J-1 Exchange Visitors Employed By Foreign Employers
Special income tax rules apply to J-1 Exchange Visitors who receive pay from a foreign employer. One rule provides certain exemptions from income tax for such Exchange Visitors. Another rule relates to the period of time that such Exchange Visitors remain nonresident aliens under the 183-day residency formula.
Special Income Tax Exemptions
Section 872(b)(3) of the Internal Revenue Code (the “Code”) provides a special exemption from tax for nonresident alien J-1 Exchange Visitors who are employed by a foreign employer. The provision actually applies to such income received by any nonresident alien in F, J, M and Q status as well. However, exemptions for these other visitors are less common because of the terms and conditions of their immigration status related to providing personal services in the United States while in that status.
Under this provision, a J-1 Exchange Visitor who is a nonresident alien for federal income tax purposes may exclude from gross income their compensation for personal services received from a foreign employer. The definition of a “foreign employer” includes:
This exemption does not apply to employees of foreign governments. These nonresident employees, who enter the United States in A status, are exempt from tax on their remuneration for their official duties under the special rules of section 893 of the Code. Employees of foreign governments who enter the United States for commercial activities may not be exempt from U.S. income tax on the compensation from their foreign government employer because they do not qualify under either rule.
The term “foreign employer” also includes an office or place of business maintained in a foreign country or U.S. possession by a U.S. citizen, a U.S. partnership, or a U.S. corporation. (U.S. possessions are American Samoa, the Northern Mariana Islands, Guam, Puerto Rico, and the U.S. Virgin Islands.)
This exemption only applies to federal income taxes. J-1 Exchange Visitors who are nonresident aliens are exempt from U.S. Social Security and Medicare taxes under the NRA FICA Exception.
Special Residency Rule
J-1 Exchange Visitors who qualify for exemption from tax on their pay for services from their foreign employer may be nonresident aliens for a longer period. Under the residency rules, J-1 Nonstudents do not count U.S. days in 2 out of the current 7 calendar years. This period of exemption from counting U.S. days is extended to 4 out of the current 7 calendar years for J-1 Nonstudents employed by a foreign employer as defined above.
Difficulties arise in determining the calendar years that J-1 Nonstudents must count their U.S. days when they are in the United States for 3 or 4 calendar years but their pay for services in some of these years is from their foreign employer and in other years from a U.S. employer. IRS regulations under section 7701(b) interpreting the residency rules make it clear that such J-1 Nonstudents may extend their calendar years in which U.S. days do not count if they receive all of their pay for services from a foreign employer in all of the calendar years. For example, a J-1 Nonstudent who is:
J-1 Nonstudents may use this rule only if all of their pay for services is paid by a foreign employer. J-1 Nonstudents who receive any pay for services from another source do not qualify for this special residency rule. They may, however, receive scholarship or fellowship grants that do not require services since such payments are not “pay for services.” They may also qualify for this special rule even if they receive U.S. investment or other non-service income.For more information on J-1 Exchange Visitors, make sure to read Paula N. Singer’s J-1 Nonstudent Exchange Visitors Performing U.S. Services tax guide available on shopping.windstar.com.
Paula N. Singer, Esq. chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer, Newton, MA, has over 25 years of experience providing advice and compliance services to employers on cross-border employment matters. For more information, visit www.windstar.com. For additional information, call 1-800-259-6398 or email: firstname.lastname@example.org.
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