1. Social Security Taxes (FICA/Medicare)

All H visa holders are subject to social security taxes per Internal Revenue Code § 3121. The only visa types exempted from social security taxes are nonresident aliens temporarily in the US under an F, J, M, or Q visa (IRC § 3121(b)(19) and Rev. Rul. 92-106, situation 3 (1992-2 C.B. 258)). Note: There is one minor exception as if you cared. :) H visa holders who are residents of the Philippines performing services in Guam are exempt from social security taxes (IRC § 3121(b)(18)).

Their employers are also subject to paying their half of social security taxes per IRC §§ 3111(a) and (b) and 3301.

No refunds are available to either employers or employees, but the employees can eventually draw social security benefits if they have paid in for the requisite quarters of coverage (40). Note that a quarter of coverage is defined as earnings of $920. So, for example, earnings of $3,680 ($920 x 4) in January 2005 would yield four quarters of coverage for the year.

2. Federal Unemployment Taxes (FUTA)

All employers of H visa holders are subject to Federal unemployment taxes per IRC §§ 3111(a) and (b), 3301 and 3306. The only visa types that are exempted from unemployment taxes are nonresident aliens temporarily in the US under an F, J, M, or Q visa (§ 3306(c)(19) and Rev. Rul. 92-106, situation 3 (1992-2 C.B. 258)).

3. Federal Withholding Taxes

The wages paid to nonresident aliens including those under H-2B visas for services performed in the US are considered effectively connected with the conduct of a trade or business in the US. Therefore the wages are subject to graduated tax withholding rates under IRC § 871(b) and to income tax withholding under § 3402(a).

There is an exception under § 864(b) which applies if the services are performed for a nonresident alien individual or a foreign corporation by a nonresident alien individual temporarily in the US for 90 days or less during the tax year and whose compensation is $3,000 or less.

See also Rev. Rul. 92-106 (1992-2 C.B. 258), titled Withholding of Income, FICA and FUTA Taxes, and IRS Publication 515, titled Withholding of Tax on Nonresident Aliens and Foreign Entities, which explain things in more detail.

4. US Tax Return Filing Status – which form to file: 1040 or 1040NR?

H visa holders are treated as Resident Aliens for income tax purposes and must file Form 1040 if they are physically present in the US on at least 183 days during the 3-year period including the current tax year and the two preceding tax years, aka the Substantial Presence Test. For the 183 day requirement, days are counted by counting all days of presence in the current tax year plus 1/3 of the days of presence in the first preceding tax year plus 1/6 of the days of presence in the second preceding tax year.

If their physical presence in the US is less than the 183-day requirement, they are treated as Nonresident Aliens for income tax purposes and must file Form 1040NR.

Most H-2B visa holders will be better off filing a regular 1040. If for some reason like not wanting to have to include their non-US-sourced income on their 1040, they could avail themselves of the Closer Connection exception to the Substantial Presence Test by filling out Form 8840, Closer Connection Exception Statement for Aliens. On this form they answer a number of questions about the location of their property, social and family ties, income sources, etc. If their position is reasonable that they are more closely connected to their homeland rather than the US, they can file using Form 1040NR with the Form 8840 attached. The IRS will ultimately decide.

If an H-2B visa holder is married, I recommend filing the 1040 return under the Married Filing Jointly status and attaching a properly filled out W-7 for the wife along with the requisite copies of documents such as a certified copy of her passport. If the tax return is filed with the W-7 attached, it must be filed with ITIN Operations, Austin. The specific address is in the W-7 instructions.

The W-7 requires the wife’s signature and proof of her information such as a certified copy of her passport or other documents as specified in the instructions for the W-7. This could be a hassle for the H-2B holder to get this, but it could save the couple a lot of tax. The same is true for the H-2B holder’s children. W-7s and the required documents would need to be attached for them, although the father could sign for them as their delegate if they are under age 14.

Note, however, that in order to file jointly, the visa holder will have to choose to treat his nonresident wife as a U.S. resident. This means that the visa holder and his wife will be treated as U.S. residents for the entire year in the first year that the visa holder qualifies as a U.S. resident under the substantial presence test. It also means that the spouse will have to report all her world-wide income for the year on their joint 1040 return in addition to her husband’s worldwide income. This could be a problem for some H-2B visa holders whose wives are working in México, for example.

If the visa holder is married and chooses not to file jointly because, e.g., the documentation for his wife is too hard to get or he doesn’t want to report his wife’s income on their joint return, he will need to file under the status Married Filing Separately. In that case there is a further complication involving community property. Because Texas is a community property state, the visa holder filing under the Married Filing Separately status will report half his income and expenses as a U.S. resident on his Form 1040 and will need to report the other half of his income and expenses as a U.S. resident on a Form 1040NR return for his spouse.

If he is single or is married and chooses to file under the Married Filing Separately status, in the first year of residence, the visa holder will have dual status and be a nonresident alien for part of the year and be a resident for the remainder of the year as explained in more detail next.

Once a single individual or a married individual who chooses to file under the Married Filing Separately status is granted a visa and such individual meets the physical presence test in the U.S., the visa holder needs to file two returns in the first year in which he becomes a U.S. resident under the substantial presence test. Similarly he will also need to file two returns in the last year when he ceases to be a U.S. resident under the substantial presence test:

  1. Form 1040NR or 1040NR-EZ labeled at the top, “Dual Status Statement,” reporting only U.S. source income for the part of the year that he is not a U.S. resident under the substantial presence test, and
  2. Form 1040 labeled at the top, “Dual Status Return,” and on which his worldwide income is reported for the remaining part of the year that he is a U.S. resident under the substantial presence test.

Between the dual status years, file Form 1040 as long as the physical presence test continues to be met.

Note: If the substantial presence test isn’t met for the first year such individual is in the U.S. but is met is the next year, he can make a “first year choice” to be treated as a resident for tax purposes in that first year. See IRS Publication 519, U.S. Tax Guide for Aliens, Chapter 1, for details.

Further note: There is considerable misguidance or lack of clarity on the Internet about which form to file. Some sites advise filing Form 1040NR without any further clarification. Other sites, e.g., http://www.visapro.com/, imply filing Form 1040NR by stating, e.g., “As a nonresident alien in the U.S. on a H-2B visa, you must file income tax returns.