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FICA

The Federal Insurance Contributions Act (FICA) tax, a kind of payroll tax, is a U.S. employment tax imposed in an equal amount on employees and employers to fund federal programs for retirees, the disabled, and children of deceased workers. The FICA tax pays for Social Security and Medicare. The Federal Insurance Contributions Act is codified as 26 U.S.C. ch.21.

About FICA

Social Security benefits include old-age, survivors, and disability insurance. Medicare is the hospital insurance portion. Prior to the Great Depression (1930's), economic problems were great hazards to working-class Americans. The United States did not have federal-government-mandated retirement savings; consequently, for many workers, the end of their work careers was the end of all income.

The U.S. had no federal-government-mandated disability income insurance to provide for citizens disabled by injuries; consequently, for most people, a disabling injury meant no more income.

The U.S. had no federal-government-mandated disability income insurance to provide for people unable to ever work during their lives, such as anyone born with severe mental retardation.

The U.S. had no federal-government-mandated health insurance for the elderly; consequently, for many workers, the end of their work careers was the end of their ability to pay for medical care.

In the 1930's, the New Deal introduced Social Security to rectify the first three problems (retirement, injury-induced disability or congenital disability). It introduced the FICA tax as the means to pay for Social Security. In the 1960's, Medicare was introduced to rectify the fourth problem, heath care for the elderly.

For 2008:

FICA tax is imposed only on the first $102,000 of gross wages. The limit, known as the Social Security Wage Base, goes up each year based on average national wages.

  • The employees share of the Social Security portion of the tax is 6.2% of gross compensation up to the limit of $102,000 of gross wages.
  • The employee's share of the Medicare portion is 1.45% of wages with no limit.
  • The employer is also liable for separate 6.2% and 1.45% Social Security and Medicare taxes, respectively.
  • Self-employed people are responsible for the entire FICA percentage of 15.3%, since they are both the employer and the employee.
  • The tax is not imposed on investment income (such as interest and dividends.)

The total Social Security tax is 12.4% and the total Medicare tax is 2.9% of wages.

Exemptions

A special case in FICA regulations includes exemption for various categories of employment:

  • On-campus student employment up to 20 hours a week (40 hrs during summer vacations)
  • Off-campus student employment allowed by USCIS (CPT or OPT off-campus employment is not FICA exempt)
  • Practical Training student employment on or off campus
  • Employment as professor, teacher or researcher
  • Employment as a physician, au pair, or summer camp worker

According to IRC 3121(b)(19), nonresident Alien students, scholars, professors, etc. are exempt on wages paid to them for services performed within the United States as long as such services are allowed by USCIS for these nonimmigrant statuses, and such services are performed to carry out the purposes for which such visas were issued to them.

  • Alien student or scholar must be temporarily present in the US in F-1, J-1, M-1 or Q status
  • Alien students or scholars employment must be authorized under the immigration law for his particular nonimmigrant status
  • Alien student or scholar must be a nonresident alien under the tax residency rules of IRC 7701(b)

This applies regardless of employer as long as all the restrictions are met. FICA exemption is valid during the school year. FICA exemption is valid during the summer months (school not in session). All practical training is covered, as it is compensation for work under an EAD for economic reasons. The student FICA exemption does not apply during OPT; the NRA FICA exemption does apply.

This is based on the date when the income is paid not when it is earned. This is because individuals are on a cash basis for determination of the income tax implications of their pay.

Students may be enrolled at another institution and working at UR and still receive the NRA FICA exemption.

Once exemption under this rule is exhausted, default to the U.S. student exemption.

According to IRC 3121(b)(10), all students (U.S. citizens or otherwise) enrolled full-time in a university and working part-time for the same university are exempted from FICA payroll taxes, so long as their relationship with the university is primarily an educational one. Off-campus employment is not FICA-exempt.

Immigration status and tax residency are irrelevant--the determination of eligibility is the same for everyone and is based on enrollment, the employee's primary relationship to the school and only applies to wages earned from the school where the student is regularly enrolled.

FICA exemption is valid during the school year only; FICA exemption is not valid during the summer months (when school is not in session).

Limitations on Exemption

The exemption does not apply to spouses and children in F-2, J-2, M-2, or Q-3 nonimmigrant status.

The exemption does not apply to employment not allowed by USCIS or to employment not closely connected to the purpose for which the visa was issued.

The exemption does not apply to F-1, J-1, M-1, or Q-1/Q-2 nonimmigrants who change to an immigration status which is not exempt or to a special protected status.

The exemption does not apply to F-1,J-1,M-1, or Q-1/Q-2 nonimmigrants who become resident aliens.

