How to determine FICA tax exemption for your nonresident employees
The tax withholding of nonresident alien employees has become a big issue for payroll offices in organizations across the US.
One issue that has become particularly tricky for payroll staff is the proper determination of FICA tax exemption.
Where an organization employs multiple nonresidents – each with differing personal circumstances and visa requirements – it can be challenging to properly separate the nonresidents that should be paying FICA from those that should not.
In this guide, we are going to take a closer look at the circumstances in which a nonresident is exempt from FICA deductions and share some tips for effective management of nonresident payroll.
What is FICA tax?
FICA stands for Federal Insurance Contributions Act. It is the means by which Medicare and social security are funded in the US.
Children who have lost their working parents, widows and widowers, and disabled workers who qualify for benefits can avail of the benefits that FICA provides.
Contributions to FICA are deducted from an employee’s income and both the employee and the employer must make FICA contributions.
Many workers in the US will have FICA deducted from their income each time they receive their paycheck.
When should FICA be withheld from a nonresident employee?
Many nonresidents in the US may be exempt from making FICA contributions and therefore it is not necessary to withhold the tax.
However the exemption does not apply to the following:
- Nonresidents working in an employment role that has not been approved by United States Citizenship and Immigration Services (USCIS)
- Nonresidents working in an employment role which isn’t connected closely to the purpose that their visa was issued
- Spouses and children under a F-2, J-2, M-2, or Q-3 nonimmigrant status
- Nonresidents in the US on F-1, J-1, M-1, or Q-1/Q-2 visas who are changed to an immigration status which isn’t exempt or change to a special protected status
- Nonresidents in the US on F-1, J-1, M-1, or Q-1/Q-2 visas who have become resident aliens in the US
- If the exemption period has passed 2 years for J and Q visas
- If the exemption period has passed 5 years for F and M students
Is FICA withholding mandatory?
FICA contributions are mandatory for nonresident aliens unless they are exempt from paying FICA tax.
Who is exempt from paying FICA tax?
Many nonresidents in the US are exempt from paying FICA taxes.
For example, international students, scholars, professors, teachers, trainees, researchers, physicians, au pairs, and summer camp workers who are present in the United States in F, J, or M-1 visas, or Q-1/Q-2 nonimmigrant status will usually be exempt from paying FICA taxes on their wages (as long as it is allowed by USCIS).
This is applicable to you for the first five years that you are in the US (unless you remain a student in which case you may still be exempt).
However, this FICA exemption does not apply to F, J, or M-1, visa holders or Q-1/Q-2 nonimmigrants who move to immigration status which is not exempt or to its own protected status.
Similarly, you are no longer exempt if you switch from these visas or nonimmigrants to resident alien status.
International students
If a nonresident is a full-time student at a US educational institution, the exemption period will cover the first 5 calendar years that they spent in the US.
If they are not a full-time student, they will be exempt for the first two years.
International students will be considered Resident Aliens for Tax Purposes in the US when the exemption period ends. This also means that they will be subject to the withholding of FICA tax.
However, if they remain as students, they may still be exempt from making FICA contributions. This is only the case if they become resident students who perform services for an educational institution for the benefit of the institution and they perform the services while enrolled as a student.
During any period where the student is in ‘practical training’ allowed by USCIS, the five-year exemption for eligible full-time students on an F-1, J-1 or M-1 visa still applies.
This is only the case if they are still classified as a Nonresident Alien for Tax Purposes.
There are also some employment types that are exempt from FICA contributions, for example:
- Employment working as a professor, researcher or teacher – within the 2 years exemption period
- Employment working as a physician, summer camp worker or au pair – within the 2-year exemption period
- Practical Training student employment working either on or off-campus
- On-campus student employment working for up to 20 hours a week during term and 40 hours during summer vacations
- Any off-campus student employment that is allowed by USCIS
What are the 2024 FICA tax rates?
The FICA tax rate in 2024 is 7.65%.
The social security tax is 6.2% on the earnings up to $168,600.
Medicare tax is 1.45%.
Both the employee and the employer must make FICA contributions and the combined rate is 15.3%.
How can Sprintax Calculus help my organization?
Sprintax Calculus (formerly known as Sprintax TDS) is an ideal solution for organizations that employ nonresident employees.
Sprintax Calculus is a software that has been developed specifically to ensure that nonresident students, scholars and professionals are taxed correctly on income earned in the US, so that the appropriate amount of tax is withheld from their earnings and reported to the IRS.
With Sprintax Calculus you can easily determine whether or not your nonresident employees should be exempt from FICA.
Our user-friendly dashboard enables your payroll staff to manage the tax profiles of their nonresident employees all in one place.
Our software can also help you to determine if your nonresident employees are entitled to any tax treaties or deductions!
Why Sprintax Calculus?
- Sprintax Calculus is a cloud-based and secure service
- Automated nonresident tax solution – Instant generation of tax forms (such as 1042-S, W-4, W8-Ben and more) in seconds
- Determine Residency and Tax Treaty Eligibility – Calculate tax withholding rates
- User-friendly dashboards – Easy to use system with advanced reporting tools
- Quickly determine whether your employees are FICA exempt
Book your FREE demonstration today
If you would like to learn more about how Sprintax Calculus can support you with your nonresident tax withholding, why not register for a FREE Sprintax Calculus demo here.
