H-1B taxes explained

What comes out of an H-1B paycheck

An H-1B salary is ordinary W-2 wages. Four taxes come out of each paycheck: federal income tax, Social Security, Medicare and, depending on where you live and work, state and sometimes city income tax. Pre-tax benefits come out too, and they shrink the pay that income tax is charged on.

The visa settles only one thing: you pay Social Security and Medicare. Whether you are taxed as a resident or a nonresident, and on what income, comes from tests that count days, not visa stamps. Put your salary into the H-1B tax estimator for a planning range.

Start with withholding: how Form W-4 works

Your employer withholds federal income tax based on Form W-4, the Employee’s Withholding Certificate. The current form has no allowances: you give your filing status in Step 1, flag a second job or a working spouse in Step 2, claim credits for dependents in Step 3, and in Step 4 add other income, extra deductions, or a flat extra amount per paycheck. Withholding is a prepayment; the bill is settled on your return. Under-withhold and you owe a balance in April, possibly with an underpayment penalty. Over-withhold and you lend the IRS money for free.

Nonresidents fill it in differently. If you will be a nonresident alien for the year, usually because you arrived in the autumn, IRS Notice 1392 applies. You check single or married filing separately in Step 1(c) whatever your actual marital status, leave a spouse’s job out of Step 2, write “nonresident alien” or “NRA” below Step 4(c), and may not claim to be exempt. Your employer also adds an amount to your wages before applying the tables, because nonresidents cannot take the standard deduction built into them. The IRS says nonresidents should not use its Tax Withholding Estimator; residents can.

First-year numbers rarely line up exactly. The tables assume each paycheck repeats for a full year and build in a standard deduction that a dual-status return cannot claim, so budget for either a refund or a balance. Many states also have their own withholding certificate.

When to revisit your W-4

• Your tax status changes. Once you expect to be a resident, usually from January 1 of your first full calendar year, replace a nonresident W-4 with one under the ordinary instructions.
• Your household changes. Marriage, a child, or a spouse starting work on an H-4 EAD. Two incomes each withheld as if it were the only one is a classic cause of a surprise bill.
• Your pay changes shape. Large bonuses and stock vesting are often withheld at a flat supplemental rate that can be lower than the rate your top dollars are actually taxed at.
• Something else moved. A new employer, a new state, or a large balance due or refund last year.

Social Security and Medicare: no exemption on H-1B

Social Security and Medicare taxes, together called FICA, apply to H-1B wages from the first paycheck. Your employer withholds 6.2% for Social Security up to an annual wage base that usually rises each year, and 1.45% for Medicare with no cap, and pays a matching share of its own. Once your wages from one employer pass $200,000 in a calendar year, it also withholds the 0.9% Additional Medicare Tax. The threshold that actually applies to you depends on filing status, and any difference is settled on Form 8959 with your return.

The exemption you may have heard about belongs to nonresident students and exchange visitors in F-1, J-1, M-1 or Q-1 status, and the IRS says it ends when they become residents or change to a status that is not exempt. H-1B is not exempt. If you move from F-1 OPT to H-1B, FICA applies from your H-1B start date even if you are still a nonresident for income tax that year. If FICA was wrongly taken from exempt pay, ask the employer for a refund first and use Form 843 if that fails. An H-4 spouse’s EAD wages are subject to FICA too.

• Two employers in one year. Each withholds Social Security up to the wage base separately, so after a job change the excess over the annual maximum comes back as a credit on your return.
• No refund when you leave. Correctly withheld FICA stays paid even if you never collect benefits, and US retirement benefits generally require 40 credits, roughly ten years of work.
• Totalization agreements. The US has Social Security agreements with a number of countries. They can exempt workers temporarily sent here by a home-country employer, but rarely someone hired directly onto US payroll.

