Tax Liability for Foreign Recipients of US Income
Tax Status for IIE Foreign Participants – Nonresidents
Foreign students, teachers and trainees who came to the U.S. on J, F, M or Q visas are “Exempt Individuals” and are not subject to the Substantial Presence Test (183-day residency rule). Students on these visa types are considered nonresidents until they have been in the U.S. for more than five (5) tax years—it does not have to be consecutive years. Teachers and trainees are considered non-residents until they have been in the U.S. for more than two (2) of the last six (6) tax years.
The U.S. income tax law for nonresident aliens is not widely understood by U.S. employers and, as a result, nonresident taxpayers may owe additional tax when they file their U.S. nonresident tax return. The major reason for this is that employers withhold tax from nonresidents’ income in the same manner as U.S. citizens who are entitled to various tax benefits that are not available to nonresident taxpayers.
Some examples of tax benefits that are not available to nonresidents are the Standard Deduction, and Joint Filing with your spouse and claiming the dependent exemption for your children. Also, your employer may not be aware that you are receiving other income such as your IIE scholarship, in addition to income from them. So, when your income is combined from all sources on your tax return, your tax rate can increase (example from 10% to 12%) and you may end up owing taxes if your withholding was based on the 10% tax rate.
Your Tax Responsibility: How to Make Sure You Do Not Owe Additional Tax
When you start working, your employer will ask you to complete Form W-4 to determine the amount of taxes to be withheld from your paycheck.
IIE recommends that you check ‘Single’ in Step 1 (c) as your filing status and skip to Step 5 to sign the form even if you are married and have children. For U.S. tax purposes, you want to have single filing status.
Since it may be hard for you to pay off a significant amount of owed taxes in one payment at the time that you file, you can choose to increase your withholding tax by asking your employer to withhold about 5% of your gross income in additional tax withholding if you will earn more than $10,000 in addition to your IIE or university scholarship. Asking your employer to increase your tax withholding may ensure that you do not owe taxes when your tax return is filed.
In addition, many employers do not know that nonresident students are not subject to FICA (Social Security and Medicare) taxes on the income they earn during practical training and may incorrectly withhold 7.65% of your wages. So please look at your pay stub and make sure that FICA is not being withheld in error because it has become almost impossible to later claim the FICA refund from the IRS.