While taxes may not be the first thing on an international student’s mind when planning to study in the United States, the tax consequences for these students can sometimes be significant. This article discusses one such tax issue that students, employers, and universities should be familiar with to avoid problems with respect to both income and employment taxes.
How U.S. Taxation Applies to International Students
To determine how international students may be taxed in the United States, a review of a few basic definitions is needed. For U.S. tax purposes, individuals are classified as one of three types of taxpayers:
- ▪ Citizen—In the United States, a person becomes a citizen by either being born in the United States or by being naturalized (U.S. Constitution, 14th Amendment, Section 1), as well as when born outside the United States to a U.S. citizen parent under certain conditions (US Citizenship and Immigration Services, https://tinyurl.com/c5f5db3f).
- ▪ A resident alien—A non-U.S. citizen who either is a permanent resident (having a “green card”), or who is present in the United States for a minimum number of days over a period of 3 years (the “substantial presence” test) [IRC section 7701(b)(1)].
- ▪ A nonresident alien—A non-U.S. citizen who is not a permanent resident and is not in the United States for a minimum number of days over a 3-year period (the “substantial presence” test) [Treasury Regulations section 1.871-1(a)].
The type of taxpayer determines how that individual will be taxed. Most countries use one of two systems. A worldwide taxation system or a territorial tax system. A worldwide tax system is one in which a nation taxes its citizens/residents on all of their income, regardless of where that income is earned. The United States uses a worldwide system that taxes U.S. citizens and resident aliens regardless of where income was earned. A country that uses a territorial tax system taxes everyone, citizens and non-citizens, but only on income earned within that country’s borders (Annette Nellen, James C. Young, Bradrick M. Cripe, Sharon S. Lassar, Mark B. Persellin, and Andrew D. Cuccia, South-Western Federal Taxation 2025 Edition: Corporation, Partnerships, Estates and Trusts, Cengage Learning, 2024, 9-2). Although this system is used in many countries, the United States uses the territorial system to tax non-resident aliens only. As a result, non-resident aliens are only taxed on income earned in the United States.
For non-U.S. citizens, the classification between resident and non-resident alien status can have a signifi-cant impact on the taxation of income earned both in the United States and abroad. International students, including student athletes, often receive scholarships and income from various sources to attend U.S. schools. Under current U.S. law, some or all of those scholarships may be taxable income, for example, scholarships used or received to pay for room and board [IRC section 117(b)(1) and Proposed Treasury Regulations section 1.117-6(c)(2)] More recently for student-athletes, the possibility of NIL (name, image, likeness) income may mean both income taxation and self-employment income. Furthermore, other income, such as wages, salaries, and interest may also be taxable. Many international students studying in the United States may have part-time jobs or full-time employment during their stay as part of their academic program; these monies may be taxable.
Types of Student Visas
Different types of visas are available to international students. An understanding of these visas provides background regarding which types of income could be earned by these students while in the United States as well as potential income from outside of the United States which is taxable to a U.S. resident alien.
For international students hoping to study in the United States, the federal government provides 3 different types of student visas:
- ▪ F-1 visa—for international students pursuing full-time academic studies at a school, college, or university (U.S. State Department, “Other U.S. Student Visas,” https://j1visa.state.gov/basics/other-u-s-visas)
- ▪ J-1 visa—for foreign nationals who have been approved to take part in work-and-study based exchange programs such as visiting scholars, camp counselors, au pairs, and research assistants (U.S. State Department, “J-1 Visa Basics,” https://j1visa.state.gov/basics)
- ▪ M-1 visa—for full-time international students pursuing vocational studies (U.S. State Department, “Other U.S. Student Visas,” https://j1visa.state.gov/basics/other-u-s-visas).
This article is about international students attending U.S. universities for academic studies, and thus concentrates on the F-1 visa. Each visa varies in their terms, such as the time allowed in the United States, the availability of “vacation,” and the ability to return home during their period of study. This article focuses on traditional international students (including student athletes) attending a college or university in the United States.
Students with an F-1 visa are required to be enrolled in an academic program at a U.S. higher education institution. Furthermore, this type of visa has no specific time limit for student graduation; thus, these students can remain in the United States for the duration of their program. In addition, students can transfer from one academic program to another at any time, or begin a new program when they finish a program or degree. While students generally cannot work full-time with an F-1 visa, four types of work are allowed: on-campus student employment, off-campus employment for students with economic hardship, curricular practical training (CPT), or optional practical training (OPT) (U.S. Citizenship and Immigration Services, “Students and Employment,” https://tinyurl.com/ym4bsu9d).
While CPT and OPT are similar, the major difference between the two is the timing of the work involved. CPT is for work which occurs before completion of the course of study and which is part of the curriculum (e.g., paid or unpaid internships, clinicals). OPT can be completed before, during, or after completion of the curriculum. Generally, students can work in OPT for up to one year full-time, although students in science, technology, engineering, and mathematics (STEM) fields may apply for an extension of up to 24 months (Study in the USA, “What is the Difference Between OPT and CPT?” 2020, https://tinyurl.com/h4rs8ndt).