Resident or nonresident: the substantial presence test decides

For federal income tax you are either a resident alien or a nonresident alien, and your visa does not choose. Without a green card, the substantial presence test decides: you are a resident if you were in the US on at least 31 days this year and at least 183 days counting all of this year’s days, one-third of last year’s and one-sixth of the year before. Unlike days as an F-1 or J-1 student, every H-1B day counts.

If you arrived from abroad before roughly early July and stayed, you pass in your first year; arrive in the autumn and you usually do not. From your first full calendar year almost everyone is a resident, filing Form 1040 with the same standard deduction, rates and credits as a citizen. The resident vs nonresident guide has the full rules, and the substantial presence test calculator does the arithmetic for your dates.

Your arrival year: dual-status and the first-year choice

The arrival year is often dual-status. Residency starts on the first day you are present in the year you pass, so someone who lands on March 1 is a nonresident for January and February. You file Form 1040 marked “Dual-Status Return” with a Form 1040-NR statement for the nonresident months, when only US-source income is taxed, so foreign salary from before the move is generally outside US tax. Dual-status filers cannot take the standard deduction or file jointly without a spouse election.

Arrived too late to pass? The first-year choice treats you as a resident from arrival if you were here for 31 consecutive days, were present on at least 75% of the days from then to December 31, and pass the test outright the next year, which often means extending the first return.

F-1 switchers usually start counting on their H-1B start date, often October 1, because exempt student days do not count. They are normally nonresidents that year unless their five exempt calendar years were already used up. The F-1 student tax guide and OPT tax calculator cover the student months.

Once you are a resident, the IRS taxes worldwide income

A resident reports income from everywhere: interest from accounts back home, rent from a flat you still own, dividends, and gains on property or shares sold abroad, including income that is tax-free where it is earned. A foreign tax credit generally stops the same income being taxed twice. Foreign mutual funds are usually passive foreign investment companies, with harsh US rules and often an annual filing, so speak to a preparer before buying more.

Residency also brings disclosure: an FBAR if your foreign accounts together exceeded $10,000 at any time in the year, and Form 8938 under FATCA above its higher thresholds. Moving your own savings between your own accounts is not income, though large gifts to family can require a gift tax return; the guide to sending money abroad covers the practical side.

State income tax changes the answer a lot

Federal rules are the same wherever you live, but state income tax is not. A handful of states, including Texas, Florida and Washington, do not tax wages at all, others take a meaningful share of your salary, and some cities, New York City among them, add their own tax on top. Two identical H-1B offers in different states can differ by thousands of dollars in take-home pay. States also set their own residency rules, based on domicile and days spent there rather than the substantial presence test, and some do not follow federal treaty exemptions.

Moving mid-year usually means a part-year return in each state, each covering the income earned while you lived there. Tell payroll your move date and keep proof of it. Remote work adds wrinkles: wages are generally taxed where you do the work, but a few states, New York the best known, can tax remote employees of in-state employers, and your home state usually credits tax paid to another state on the same income. Before relocating, check with your employer too: for an H-1B worker a new worksite can require an updated Labor Condition Application or an amended petition.

Pre-tax benefits lower your taxable income

• Traditional 401(k) contributions come out before federal income tax and, in most states, state income tax, but not before FICA. A Roth 401(k) is taxed now and tax-free later if the rules are met. Withdrawals before age 59½ generally carry a 10% additional tax, so if you might leave the US, read what happens to your 401(k) if you leave.
• Health premiums, HSAs and FSAs. Premiums paid through your employer’s plan, payroll HSA contributions, and health or dependent care FSA contributions generally escape both income tax and FICA. An HSA requires a high-deductible plan and stays yours if you leave; FSA money is largely use-it-or-lose-it. California and New Jersey tax HSA contributions at state level. See the health insurance guide.
• Commuter benefits for transit and parking, where offered, are also excluded from income tax and FICA.

Contribution limits change every year. Residents under the income limits can also use a Roth IRA; see the Roth IRA guide for H-1B workers and investing on a visa.

