H-1B visa foreign workers are expected to pay 25-35% of their earnings in federal, state, and local taxes while working in the United States. In addition, while living in the United States, you may be required to pay property tax, sales tax, capital gains tax, transfer tax, inheritance or estate tax, hotel or lodging tax, gas tax, and other fees.
If you are a nonresident on an H1B visa working in the U.S., you are taxed on U.S. earnings at the same rate as citizens and must file Form 1040NR, but without claiming the same deductions. As a U.S. resident, you gain access to those deductions but will be taxed on worldwide income.
The H-1B status is granted to nonimmigrant foreigners who are not a US green card holders or lawful permanent residents, to reside in the United States to work in a specialty occupation. H-1B visa holders can, however, apply for a US green card during their stay in America.
Tax Residency Rules
Although the tax residency rules are based on the immigration laws concerning immigrant and non-immigrant foreigners, the ‘tax rules’ define ‘residency’ for ‘tax purposes’ in a way that is very different from U.S. immigration law.
For tax purposes, there are two types of foreigners: resident and nonresident foreigners. Resident foreigners are taxed in the same manner as U.S. citizens on their worldwide income, and nonresident foreigners are taxed only on income that is derived from sources within the United States.
Substantial Presence Test (SPV) Test
Generally, all those on H-1B status will be treated as a U.S. resident for federal income tax purposes if he or she meet the Substantial Presence Test (SPV). The SPV test is applied on a calendar year-by-calendar year basis (January 1 – December 31). Under certain circumstances, an H-1B holder who fails to meet the Substantial Presence Test may be able to choose to be treated as a U.S. resident for the tax year.
The Substantial Presence Test is a mechanical test based on counting a non-immigrant foreigner’s days of physical presence in the United States under a 3-year “look-back” formula. For purposes of this 183-day test, any part of a day that a nonimmigrant foreigner is physically present in the United States is counted as a day of presence.
Generally, an H-1B holder who spends 122 days in the United States in each year of the 3 years will meet the Substantial Presence Test for the current calendar year and be considered a U.S. resident.
The following are two common scenarios that illustrate the determination of an H1-B holder’s U.S. tax residency status:
Scenario 1: The H1-B holder arrives in the United States on or before July 2 of Year 1 and remains in the United States through December 31 of Year 1.
The H1-B holder will have been present in the United States for at least 183 days, thus meeting the Substantial Presence Test for Year 1.
The H1-B holder’s residency starting date will be the date of his or her first arrival into the United States during Year 1.
Scenario 2: The H1-B holder arrives in the United States on July 3 of Year 1 and remains in the United States through December 31 of Year 1.
The H-1B holder was not present in the United States in either of the two immediately preceding calendar years. The H1-B holder will not have been present in the United States for at least 183 days during the 3-year period that includes Year 1 and the two preceding calendar years.
The H-1B holder would have only been present in the United States for 182 days, thus failing to meet the Substantial Presence Test for Year 1.
Although the H1-B holder is not a U.S. resident foreigner for Year 1, if he or she is present in the United States for at least 122 days during the succeeding calendar year (Year 2), the individual will qualify as a U.S. resident foreigner under the Substantial Presence Test in Year 2 and each succeeding calendar year that he or she is present in the United States for 122 days or more.
The H1-B holder’s U.S. residency starting date in Year 2 will be the date of his or her first physical presence in the United States during Year 2.
Double Taxation
An H1-B foreigner who is a U.S. resident foreigner under the Substantial Presence Test and who is also a resident of his or her home country under that country’s internal tax laws is known as a “dual resident taxpayer.”
United States income tax treaties contain “tie-breaker rules” that apply to determine a single country of residence for purposes of applying the income tax treaty and calculating income tax liability in situations where an individual would otherwise be treated as a resident of both the United States and the other country, resulting in potential double taxation.