Transfer Students And Payroll Taxes: What International Students Should Know

International students in the United States face a complex tax system with intricate rules and regulations. The US tax system can be daunting for international students, who must navigate their tax obligations and any potential benefits. International students on F-1 visas are required to file tax returns, even if they do not work during their studies. International students are generally considered 'nonresident aliens' for US tax purposes, and their tax liability depends on their income source and visa status. While payroll taxes are levied on an employee's gross salary, international students may be exempt from certain taxes, such as Social Security and Medicare, if they meet specific criteria.

Are International Transfer Students Subject to Payroll Taxes?

F-1 visa holders

It is important to note that the rules and regulations regarding taxation for F-1 visa holders can be complex, and it is always recommended to consult official government sources, such as the IRS, or seek advice from a qualified tax professional for the most accurate and up-to-date information.

Tax treaties

International students on F-1 visas are considered nonresident aliens for tax purposes for the first five calendar years of their stay in the US. Nonresident aliens are generally taxed only on their US-sourced income. If the nonresident alien's country of residence has signed a tax treaty with the US, they may be partially or completely exempt from tax. The US has income tax treaties with 65 countries. These treaties can reduce or eliminate US tax on various types of income, including pensions, interest, dividends, royalties, and capital gains.

To claim tax treaty benefits, international students may need to fill out Form W8-BEN and give this form to their employer when they start their job. They may also need to fill out Form 8233, Exemption from Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual, along with a country-specific statement that details the terms of the treaty. These forms are available at the Tax Department of the university and must be submitted to the IRS for their review and approval.

Even if an income tax treaty allows an exemption from withholding, a Form W-4 should still be completed because the treaty exemption is never claimed on the Form W-4 and treaty provisions may have dollar limitations. Non-resident alien students who receive payments that are not completely exempt from income tax withholding under a tax treaty will receive a Form W-2, Wage and Tax Statement, from Payroll Services. Form W-2 is also provided to the IRS. Students from countries that have a tax treaty with the US that includes a wage article may claim exemption or a reduction of income tax withholding if the payment meets the requirements of the treaty and the student completes the required forms with the University's Tax Department. The taxes covered under a treaty exemption include Federal, Virginia, and/or D.C. tax. Maryland does not recognize tax treaties.

It is important to comply with tax requirements, as missing the deadline may lead to fines and penalties, and jeopardize future visa applications.

Social Security and Medicare taxes

International students in the United States on F-1 visas are required to file tax returns, even if they do not work while pursuing their education. International students who earn an income in the United States are generally subject to the same federal, state, and payroll tax requirements as U.S. citizens.

Foreign students in the United States are subject to Social Security and Medicare taxes, also known as FICA taxes, on wages paid to them for services performed within the United States. However, there are certain exemptions based on their nonimmigrant status and the type of work they perform.

Nonresident alien students, including those on F-1, J-1, M-1, or Q-1 nonimmigrant visas, are generally exempt from Social Security and Medicare taxes on wages earned from services performed within the United States, as long as these services are allowed by the United States Citizenship and Immigration Services (USCIS) and are in alignment with the purpose of their nonimmigrant status. This exemption typically applies to students who have been in the United States for less than five calendar years.

On-campus employment, such as working for a school, college, or university, may qualify for the "student FICA exemption" if the student is enrolled at least half-time, and the employment is related to their course of study. Off-campus employment or working for other employers generally does not qualify for this exemption.

Foreign students who have been in the United States for more than five calendar years may meet the "Substantial Presence Test" and become resident aliens for tax purposes. In such cases, they may become liable for Social Security and Medicare taxes unless they are still eligible for exemptions under specific criteria.

It is important to note that the United States has entered into Totalization Agreements with several countries to avoid double taxation of income with respect to Social Security taxes. These agreements must be considered when determining an individual's liability for Social Security and Medicare taxes.

Taxable income

The US tax system can be complex, especially for international students. It is important to note that international students on F-1 visas are considered non-residents for tax purposes and are generally exempt from paying Social Security and Medicare Taxes if they have been in the US for less than five years. However, they may still need to file tax returns.

International students in the US need to understand what constitutes taxable income. Taxable income can include salaries, specific gifts, and awards. It is important to note that even scholarships and fellowship grants can be considered taxable income. While scholarships and grants related to tuition and qualified expenses are typically tax-exempt, non-qualified scholarships, such as those for room and board, may be taxable. The tax rate on these scholarships is usually 30%, but it can be reduced under an income tax treaty between the US and the student's home country. Additionally, international students who earn income through internships or other employment may have their wages subject to payroll taxes.

It is important to understand the difference between federal and state taxes. When international students earn money in the US, they must pay federal income taxes to the Internal Revenue Service (IRS) and state income taxes to the department of revenue for the state in which they reside and earned the income. The percentage of taxes owed depends on the amount of income earned, and tax returns are typically due in April each year.

To file taxes, international students may need to obtain an Individual Taxpayer Identification Number (ITIN) by filling out Form W-7. They may also need to fill out Form 8843, which is required for those who did not earn taxable income but are still required to file a tax return. Additionally, if international students qualify for tax treaty benefits, they may need to fill out Form W8-BEN and Form 8233. It is recommended to consult with a tax professional or the university's resources for specific guidance on tax obligations.

Nonresident aliens

International students in the US on an F-1 visa are required to file tax returns, even if they do not work during their studies. However, they are only taxed on income earned in the US. Nonresident aliens are subject to special rules regarding the taxation of their income.

Some nonresident aliens may be eligible for exemptions from federal income tax withholding due to tax treaties. To claim this exemption, they must file Form 8233 with their employer or payroll office. If a nonresident alien refuses to file Form W-4 or submits an invalid form, federal income taxes will be withheld at the rates for single status with no withholding adjustments. Employers must report wages exempt under a tax treaty on Form 1042 and Form 1042-S. Any additional wages above the exempt amount are reported on Form W-2.

Frequently asked questions