Filing your return: Form 1040 or 1040-NR

Your employer must give you your W-2 by January 31, and federal returns are generally due April 15. Form 4868 extends the time to file to October 15, but not the time to pay.

• Resident all year: Form 1040, exactly like a citizen.
• Nonresident all year: Form 1040-NR, covering only US-source and effectively connected income, with no standard deduction, a short list of itemized deductions (state and local income tax is the one most workers use), and generally single or married filing separately status.
• Dual-status: Form 1040 with a 1040-NR statement if you were a resident on December 31, and the reverse if not.

Filing a resident Form 1040 for a nonresident year is a common arrival-year mistake that needs an amended return to fix. Many consumer tax programs do not handle Form 1040-NR or dual-status returns.

Filing jointly with an H-4 spouse

A joint return, usually the cheapest option for a one-income couple, requires both spouses to be treated as residents for the whole year.

• You arrived together. H-4 days count toward the substantial presence test just as H-1B days do, so if you both pass you are both dual-status in year one and can jointly elect to be residents for the entire year, which lifts the dual-status restrictions, standard deduction included.
• Your spouse joined later or lives abroad. If you are a resident at year end, you can treat your nonresident spouse as a resident by attaching a statement signed by both of you to a joint return.

The price of either election: both spouses report worldwide income for the whole year, including foreign salary from before the move, and for every later year while the choice stays in effect. Without an election you generally file married filing separately, or possibly head of household if you maintain a home for a qualifying child or relative.

Your spouse also needs a taxpayer number: a Social Security number with an H-4 EAD, or otherwise an ITIN on Form W-7, normally filed with the first joint return. When both of you work, use Step 2 of the W-4. The child tax credit requires the child to have a Social Security number; a dependent with only an ITIN may qualify for the smaller credit for other dependents.

Tax treaties: useful for a few, irrelevant for most

Treaties do less for H-1B workers than people expect. Their employment articles mostly cover short visits paid by a foreign employer, and once you are a resident the saving clause generally switches treaty benefits off, apart from listed exceptions. They can still matter for university teachers and researchers, since some treaties exempt that pay for a limited period (claimed by nonresidents on Form 8233, and in some cases continuing after residency starts), and for pensions, dividends and interest from home. Read your country’s article on the IRS tax treaty pages before relying on it, and remember that a state can tax income a federal treaty exempts.

Leaving the US mid-year

Leave for good partway through a year in which you are a resident and your residency normally runs to December 31, so you file as a resident for the whole year. You can end it on your last day in the US instead if, for the rest of the year, your tax home and closer connection were in another country and you are not a US resident at any point the next year; you claim that date with a signed statement on a dual-status return.

• File the departure-year return by the usual deadline. Final pay, severance and bonuses for US work are generally still US-source, and equity that vests after you leave can be partly US-source, allocated by time worked here.
• Your 401(k) and HSA can usually stay where they are.
• The IRS says most departing aliens need a departure clearance, the sailing permit, obtained by filing Form 1040-C or Form 2063 before leaving; its page lists who is exempt.
• Your last state will usually expect a part-year resident return.

Documents to keep

• W-2s from every employer, and your final pay stubs
• 1099 forms if any freelance side work was authorized and issued
• Prior-year returns, especially from a dual-status year
• Your I-94 travel history and other records of days present in the US
• Foreign account statements and proof of tax paid abroad
• Proof of any state move date, and copies of spouse election and ITIN paperwork

Other H-1B guides on this site

This page covers taxes specifically. Depending on what you are trying to work out, one of these is probably a better starting point:

• H-1B visa requirements, fees and timeline — eligibility, the cap and lottery, and the filing process.
• H-1B tax calculator — put a salary figure in and see estimated take-home pay.
• H-1B financial guide — the wider first-year money checklist beyond tax.
• Green card financial guide — what changes when you become a permanent resident.
• All tax guides — ITIN, FBAR, FATCA and student taxes in one place.