American companies are preparing to hire and onboard summer interns. The US internship programs provide American employers with the chance to attract top talent, while students gain hands-on experience, strengthen professional skills, and build a professional network.
International students in the US can gain work experience through summer internship programs, such as the Optional Practical Training (OPT) program administered by USCIS. Optional Practical Training (OPT) is temporary employment that is directly related to an F-1 student’s major area of study. This program provides up to 12 months of work authorization for students entering the US under the F1 student visa.
Employers frequently inquire about federal income and social security (FICA) tax
KPMG in a report titled, Mobility Matters – Understanding US tax obligations of international student interns – discusses the application of taxation.
Where to start….?
Under U.S. income tax
Residents are taxed on worldwide income and are entitled to the same deductions and credits available to U.S. Citizens. Nonresidents are taxed on income received from U.S. sources only, such as income earned from the performance of personal services in the United States.
So, the first step in determining an international student’s U.S. federal income tax obligations, and his or her employer’s corresponding withholding and reporting responsibilities, is to determine the student’s tax residency status.
U.S. Tax Residency
An international student’s residency status depends on his or her immigration classification and the number of days the student is present in the United States over a period of three calendar years.
As a foreign citizen or national, a student present in the United States on an F visa is treated as a nonresident. A nonresident becomes a tax resident by either becoming a lawful permanent resident (i.e., obtaining a green card), or having “substantial presence” in the United States.
A foreign citizen who is present in the United States for 31 days during the calendar year and whose days of U.S. presence are 183 days or more will be a U.S resident.
The 183 days are figured as the sum of (1) the days present during the current calendar year, plus (2) one-third of the days present during the preceding calendar year, and (3) one-sixth of the days present during the second preceding calendar year.
An average of 122 days of U.S. presence per year over three years will trigger residency status.
U.S. lawmakers also recognized that there are situations in which taxation of a person as a U.S. resident would be inappropriate because of the reason for the individual’s U.S. stay.
Thus, an exception to the substantial presence test is available to an individual who comes to the United States to learn. Under this exception, days present as an “exempt individual” (a term that includes students) do not count as days of U.S. presence when applying the substantial presence test.
Therefore, a student in the United States on an F visa and who substantially complies with the requirements of the visa will not count the days he or she is physically present in the United States in establishing whether the 183-day threshold has been crossed for determining U.S. tax residency status.
The exemption does not apply indefinitely. Generally, a student cannot be treated as an exempt individual if he or she has had that status for any part of more than five calendar years.
But is an F visa holder who has been present in the United States for more than five years automatically deemed a U.S. tax resident? Not necessarily. If the student has substantially complied with the requirements of the F visa and can show he or she has no intention to reside permanently in the United States, the student may continue to be treated as an exempt individual.
In that case, the student’s days of U.S. presence would not count when applying the substantial presence test, and he or she would continue to be a nonresident for federal tax purposes.
A student participating in the USCIS OPT program for F-1 visa holders is most likely in compliance with F visa requirements.
Whether a student intends to remain in the United States permanently is determined by the facts and circumstances of his or her situation. Factors to be considered include whether the student has taken steps to become a lawful permanent resident of the United States, and whether the student has maintained a closer connection to a foreign country than the United States.
A student who is eligible to exclude days of U.S. presence must file a fully completed Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, with the Internal Revenue Service (IRS).
U.S. Federal Income Taxation
A student may be an exempt individual for the purpose of determining tax residency, but this does not mean he or she is exempt from U.S. income tax. For a nonresident, U.S.-source income, including compensation earned by a student working in the United States for a U.S. employer is subject to U.S. federal income tax at regular graduated tax rates.
Both the employer and the international student would be well advised to confirm the student’s compliance with the F visa requirements to help ensure eligibility for tax relief. Employers should confirm the correct processes are in place to document and comply with their U.S. tax withholding and reporting obligations.