International students who are resident aliens for tax purposes are not exempt from FICA during the summer months (i.e. when school is not in session.)

Substantial Presence Test (SPT)

J-1, Q-1, Q-2 Scholars/Professors: Considered to be "exempt individuals" (i.e., exempt from counting days of presence in the United States (under the Substantial Presence Test) during the first two calendar years of their physical presence in the U.S.

F-1, J-1, M-1, Q-1 or Q-2 Students: Considered to be exempt individuals during the first five calendar years of their physical presence in the United States (under the Substantial Presence Test).

Nonresident Alien Status (by the SPT):

  • Foreign scholars/professors: First 2 years
  • Foreign students: First 5 years

Resident Alien for Tax Purposes

  1. The IRS audit position is that foreign national employees who become resident aliens in the tax year should be treated as residents from the beginning of the year to assure collection of FICA taxes.
  2. Foreign scholars/professors: On January 1 of third calendar year in the U.S.
  3. Foreign students: On January 1 of the sixth calendar year in the U.S.

Resident Alien Students

International students who are resident aliens for tax purposes:

  1. Not exempt from FICA during the summer months (when school is not in session)
  2. Exempt from FICA during school year based on IRC 3121(b)(10) rather than IRC 3121 (b)(19)

Change in Visa Status

  1. Those in F-1, J-1, M-1, Q-1 or Q-2 status who change to a nonimmigrant status other than F-1, J-1, M-1, Q-1 or Q2 become liable for social security/Medicare taxes.
  2. In most cases this happens on the very day of the change of status.
  3. However, once the individual makes known that she/he is planning a change in status (applying for a "green card," for example), the Office of International Taxation must start taking FICA from the person's paychecks.

FICA and Other Visa Types

Teachers, trainees, and researchers in H-1b status are liable for social security/Medicare taxes from the first day of U.S. employment, regardless of whether they are nonresident or resident aliens, and regardless of whether their wages may or may not be exempt from federal income taxes under a tax treaty.

Foreign scholars, teachers, researchers, or trainees who arrive in the United States in O-1 status or TN status (from Canada or Mexico under the NAFTA treaty) are fully liable for U.S. social security/Medicare taxes if they are employed on the payroll of the university or other employer, regardless of whether or not they are resident or nonresident aliens unless the provisions of a Totalization Agreement relieve such aliens from liability for U.S. social security/Medicare taxes.

Totalization Agreements

The United States has entered into agreements with several nations called Totalization Agreements for the purpose of avoiding double taxation of income with respect to social security taxes.

As of this time, the following nations have entered into Totalization Agreements with the United States: Australia, Austria, Belgium, Canada, Chile, Finland, France, Germany, Greece, Ireland, Italy, Japan, Korea (South), Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom.

Copies of the Totalization Agreements may be obtained from the Social Security Administration.

Any alien who wishes to claim an exemption from U.S. Social Security taxes and Medicare taxes because of a totalization agreement must secure a Certificate of Coverage from the social security agency of his home country and present such Certificate of Coverage to his employer in the United States, according to the procedures set forth in Revenue Procedures 80-56, 84-54, and Revenue Ruling 92-9.

FICA Withholding Errors

If FICA is withheld in error, the recommended approach is to have the employer obtain the refund for both the employee and employer shares of FICA. The employer will file Form 941 for the quarter in which the error is discovered as long as the year for payment is still an open year. If an employee files for a FICA refund, the NRA uses Form 843. The IRS will eventually request the employer to complete an amended Form 941 and Form W-2C to reflect the change for the employer share as well.

FICA Exemption

  • Person must be enrolled full-time and regularly attending classes to be given the status of "student."
  • Student vs. employee status should be determined at the start of each academic term.
  • The educational aspect of the relationship between the employee and the employer, as compared to the service aspect, must predominate. (Incident to and for the purpose of pursuing a course of study.)
  • An employees normal work schedule is not affected by increases in hours worked caused by work demands unforeseen at the start of an academic term.
  • If the student is scheduled for 20 hours and consistently works more than 40 hours, the amount of time actually worked is taken into account in determining whether or not the employee qualifies as a student.
  • A full-time employee is an employee who is considered a full-time employee based upon the employer's standards and practices.
  • An employee's work schedule during academic breaks is not considered in determining whether the employee's normal work schedule is 40 hours or more per week.

Contact Us

Devon Slough, International Taxation Officer
(804) 287-6007
Maryland Hall, Room G-15
Monday–Friday, 8:45 a.m.–2:45 p.m.