FICA Exceptions for J-1 Exchange Visitors

by Paula N. Singer, Esq. 

Under the U.S. tax rules all employees performing services in the United States are subject to U.S. social security and Medicare taxes unless an exception applies. There are three FICA exceptions that may apply to J-1 Exchange Visitors:

1. The NRA FICA Exception
2. The Student FICA Exception for J-1 Students
3. FICA Exemption under a Social Security Agreement

1. The NRA FICA Exception
Section 3121(b)(19) of the Internal Revenue Code (the “Code”) provides an exception from FICA tax for services performed by nonresident aliens temporarily in the United States in principal F, J, M, or Q status for employment performed to carry out the purpose specified by the individual’s immigration status. This exception is called the NRA FICA Exception.

J-1 Exchange Visitors qualify for the NRA FICA Exception if they meet all of the following criteria:

• They are nonresident aliens (NRAs) under the 183-Day Substantial Presence Test. J-1 Students are typically NRAs for their first 5 calendar years as a foreign student. They become resident aliens (RAs) in their 6th calendar year if they have at least 183 U.S. days. Nonstudents are typically NRAs for their first 2 calendar years as a J-1 Nonstudent. They become resident aliens in their 3rd calendar year if they have at least 183 U.S. days. J-1 Exchange Visitors may become RAs sooner if they have been in the United States in “F”, “J”, “M,” or “Q” status during a prior visit.
• The work is authorized under the immigration rules. Authorized work is determined by the terms of the J-1 Exchange Visitor’s Program. J-1 Exchange Visitors engaged in unauthorized employment are not eligible for the NRA FICA Exception. (Unauthorized work may also jeopardize their immigration status.)
• The work is consistent with their purpose for being in the United States. Generally all authorized employment meets this condition. However, the IRS disallows the NRA FICA Exception for individuals in derivative status who are working even if the work is authorized, for example, J-2 spouses working with an EAD. (A J-2 spouse’s purpose for being in the United States is to accompany their spouse.)

J-1 Students who fail to meet the conditions for the NRA FICA Exception because they become RAs are still potentially eligible for the Student FICA Exception for on-campus employment.

This NRA FICA Exception is more liberal for NRA students than the Student FICA Exception discussed next because it applies to on-campus employment during official breaks, authorized off-campus employment, and academic training including with a corporation.

2. The Student FICA Exception
Section 3121(b)(10) of the Code provides an exception from FICA tax for students who are employed by a school, college, or university or a Section 509(a)(3) affiliate. The exception applies regardless of the type of institution - private or public, tax-exempt or for-profit.

The exception does not require that students be a U.S. citizen in order to qualify for the FICA tax exemption. Therefore, J-1 Students, whether their residency status is resident or nonresident, are potentially eligible for the Student FICA Exception under the same rules that apply to students who are citizens.

To qualify for the Student FICA Exception, students must be enrolled and attending classes at least half-time at the institution. In order for their employment to qualify for the exception from FICA tax, it must be incident to and for the purpose of pursuing a course of study at the employer institution. Therefore, full-time employment does not qualify for the Student FICA Exception. Generally, student employment during school vacations when students may work full-time is not covered by the Student FICA Exception.  The exception applies only to work performed for the institution at which the student is enrolled.

3. FICA Exemption under a Social Security Agreement
The United States has Social Security Agreements (commonly called “Totalization Agreements”) with over 20 countries. These agreements eliminate dual coverage and dual contributions (taxes) for the same compensation. There are two situations in which an employee may be covered under another country’s social security system:

• The employee is sent to work temporarily for an organization by a foreign employer that is an affiliate of that organization and is covered under the detached worker rule of an applicable Totalization Agreement.
• The employee is making voluntary social security payments into the foreign country’s social security system on the wages they are earning in the U.S.

Generally, a detached worker is an employee who has come to the United States to work temporarily for the same employer for a period not expected to exceed 5 years.

In both situations, coverage by another country under a Totalization Agreement must be supported by a Certificate of Coverage that the Social Security agency of the other country has issued as evidence that the employee is covered by (and paying into) that country’s Social Security system.

Paula Singer, Esq., Co-founder and Chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer LLP, Newton, MA, has over 25 years of experience providing advice and compliance services to individuals and their employers, and payers on cross-border matters.

Watch for Volume 5, Number 3 for “Tax Treaty Benefits for Professors and Teachers.”

Q: I was engaged in academic training at a corporation and my employer withheld FICA. How do I get a refund?

