1. Do I have to withhold social security on compensation paid to a foreign national who will not be working in the United States long enough to vest for benefits?
Yes. Foreign nationals employed in the United States are subject to social security taxes unless an exemption applies.
2. My foreign national employee is a student engaged in practical training under his nonimmigrant student visa. His educational institution said he is exempt from social security taxes. Is he?
Maybe. Nonresident alien individuals in the United States in an F, J, M, or Q immigration status are exempt from social security taxes under Internal Revenue Code (IRC) sec. 3121(b)(19) if the individual is performing services in accordance with the purpose of the visit. But be cautious, individuals who have become resident aliens under the substantial presence test or the "green card" test of IRC sec. 7701(b) are not exempt from social security taxes under this rule.
3. How do I know if the student is a nonresident?
You need to review his immigration status history from 1985 to determine if he has been physically present in the United states in an F, J, M, or Q status for more than 5 calendar years, regardless of the amount of time spent in the United States in that immigration category each year. If he has been, you have to apply the 183-day substantial presence test (SPT) of IRC sec. 7701(b) to determine if he meets the test. If he meets the test he is a resident retroactive to his first day of presence in the US in the calendar year and subject to social security taxes.
4. Our employee claims he can extend this five-year period as a nonresident and still claim the exemption? Is that true? How does he do that?
Yes. The five-year nonresident limitation period can sometimes be extended beyond five years. To extend the period the foreign national student must write to the District Director of the Internal Revenue Service in the District in which he lives and request a determination under IRC Reg. 301.7701(b)-3(b)(7)(iii) that he is not is not intending to reside permanently in the United States and that he has substantially complied with the requirements of his visa. The individual my establish that he is not intending to reside permanently in the United States by showing that he has a closer connection to a foreign country than to the United States and that he has not taken any affirmative steps to obtain a "green card." He should gives facts and circumstances in support of his claim of a his closer connections to his home country using the closer connection criteria list provided in IRS Publication 519. If the District Director agrees he will issue a letter in agreement. Be cautious; the IRS will not issue a letter if the individual is planning on changing to an H-1B status. If the District Director issues the letter and the company is not planning on sponsoring the individual for an H-1B visa, the company does not have to withhold social security taxes.
5. We have the spouse of another student working for the company. Is she also exempt under the 3121(b)(19) rule?
No. The primary purpose for an individual on a derivative visa is to accompany the primary visa holder. (Typically only J-2 visa holders can be authorized to work.) Social security exemption is not allowed for these individuals under this rule.
6. We have other foreign nationals working for the company. What other exemption from social security can apply?
A foreign national who is sent to work temporarily in the United States by his or her foreign employer may be exempt from tax under a social security (totalization) agreement. The United States currently has agreements with 17 countries and is negotiating new agreements with several countries. To be exempt under a social security agreement, the individual must be paying social security taxes to the country under whose agreement an exemption is claimed. He or she or the foreign employer must obtain a Certificate of Coverage as evidence of this coverage. For details on the agreements visit the US Social Security Administration web site at www.ssa.gov/ or contact the International Policy Staff at (410) 965-3548 or (410) 965-3554.
7. We have another student working for the company who has been in the US for 8 years and claims she was exempt from social security tax when she worked at her university. Why was she exempt on compensation paid by the university but she is not exempt on compensation paid by the company?
If she has been in the US for 8 years as a student and does not have a letter from the District Director supporting a claim that she is not intending to reside permanently in the US, she is a resident alien and subject to social security taxes. However, a foreign national student enrolled in and employed by an academic institution can be exempt from social security taxes under IRC sec. 3121(b)(10) under the same rules that apply to students who are US citizens. The foreign national's residency status is not relevent for purposes of this rule.
8. We have an employee from China who claims he is exempt from social security taxes under the tax treaty with China? Is he?
No. The paragraph 3 of the protocol of the income tax treaty with China specifically states that the United States may impose its social security tax notwithstanding any provision of the the income tax treaty with China.
9. Do any income tax treaties apply to social security taxes?
Income tax treaties by definition apply to federal income taxes. Newer treaties specifically exclude social security taxes from the definition. The IRS has consistently ruled that the treaties do no apply to social security taxes. However, one treaty, the treaty with the former USSR has a broader definition of taxes covered. The Treasury Explanation of this treaty states that the treaty covers social security taxes as well. That treaty applies to the CIS countries that have not yet entered new treaties with the United States. If the individual is exempt from income tax under the treaty article the exemption applies to social security taxes as well. Be cautious, the exemption only applies to the employee's taxes not to the employer's.
10. If the company has withheld social security taxes incorrectly how does the individual obtain a refund?
The company can refund social security taxes on an employee retroactively for prior years if the incorrect withholding occurred during the past three years. The company can amend the applicable employment tax returns and obtain a refund from the IRS. Both employee and employer contributions will be refunded. The company should also issue a Form W-2C for the year indicating the decrease in social security wages. Over withholding during the current year can be made by credit adjustments on the current year's employment tax returns not yet filed.
If the company cannot administratively handle amending employment tax returns, the company should give the employee a letter to that effect. The individual can then request a refund on a Form 843, Claim for Refund including all necessary supporting documentation.
11. Can a foreign national employee obtain a refund of the taxes when he or she leaves the country if the individual will not work in the US long enough for benefits to vest?
No. Although occasionally the Social Security Administration reimburses these taxes to someone who is departing and will not vest in the system, its a fluke. There is no basis for refunding the tax unless the employee was exempt from social security taxes and taxes were withheld incorrectly. However, if the individual is from a country with which the US has a social security agreement, he or she may be able to use work time in that country to obtain a partial US benefit under the agreement totalization formula.
12. If the foreign national employee works in the US long enough to vest for benefits, will the benefits be paid if he moves abroad when he retires.
There may be limitations on social security benefit payments that apply to payments while the individual is ouside the United States. For a full discussion of these limitations refer to "Your Social Security Benefits While You are Outside the United States" provided by the US Social Security Security Administration.