H1B Taxes: Everything You Need to Know
Posted by Rohit Mittal in Taxes | Updated on August 26, 2022
H1-B visa holders are subject to U.S income tax law for all income they earn in the U.S. As a non-resident (H1-B visa-holder), however, you might not be able to claim the same tax deductions as a permanent resident or citizen would. It can sometimes get confusing trying to figure out which deductions you qualify for as an H1-B visa holder, and which you don’t.
Below we set out some key things you need to know about H1-B taxes and a few H1-B tax saving tips.
Read on to learn more, or check out our video Salary After Taxes in US | How much can I save in USA?
Table of Contents
What are H1B Taxes?
When you earn an income in the United States as an H1-B visa holder, you will be responsible to pay H1-B taxes.
The tax payable is calculated using the U.S tax code which sets out clear instructions for both U.S citizens and foreigners on H-1B visas. The U.S tax code also provides the applicable tax scales and tax rates.
There are different types of H-1B taxes payable which we discuss below. When all these taxes are totaled together, an H1-B visa-holder can pay as much as 30%-35% of their income to tax. This is, however, a lot less than other countries with developed economies.
Types of Taxes H1B Visa Holders Pay
Below are some of the H1-B taxes you will have to pay.
This is a tax that everyone is required to pay while working in the U.S. This tax serves as a provision for your pension after retirement. Whether you will be in the country to enjoy this benefit is not relevant when assessing whether you are required to pay for it.
Half of the Social Security Tax (the employee half) is paid by the H-1B visa holder and the other half (the employer half) is paid by the U.S employer. You will be required to pay 6.2% of your gross salary and your employer will be responsible to match that amount.
These taxes are provisions for healthcare after retirement and is paid on the same basis as Social Security Tax. The employee and employer will each be responsible for their half of the contribution. Both you and your employer will contribute 1.45% of your gross salary.
Federal Income Tax
A foreigner in the U.S with an H1-B visa is subject to the non-resident income tax system. With this system, you will be taxed on all the income earned within the U.S without receiving the deductions that U.S citizens receive.
Based on the average wage levels of the H1-B visa occupations, an individual will pay a rate of 25%-28% on taxable income.
As a non-resident, you can receive the same deductions as U.S citizens if you choose to be taxed as a resident. In this case, you will also be liable to pay tax on your income earned outside the U.S. It might be a good idea to weigh up the benefits of these options with the help of a tax advisor.
State Income Tax
This is a type of tax that you will be liable to pay depending on which state you are working in. There are states that levy additional state service tax like the state of California which adds up to 6.5%-10% additional tax.
Under Obamacare, it is compulsory to have healthcare (although there is a possibility that this might change). Your employer will be responsible for making contributions to your healthcare on your behalf. The cost of healthcare can be very high so it is important to at least have a health care plan that provides primary coverage.
How to File H1B Taxes 2019?
H1B Visa is viewed as the golden gate to a glowing career in the USA for professionals from all around the globe. If you are one among the lucky souls and have an approved H1B visa, then you are probably one step closer to secure a green card. As H1B visa is directly linked with employment in the USA, you are required to comply with the income tax rules and regulations. To be regarded as a United States resident for tax purpose, H1B holders must meet the substantial presence test for the particular calendar year.
Substantial Presence Test
The Internal Revenue Service (IRS) uses the Substantial Presence Test (SPT) as a criterion to determine whether a working immigrant qualifies as a resident of the USA for tax purpose. It is based on the physical presence of the individual during a particular financial year. To qualify for Substantial Presence Test, you have to be physically present in the USA for:-
- At least 31 days during the current calendar year for which tax return is being filed and
- The total number of days present in the current tax year + one-third of the number of days in the year before the tax year + one-sixth of the number of days in the year two years before the tax year must be equal to or greater than 183 days
Let’s illustrate the eligibility criteria with an example. Suppose you were physically present in the USA during each of the years from 2016 – 2018 for at least 150 days. To figure out whether you meet the SPT requirement, you need to count 150 days for the current year (2018), add up 50 days for 2017 (one third) and 25 days for 2016 (one sixth). It means your total for the 3 year period is 225 days (150+50+25), which is more than the minimum requirement of 183 days. So you are eligible under SPT to qualify as a resident of the USA for tax purpose.
Filing H1B Taxes in 2019
If you qualify under the Substantial Presence Test as a taxpayer, then you need to prepare for all the filing and paperwork involved with income tax under the law of the land. Here are the steps involved to file your taxes under the Federal Income Tax law for the year 2019.