Accordingly, an international student could be in the United States for an extended period of time on a student visa as long as they continue to be enrolled in an academic program. For example, a student may graduate with an undergraduate degree, then enroll in a graduate program to further their education, or pursue a second undergraduate degree. More recently, during the COVID pandemic, many student athletes were given an additional year of eligibility in sports at their higher education institution. Many students extended their studies or pursued an additional degree or program to take advantage of this.
As long as visa requirements are met, this extended period in the United States is not a problem for immigration purposes. But the tax rules are different.
As long as visa requirements are met, this extended period in the United States is not a problem for immigration purposes. But the tax rules are different and may cause issues for international students.
Resident Alien Versus Nonresident Alien
As previously noted, the taxation of individuals in the United States is the same for citizens and for resident aliens. Taxation is significantly different for non-resident aliens, however. The definition of citizen for tax purposes is the same as for immigration purposes. A person achieves U.S. citizenship by birth or by naturalization. A person who is not a citizen is either a resident alien or a nonresident alien. The definition of those two terms for tax purposes is not the same as the definition for immigration purposes, and that distinction is very important here.
Because an international student is not a citizen and does not have a “green card,” an international student’s status for income tax purposes will be determined using the substantial presence test in IRC section 7701(b)(1). The substantial presence test is met if the person: 1) was present in the United States during the current year at least 31 days and 2) is present in the United States for at least 183 days during the three-year period ending with the current tax year. The calculation of the 183 days is a weighted calculation as follows [IRC section 7701(b)(3)]:
- ▪ Days in current year × 1
- ▪ Days in previous year × ⅓
- ▪ Days in second previous year × ⅙
In counting days present in the United States, individuals must count a day if the individual is physically present in the United States at any time during that day [IRC section 7701(b) (7)(A)]. This means that a travel day when an individual enters or leaves the United States counts as one day [IRC section 7701(b)(7)(B)–(D) provide exceptions that do not relate to international students]. The following examples illustrate these basic rules.
Example 1: Gabby, an individual from South Africa, is in the United States to work for 90 days during 2021, 150 days during 2022, and 120 days during 2023.
Solution 1: For 2021, Gabby is a nonresident alien as she does not meet the substantial presence test—she has been in the United States for a minimum of 31 days for 2021 but she has not been in the United States for 183 days in 2021, or over the three-year period ending in 2021 (2019–2021).
For 2022, Gabby is still a nonresident alien. Her days in the United States are calculated as follows:
- 2021: 90 × ⅓ = 30 days
- 2022: 150 × 1 = 150 days
- Total: 180 days
For 2023, Gabby is classified as a resident alien. Her days in the United States are calculated as follows:
- 2021: 90 × ⅙= 15 days
- 2022: 150 × ⅓ = 50 days
- 2023: 120 × 1 = 120 days
- Total: 185 days
When a person becomes a resident alien during the year, that person is considered a resident alien from the first day of physical presence in the United States in that year.
Example 2: Start with the same facts as Example 1. Gabby has spent 120 days in the United States during 2023. Assume that she entered the United States on January 15, 2023 and stayed until March 24, 2023. She then went back to South Africa. She returned to the United States on November 11, 2023, and stayed into January 2024.
Solution 2: Gabby becomes a resident alien in 2023. This change in status (from non-resident alien to resident alien) occurs on her first day in the United States in 2023—January 15, 2023. She is considered a resident alien for the remainder of 2023 even though she spends a significant amount of that year outside of the United States.
The law does allow certain exceptions which may result in certain days in the United States not being counted for purposes of the substantial presence test. Specifically, the law provides that an individual is not treated as being present in the United States on any day if the individual is an exempt individual for that day or if they were unable to leave the United States because of a medical condition which arose while they were in the United States. [IRC section 7701(b)(3)(D)] While the medical condition exception does not specifically apply to international students, it could pertain in some cases; other exceptions are not relevant to international students.
An exempt individual is defined in IRC section 7701(b)(5)(A) to include a student, defined as an individual who is temporarily in the United States on only select types of visas, which include the F-1 visa. Therefore, the days in the United States on an F-1 visa are not counted. An example of this situation is as follows:
Example 3: Start with the same facts as Example 1. Assume that Gabby is in the United States for the same number of days as Example 1 but she is here as a student on an F-1 visa, rather than for work.
Solution 3: If Gabby is in the United States as a student, rather than for work, then for U.S. tax purposes, she is in the United States for 0 days in all 3 years. She is not a resident alien for any of the years in the example.
This exclusion does have a limit. Under IRC section 7701(b)(5)(E), the student exemption is only valid for 5 calendar years—specifically the first 5 calendar years that a student is in the United States on an F-1 visa. This limit is for calendar years, not academic years. Any part of a calendar year “uses up” one of the 5 calendar years. This 5-calendar year period is enough for a typical four-year academic degree program since most will begin their studies in the fall semester. If the student chooses to pursue a second degree or to take advantage of the Optional Training Program year, the student will most likely be considered a resident alien for year 6, since those days will now be counted for the substantial presence test. This could cause the student to be classified as a resident alien (and taxed as a citizen) for the 6th calendar year.
