J-1 visa programs continue to be a critical element of mobility programs for multinational employers to be able to train their foreign talent and develop an international talent pipeline for their overseas offices. Recently, this program has been impacted by the Trump Administration’s “Buy American, Hire American” Executive Order in 2017. The consequence has been an increase in denials and evidence requests of L-1 visa applications.
Nonetheless, J-1 visas are an effective way to allow overseas employees to work effectively in the United States, and they continue to be an important employee development tool for multinationals. Companies need to be aware that these types of visas do not come without their tax consequences, both to the individuals and to the companies that employee these individuals. To have a successful J-1 visa mobility program, it is paramount for companies to instill the proper payroll procedures and provide the needed tax support for the employees.
Tax implications for companies
While companies must fulfill many eligibility requirements to participate in the J-1 visa program, we will focus on discussing the tax implications companies need to consider. The main issues companies face with their J-1 visa program stem from improper payroll set-up. The following is a brief summary of the payroll requirements for J-1 visa holders.
- Employment taxes: IRC Section 3121(b)(19) states that individuals that are in the United States temporarily as a nonimmigrant with J status are exempt from employment taxes, including Social Security, Medicare and federal unemployment taxes. It should be noted that to maintain the exemption, the individual needs to maintain his or her nonresident alien status, the services performed are in connection with the purpose for which the exchange visitor entered the country, and the employment is authorized under immigration rules.
- State unemployment taxes: State unemployment tax requirements for J-1 visa holders must be reviewed and met.
- Federal and state income tax: A common misconception for J-1 visa holders is that they are exempt from income tax. While there is preferential treatment for J-1 visa holders from a residency determination perspective, companies are still required to withhold and remit federal and state income tax on income that is earned while performing services in the United States.
- Form W-4: The withholding rules are different for nonresident aliens compared to normal U.S. employees or resident aliens. Their Forms W-4 need to reflect the proper exemptions to ensure that proper withholding has been considered. Generally, a nonresident alien is only eligible for one personal exemption and must indicate “nonresident alien” on line six of Form W-4.
Improper payroll set-up will lead companies exposed to unnecessary employment tax withholding and potential interest and penalties for incorrect income tax withholding. Improper employment tax withholdings will cost the company real dollars. Since the J-1 visa holders are not subject to employment taxes, companies will save the 7.65% contribution requirement for the employer portion of Social Security and Medicare.
Tax implications for individuals
The J-1 visa program has many individual income tax advantages, but they are not without complications. J-1 visa holders need to be aware of the U.S. rules for residency determination and with their own payroll requirements.
- Preferential residency determination – J visa holders are able to exclude their days of presence as a J-1 visa holder from the substantial presence test that is used to determine U.S. tax residency. The exclusion of days does not mean an exemption from U.S. tax but it does allow the individual to be taxed in the country only on their U.S.-sourced income.
- Employment taxes – As mentioned earlier, individuals that are in the United States on a J-1 visa are not subject to employment taxes, saving 7.65% of taxes on all wages earned in the domestically. The individual is not required to complete any additional filings to claim the exemption as it is the responsibility of the company. However, if the company incorrectly withholds employment taxes from the individual, the company should be notified prior to year-end to reimburse the individual for the employment taxes. If the company is not willing to make the correction, the individual can then file Form 843 to request a refund of the employment taxes from the IRS.
J-1 visa programs are a valuable resource for any mobility program but they are not without their complications. Employers and employees both play a valuable role in making sure that the program has been administered properly from a payroll perspective. With proper oversight, J-1 visa programs can reduce total costs of mobility programs by saving the company and the individuals the 7.65% employment tax, be an effective way to fill a temporary talent gap in the United States, and to build and develop an international talent pipeline.
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