By Martin L. McCann, Esq.
So, its January 2, 2017 and you’ve just hired a bright, young student. We’ll call him Jay. A citizen of India, Jay has been in the U.S. since September 1, 2012 on an F-1 Visa. He just graduated from MIT with a degree in engineering, and has applied to your company for 12 months of Optional Practical Training (“OPT”) in his field of study. Two weeks after his start date, your accounting department sends its bi-weekly payroll information to its payroll service, and receives the following inquiry: “Are the wages paid to Jay subject to Social Security/Medicare taxes?” The answer depends on Jay’s classification for U.S. tax purposes. If he is considered a “resident alien,” then his wages will be subject to Federal employment taxes. If he is a “nonresident alien,” then his wages will be exempt from the taxes.
Wages paid to a foreign person are subject to Social Security/Medicare taxes only if the person is classified as “resident alien” for U.S. tax purposes at the time of payment. A resident alien is a lawful permanent U.S. resident (a “green card holder”) or someone who has maintained a “substantial presence” in the U.S. Under the so-called Substantial Presence Test (the “SPT”), a foreign person will be treated as a resident alien if he has been physically present in the U.S. for at least (i) 31 days in the current calendar year, and (ii) 183 days during the 3-year period that includes the current calendar year and two preceding calendar years. However, not all days of U.S. presence are taken into account.
A foreign student on an “F,” “J,” “M,” or “Q” visa does not count any day during which he is in the U.S. as an “exempt individual” for SPT testing purposes. Generally, a student visa holder who substantially complies with his visa requirements is an exempt individual during the first 5 calendar years of his stay here in the U.S. During that period, he will be classified as a nonresident alien for tax purposes, and the wages he earns under that classification will be exempt from Social Security/Medicare taxes.
A foreign student cannot exclude days of presence from the SPT if he has been exempt “any part of more than five calendar years.”¹ After that, he will lose his exempt status unless he can demonstrate to the satisfaction of the Internal Revenue Service that he does not intend to reside permanently in the United States. To do so, he must prepare and file with the IRS Federal Form 8843 (Statement for Exempt Individuals and Individuals with a Medical Condition) and provide sufficient facts that will justify continued treatment as an exempt individual. A student visa holder who is no longer exempt and who satisfies the SPT will be considered a resident alien and his wages will be subject to Social Security/Medicare taxes.
And what about Jay? He’s been in the U.S. since September 1, 2012 on an F-1 visa. Assume that he in substantial compliance with his visa and does not travel abroad in 2017. As of January 1, 2017, he will have been an exempt individual for more than 5 calendar years. Unless he’s filed Form 8843 with the IRS and has been granted continued status as an exempt individual, Jay will be treated as a nonresident alien until July 1, 2017. On that date, he will have been physically present in the U.S. for 183 days during the 3-year period 2015-17, and his classification will change from nonresident alien resident alien. As a result, the wages he receives for services performed prior to July 1, 2017 will be exempt from Social Security/Medicare taxes. Wages he receives for services performed on or after July 1, 2017 will be subject to the employment taxes.
¹ Treasury Regulation Section 301.7701(b)-3(b)(7)(iii).