for students, teachers, and researchers, come with FICA tax exemptions, a tax practitioner said May 10.

The general rule is that resident and nonresident foreign workers working in the U.S. are subject to the same tax rules as U.S. citizens, but other exemptions can apply even before the visa status is considered, Jonathan Stone, a managing director at KPMG LLP, said.

These exemptions include the individual’s country of origin, income tax treaties or totalization agreements, and the length of stay in the U.S., Stone said.

Under income tax treaties, if an individual is in the U.S. for up to 183 days in a year, their income is only subject to tax in the country of residence and not the U.S.

“If somebody is going to be physically in the U.S. for more than 183 days, it’s a completely moot exercise to look at anything else,” Stone said.

For a totalization agreement to apply, which allows foreign workers to continue to be covered by the social insurance system in their home country, the individual must receive a certificate of coverage from their home country’s agency, Stone said.

Complications related to treaties include the 13 states that do not recognize U.S. income tax treaties for state taxes and federal and state unemployment taxes, Stone said.

Generally, all employees working in the U.S. are subject to unemployment taxes. “No exemptions,” Stone said.

Additionally, individuals must apply for a Social Security number or Individual Taxpayer Identification Number after receiving a visa, and the employer may be required to assist the individual in doing so, Stone said.

Visas Without Tax Benefits

The general rule for visas is that if the IRS has not issued guidance on a visa type, then it is subject to taxation, Stone said. Visas that do provide tax exemptions provide exemption from Social Security and Medicare taxes and not income tax, he said.

Temporary employment visas, which include Types H, L, O, P, and Q, require the employer to file a petition with U.S. Citizenship and Immigration Services and then apply for a visa, Stone said.

Type J visas, for exchange visitors; Type I, for members of the media traveling to the U.S. for an organization outside the U.S.; Type E, for traders and investors who qualify to conduct treaty-based trade or investment in the U.S.; and Type TN and TD, for workers from Canada or Mexico working in the U.S., also do not confer tax benefits, Stone said.

Visas With Tax Benefits

Types F and J, as well as M and Q, are among the most common types of visas with tax benefits and cover foreign students, scholars, professors, teachers, trainees, researchers, and other foreign workers, Stone said.

These types receive the exemption from Social Security and Medicare taxes as long as the holder is performing employment covered by the exemption and that they were admitted to the U.S. to perform, Stone said.

Covered employment includes work of up to 20 hours per week for a student on their university campus, or 40 hours during summer vacation, Stone said. Other types of covered employment includes off-campus work for students if it is allowed by USCIS, practical training employment of students on or off campus, or on-campus work as a professor, teacher, or researcher, he said.

Additionally, tax benefits are lost if an individual is in the U.S. for more than five years from the date of issuance, and spouses and children are also not covered by the exemptions, Stone said.

Other types of visas that receive tax benefits include Type D, for crew of ships or aircraft, with the exemption dependent on the nationality of the employer and vessel, and Type G, for diplomats or employees of international organizations, Stone said.

Some types of H visas also receive tax benefits, including H-2 visas for residents of the Philippines who work in Guam, and H-2A visas for temporary agricultural labor, Stone said.

Payroll Considerations

Payroll must consider whether a visa holder will receive a Social Security number and accordingly whether a Form W-2 can be issued and the employee included in state unemployment tax reports, Stone said.

“Make sure that they get their Social Security number. You can’t do anything without that Social Security number,” Stone said.

The employer also should consider whether employees with visas must be set up differently in HR and payroll systems and whether new or changed earnings codes are needed, Stone said.

Finally, tracking visa statuses is “where most companies I work with fall flat,” often using spreadsheets, Stone said.

The impact of an incorrect visa status or incorrect application of a tax treaty or totalization agreement can include amended returns and Forms W-2c if necessary, Stone said.

If requesting a refund of Social Security or Medicare taxes, the IRS often asks the employer if the employee has signed a consent form for the taxes to be refunded to them, Stone said. While there is not a specific form provided , Rev. Proc. 2017-28 provides what exactly needs to be on the consent form, Stone said.

Additional Medicare Tax cannot be refunded to employees and instead must be refunded through their tax return, Stone said.

Stone was speaking at the American Payroll Association’s 40th Payroll Congress, in Las Vegas, Nevada.

To contact the reporter on this story: Jamie Rathjen in Las Vegas, Nev. at jrathjen@bloombergindustry.com
To contact the editor on this story: William Dunn at wdunn@bloombergindustry.com