How Immigrant and Non-Immigrant Visas Impact U.S. Income Taxation

It is important for business owners to understand the various types of visas that immigrant employees can use to adhere to their immigration and employment statuses, as this does impact the tax implications of a company.

Understanding what visa an immigrant employee is present on while in the U.S. is part of determining how that employee is taxed in the U.S. Foreign nationals are subject to a different set of U.S. tax rules based on their designation as a U.S. resident or nonresident, the particular visa they hold, and the tax treaties between the U.S. and their home country. There are currently 185 types of visas in the U.S., all of which fall into one of two categories: immigrant and nonimmigrant. 

Immigrant Visa

A common immigrant visa, a “Green Card,” entitles the holder to remain in the U.S. and work in the U.S. legally. The key characteristic of a Green Card is its permanence. Unless someone formally relinquishes their U.S. Green Card to a State Department official or it is revoked or administratively or judicially abandoned, their Green Card can never be taken away. Green Card holders, by definition, are considered residents of the U.S. Accordingly, Green Card holders are subject to U.S. taxation on their worldwide income (regardless of where it is paid or earned), may file a joint income tax return with their resident spouse, can claim the greater of itemized deductions or a standard deduction, and are able to claim tax credits on their individual income tax returns. 

Nonimmigrant Visa

Common nonimmigrant visas include L Visas, J Visas, B Visas, H-1B Visas, F Visas, TN Visas and G Visas. Each of these visas differ as to the reason for entry into the U.S. and the length of stay desired. Therefore, each visa has distinct limitations and U.S. tax implications that should be considered.

The distinction between U.S. residents and nonresidents is important to note. Residents of the U.S. are taxed on their worldwide income, as stated above, whereas nonresidents of the U.S. are taxed only on their U.S. effectively connected income – income which is sourced to the U.S. They must file separate income tax returns from their spouse, are obliged to itemize their deductions and cannot claim the standard deduction, and are very limited as to the tax credits that they may claim.

Substantial Presence Test

The determination of residency is established by the Substantial Presence Test (IRC Section 7701(b)). Depending on whether a foreign national satisfies the requirements of the Substantial Presence Test for all or any part of a tax year, they may be considered a U.S. resident for that part of the year.  

The substantial presence test is based upon the number of days a foreign national is present in the U.S. in three consecutive calendar years. If the individual is present for the requisite number of days, they are considered a U.S. resident.

Common Nonimmigrant Visas

L Visa

L visas are issued to intercompany transferees that are relocated to a U.S. company from a foreign parent, affiliate or subsidiary. This type of visa is generally obtained by executives, managers and employees with specialized knowledge that have worked with the company full-time for at least one of the previous three years. Time spent in the U.S. while on a L visa counts towards the substantial presence test when determining U.S. residency for U.S. tax purposes. Unless a treaty applies, all wages earned by these employees are subject to U.S. Social Security tax regardless of whether the same income is subject to U.S. income tax.

J Visa

J-1 visas are issued to students, scholars and trainees of an organization eligible to administer exchange training programs. J-1 visa holders are limited to an 18-month stay in the U.S. These individuals are then not to return to the U.S. for two years after the end of an assignment. Time spent in the U.S. while on a J-1 visa does not count towards the substantial presence test when determining residency for U.S. tax purposes. Employees with a J-1 visa are exempt from U.S. Social Security tax, although this visa is more commonly used by students.

B Visa

B visas are issued to temporary visitors of the U.S. B-1 visas are issued to foreign nationals to conduct qualifying types of business activities in the U.S. for their foreign employer. The B-1 visa is issued for a specific time period, and the holder must leave the U.S. at the end of their temporary stay. In order to be eligible for the visa, before being granted the visa, the individual must usually demonstrate their financial ability to leave when the stay has concluded. Time spent in the U.S. while on a B visa counts towards the substantial presence test. The income earned by a B-1 visa holder is subject to U.S. Social Security tax unless a treaty applies.

H-1B Visa

H-1B visas are issued to specialty workers with a bachelor’s degree or higher and is the most common nonimmigrant work visa. To qualify for a H-1B visa, the individual must have a job offer from a U.S. employer for duties to be performed in the U.S. The employer has to file an “attestation” with the federal Department of Labor; among other things, this certifies that the employer will pay at least the average or prevailing wage for that type of job. Time spent in the U.S. while on a H-1B visa counts towards the substantial presence test when determining residency. Unless a treaty applies, all wages earned by these employees are subject to U.S. Social Security tax regardless of whether the same income is subject to U.S. income tax.

F Visa

F visas are issued to foreign national students studying full time at an American education institution. These students are permitted to work during summers while in the U.S. and for a one-year period following graduation for practical training. Time spent in the U.S. while on a F-1 visa does not count towards the substantial presence test, and F-1 visa holders are exempt from U.S. Social Security tax.

TN Visa

Nonimmigrants from Canada and Mexico that wish to enter the U.S. in specified occupations may obtain a TN visa. TN visas are issued for a 12-month stay in the U.S. at a time, and time spent in the U.S. while on a TN visa counts towards the substantial presence test. TN visa holders are also subject to U.S. Social Security tax unless a treaty applies.

G Visa

G visas are issued to foreign nationals employed directly by an international organization or to those representing a foreign government on behalf of an international organization. Time spent in the U.S. while on a G-4 visa does not count towards the substantial presence test when determining U.S. residency. G-4 visa holders are exempt from U.S. income tax on their income from the international organization and are also exempt from U.S. Social Security tax. However, note that if a G-4 visa holder has other non-international organization U.S. effectively connected income, that income is taxable in the U.S. unless exempt by statute or a treaty.

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Foreign nationals are subject to a different set of U.S. tax rules based on their designation as a resident or nonresident, the particular visa they hold, and the tax treaties between the U.S. and their home country. The U.S. taxation of residents and nonresidents requires an understanding of foreign national facts and circumstances, as well as the applicability to changing U.S. tax law. As companies explore relocating operations or expanding their foreign national workforce, the corporate and individual tax implications must be considered. Our team of international tax professionals can support you through every stage of your business. Please contact us to learn more.

This discussion is not meant to provide legal immigration advice but rather to educate on the U.S. tax ramifications of some of the more common visas possessed by foreign nationals while legally in the U.S.