A: The Student FICA Exception does not apply to off-campus employment. In order to be exempt from FICA under the NRA FICA Exception during academic training, you must have been a nonresident alien (NRA) under the 183-Day Substantial Presence Test. If you were an NRA, you should contact your employer with information about this FICA exception (it is described in IRS Publication 15, Employer’s Tax Guide) as well as information supporting your NRA residency status and request a refund of the FICA taxes withheld.

If your employer refuses to provide a refund, you may submit a Form 843, following the instructions in IRS Publication 519 under “Social Security, Refund of Taxes Withheld in Error.” It is helpful to include a completed Form 8316 with your request. Since the IRS will follow up with your employer requesting that they adjust their employer FICA taxes on your compensation and issue a Form W-2C, it would make sense for them to deal with your request for a refund from them rather than from the IRS.

Paula N. Singer, Esq.’s Tax Guide "International Aspects of Individual U.S. Tax Returns" Receives Honor

Paula Singer’s tax guide, International Aspects of Individual U.S. Tax Returns, won a bronze medal in the Accounting/Tax category of the first annual Axiom Business Book Awards sponsored by the Jenkins Group.

International Aspects of Individual U.S. Tax Returns is 200 page tax guidebook that explains the various United States tax rules, forms, and procedures that apply to individual taxpayers who have tax returns with international aspects.  These individuals include United States citizens and residents with income-producing assets abroad and those living and working or retired abroad, foreign nationals with United States source income and those living and working or studying in the United States, and individuals relocating to or from U.S. possessions.

Click here to learn more about the award winning tax guide International Aspects of Individual U.S. Tax Returns.

Windstar and COKALA Announce 2008 Nonresident Alien Payment Trainings

Windstar and tax advisory services firm COKALA recently announced the dates and locations for their 2008 two-day nonresident alien payment classes.

Below are the training locations and dates:

• Washington, DC - May 6-7, 2008
• Chicago, IL - July 22-23, 2008
• Boston, MA - September 16-17, 2008
• Orange County, CA - October 7-8, 2008

The training program has separate tracks geared specifically for educational organizations and corporations and will educate attendees on tax regulations governing payments to non-U.S. companies and individuals, and the immigration laws that may prohibit payments to those foreign visitors or vendors.  Windstar experts Paula N. Singer, Esq., Linda Dodd-Major, and Terri Crowl are serving as session presenters for the program.

To register or learn more, visit www.cokala.com.

Save the Date: Summer Nonresident Alien Tax Training Workshop August 5 – 8, 2008

Windstar’s summer nonresident alien tax training is August 5th – 8th at the Hilton Boston/Dedham in Dedham, Massachusetts.  Windstar’s nonresident alien and immigration experts will provide you with substantive training on what you need to know to stay compliant with nonresident alien tax and immigration rules. In addition to learning how to prepare yourself and stay ahead of the IRS’ increased attention to nonresident alien tax compliance, you will also learn how to use International Tax Navigator to its fullest.

The registration cost is $1,350 for the first attendee from an institution and $1,200 for each additional attendee if registered by June 30th. After June 30th the registration cost is $1,450 for the first attendee from an institution and $1,300 for each additional attendee. Attend the “Introduction to Tax Navigator” session on August 5th for an additional $300 fee.

A complete agenda and registration information will be available in early May. Visit www.windstar.com for the latest in nonresident alien tax training news.

Recently Published Articles by Paula N. Singer, Esq.

Paula N. Singer, Esq. had two articles published in the February, 2008 edition of Corporate Business Taxation Monthly:

• “The U.S. Tax Obligations of Foreign Nationals: Debunking the Myths”
• “The 10 Most Common Mistakes Made by Organizations Paying Foreign Nationals”

You can view a listing of other articles written by Paula Singer by visiting http://www.windstar.com/public/articles.html.

Windstar Will Dock at These Upcoming Trade Shows

American Payroll Association (APA) Annual Congress
Austin Convention Center
Austin, TX
May 13 – 17, 2008

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NAFSA Annual Conference and Expo
Washington Convention Center
Washington, DC
May 25 – 30, 2008

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New England Payroll Conference
Radisson Hotel
Nashua, NH
June 4 – 6, 2008

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Check back in future issues of Crow’s Nest or visit http://www.windstar.com/public/events.html for the latest in trade show information.

©Copyright 2008 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication.  While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.

Since 1995 educational institutions, hospitals, research institutions, and corporations have relied on Windstar Technologies, Inc. to deliver the expertise to comply with the U.S. tax residency rules, tax rates, and special tax exemption rules under the law and U.S. treaties.  When government agencies require information about foreign nationals in the workplace, Windstar provides straightforward analysis and reporting.  Comprehensive software for analysis and reporting, expert knowledge, and unparalleled customer service combine to make Windstar the first choice for nonresident alien tax compliance.

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