Example 4: Assume Gabby enters the United States on an F1 visa on August 3, 2017, to attend a U.S. university. Assume for simplicity that she does not return home to visit during her education. Her days in the United States for the following years are as follows:
- 2017: 151
- 2018: 365
- 2019: 365
- 2020: 366
- 2021: 365
- 2022: 365
- 2023: 365
- 2024: 152
Gabby graduates with a bachelor’s degree in May of 2021 and decides to pursue a master’s degree. The master’s degree is a two-year program so she is a student from August 2021 to May 2023. She then decides to complete a year of OPT before returning to her home country on May 31, 2024.
Solution 4: Gabby completes 6 academic years between August 2017 and May 2023. During 2017 through 2021, her days in the United States for the substantial presence test are 0 because she is classified as a student for those five years. Beginning in 2022, her status changes. In both 2022 and 2023, she is in the country for 365 days and all of those days are counted for the substantial presence test. When calculating her days in the United States, she will be classified as a resident alien for 2022, 2023, and 2024. The calculations for 2022 are as follows:
- 2020: 0 × ⅙ = 0 days
- 2021: 0 × ⅓ = 0 days
- 2022: 365 × 1 = 365 days
- Total: 365 days
Gabby is considered a resident alien beginning on the first day she is in the United States in 2022, January 1 in this example. Calculations for 2023 and 2024 are as follows:
- 2023
- 2021: 0 × ⅙ = 0 days
- 2022: 365 × ⅓ = 122 days
- 2023: 365 ×1 = 365 days
- Total: 487 days
- 2024
- 2022: 365 × ⅙ = 61 days
- 2023: 365 × ⅓ = 122 days
- 2024: 152 × 1 = 152 days
- Total: 335 days
It should be noted that, if Gabby does not enter the United States at all in 2025, she will not be considered a resident alien. This is because she is not present for at least 31 days during 2025.
The Problem and the Affected Parties
Students.
As previously discussed, the United States generally taxes non-resident aliens using a territorial tax system, which means that they only pay income tax in the United States on their U.S.–sourced income. Any income non-resident aliens earn from outside of the United States is exempt from income tax in the United States. In addition, nonresident aliens are not subject to FICA taxes (Social Security and Medicare) under IRC section 3121 nor self-employment tax under IRC section 1402. In some cases, a tax treaty between the United States and the student’s home country may affect the tax liability. Tax treaties vary but generally affect only income taxes, not employment taxes (see the United States Model Income Tax Convention, Article 2).
When a student’s classification changes from nonresident alien to resident alien, the student may still be able to benefit from a tax treaty for income tax purposes. If so, the student’s income tax liability may not change significantly. If, however, the United States does not have a tax treaty with the student’s home country, the student would be subject to U.S. income tax on all of their income earned worldwide. This could be a significant liability in some cases.
The biggest change for a student is employment taxes. Compensation earned for personal services are subject to employment taxes, that is, Social Security and Medicare taxes or self-employment taxes. This change significantly affects both the student employee and the employer (see below).
If students and employers are not aware of the status change for the student, the employer might not withhold employment taxes or enough income tax.
The danger is that, if students and employers are not aware of the status change for the student, the employer might not withhold employment taxes or enough income tax. Alternately, if the student has self-employment income, they may not be saving and making appropriate quarterly estimated payments.
Employers.
Employers are also required to withhold income tax from an employee’s paycheck under IRC section 3402 and FICA taxes under IRC section 3102. Both of these amounts are payable by employers to the IRS in a timely manner. FICA taxes are assessed on both the employee and the employer (IRC section 3111), so the employer is liable for the payment of both. The employer is responsible for the payment of the employee’s share of FICA taxes even if the employer did not withhold those taxes from the employee’s paycheck [Treasury Regulations section 31.3102-1(d)].
These taxes are an employer obligation that can result in significant penalties if these obligations are not met. Employers may also face a more practical dilemma: When an employer realizes that they should have been withholding and paying employment taxes, it must amend prior employment tax returns to report the income and pay the required taxes for the international student. Half of that employment tax liability is an amount to be paid by the employee through withholding by the employer. This catch-up withholding could be a significant issue for employees if the amount is taken too quickly. This might result in a short-term loan to the employee. Alternately, the employer might decide to pay the employee portion on their behalf, resulting in additional income to the employee for both income and employment tax purposes.
Payroll and human resources departments must be mindful of these issues and ask enough questions to ensure compliance with the law. Many international students are unaware that this change of status occurs, and thus might not bring it to the attention of the relevant parties.
Universities.
Universities could assist students with these issues by making them aware of this potential status change and what it could mean. In particular, campuses generally have an office to assist international students upon arrival and during their tenure at the university. The personnel in these offices need not be tax experts to make students aware that after five years, their tax status may change. This knowledge can be the key to avoiding unexpected issues.
Raising Awareness
Taxation in the United States can be very complicated, especially for those who are here for only a few years and are generally unfamiliar with the U.S. taxation system. Students and employers need to be aware that this status change can occur and have a significant impact. Universities can assist students with anticipating this change and understanding how it can affect them.