Step 1: Know the Deadline to File Taxes
For filing your tax return for the financial year 2018, the deadline set by the authorities in the USA is April 15, 2019. So mark your calendar accordingly and make sure to receive all the tax documents with plenty of time in hand. If you don’t receive your income and investment forms by the mid of February, get in touch with the concerned authorities without any further delays.
Step 2: Gather Your Tax Documentation
The required documentation for tax filing in the USA includes form W-2, form 1099, mortgage interest statement, and investment income statement. If you wish to receive tax concession under itemized deductions, you must back up your claims with proof. So make sure to have receipts for child care, educational cost, charitable donations and other applicable receipts handy.
Married individuals will also need to submit additional documentation like form 8822 (for relocation due to marriage), form SS-5 (for change of name) and W4 (for adjustment of tax due to change in household income). Whenever in doubt, it’s a good idea to consult the tax preparation checklist on the official IRS website.
Step 3: File Your Taxes
Once you are ready with all the required documents, the next step is to file your income tax. You can either hire a professional tax consultant or use commercial tax software on your own for filing the tax return. If there are no complexities in your income and you are filing only the standard deductions, online filing can be your best bet. It’s quite straightforward if you are internet-savvy.
However, if it appears to be complicated and you lack confidence in your ability to calculate the numbers accurately, a professional service can serve you well. It will cost you some fees, but you can rest assured that the responsibility will be taken care of competently.
10 Amazing H1B Tax Tips
Below are a few handy H1-B tax saving tips that will help you with your next tax return.
1. Keep the W-2 form handy
This is a very handy form to keep close which will make your tax return process much easier. This form contains details of your yearly payroll and you can get this from your employer. If you were employed by various employers during the same year you will need to collect multiple of these W-2 forms.
2. Make investments
Your income tax returns can be lightened by making various investments. You can make investments in retirement schemes (if your employer has not signed you up for these yet). You can also invest in the stock market or fixed deposits.
3. Claim spousal exemption
In the U.S you can qualify for a spousal exemption. You will be required to fill in an ITIN (Income Tax Identification Number) form to claim this exemption. You will get the ITIN by filling in a W-7 form. This is a great H1-B tax saving.
4. Pay tax on your worldwide income
According to U.S tax laws, if you are a U.S resident who also holds an H1-B visa, you are required to pay tax on your worldwide income. This means you will be required to pay tax on all interest earned from banks in foreign countries.
5. Declare all your financial interest
This is a factor that many people don’t notice and the penalty is definitely something that you would want to avoid.
If you own financial accounts in foreign countries and the progressive value of these accounts exceeds $10,000 per year, you will need to submit a TD 90-22.1 form at the IRS by 30 June each year. Failing to meet this deadline will mean a non-compliance penalty of $10,000 per year.
6. Declare your dependents
If you have dependents that are not allowed to enter the U.S, you can still declare them as your dependents when filing your tax returns. However, your dependents still have to qualify as dependents according to the laws of the United States.
7. Claim your Medicare for the period you were on OPT
If in a year of assessment you were both on OPT (Optical Practical Training) and an H1-B visa, chances are your employer withheld amounts for both Medicare and Social Security Tax. You are entitled to be reimbursed for the amounts withheld for Medicare, so make sure to claim this reimbursement.
8. Claim deductions for moving expenses
You can claim deductions for moving expenses if you either moved to the U.S from a foreign country or if you relocated to another location in the U.S. You should, however, meet the pre-set time and the distance standard.
9. Claim medical deduction
If your medical expenditure exceeds 7.5% of your AGI (Adjusted Gross Income), you will be able to claim medical deductions. You will need Form 1040, Schedule A for this.
10. Get loans or make donations
You can get a tax saving for taking out a mortgage loan (loan providers like Stilt provide loans for foreign nationals on H1-B visas). You can also get tax relief from making donations to charities and for any expenditure incurred for actually filing your tax return.
- Why Was No Federal Income Tax Withheld From My Paycheck?
- Why Do I Owe Taxes?
- Why Do I Owe State Taxes?
- Are You Exempt from Federal Withholding?
- How to File Taxes With No Income
- Can You File Taxes Without a W2?
As a result of your liability for H1-B taxes, your net income can be lessened by up to 30%-35%. This might seem like a lot, but compared to other developed economies it is quite low. You can lessen this amount by taking the above H1-B tax saving tips into account when filing your tax returns. Fortunately, you will have the advantage of using and enjoying the U.S infrastructure in return for paying those taxes.
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