OPT for International Students: Navigating Social Security Tax Exemptions and the Proposed "OPT Fair Tax Act"

Optional Practical Training (OPT) offers international students holding an F-1 visa a valuable opportunity to gain work experience in the United States for up to 12 months, typically after graduation. However, navigating the complexities of U.S. tax laws, particularly regarding Social Security and Medicare taxes (FICA), can be challenging for OPT students. This article aims to clarify the FICA exemption for international students on OPT, address common misconceptions, and discuss the potential impact of the proposed OPT Fair Tax Act.

Understanding OPT and Tax Residency

OPT allows most international graduates of U.S. universities to work in the United States after graduation on their F-1 visa. During post-completion OPT, students may remain nonresidents or become residents for tax purposes, depending on whether they meet the Substantial Presence Test.

It is important to recognize the difference between a Resident and Non-Resident Alien (NRA) for tax purposes. Most typically, a student or graduate in F-1 status that has been in the US for less than 5 years will be considered an NRA for tax purposes. Students in the US for more than 5 years are usually considered Residents for tax purposes. Your tax structure will change when you become a resident for tax purposes.

As a general rule, all wage income received in the USA is subject to three main types of tax: (1) federal income tax; (2) Social Security tax; and (3) Medicare tax.

The FICA Exemption for International Students

International students in F-1, J-1, or M-1 status for less than 5 calendar years are generally nonresident aliens under residency rules of IRC section 7701(b). International students in F-1, J-1, M-1, Q-1 or Q-2 nonimmigrant status are entitled to the FICA exemption for the first 5 calendar years of physical presence in the USA. After this period of time has passed, international students are classified as Resident for Tax Purposes and are subject to FICA tax withholding. International persons in H-1B, TN, O-1 or E-3 status are fully subject to FICA tax withholding.

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Importantly, time in F-1 status is not counted toward this test until a student has been in the country for any part of five calendar years. As a result, wages earned within this window are exempt from FICA, while earnings after the window closes are taxed like those of other workers.

The FICA taxes do not apply to services performed by students employed by a school, college, or university where the student enrolled at least half-time. The student’s on-campus employment must be incidental to and for the purpose of pursuing a course of study. Consequently, a foreign student who becomes a resident alien may be eligible for this exemption if qualified. Off-campus jobs or working for other employers do not qualify.

Qualifying for the FICA Exemption

To qualify for the FICA exemption, international students must meet specific criteria. Generally, students in F-1, J-1, or M-1 status for less than five calendar years are considered non-resident aliens and are exempt from Social Security and Medicare taxes. This exemption typically applies to on-campus employment, practical training, and off-campus employment authorized by USCIS.

FICA taxes do not apply to payments received by students employed by a school, college, or university where the student is pursuing a course of study. Employment includes the following:

On-campus student employment up to 20 hours a week (40 hrs during summer vacations)
Off-campus student employment allowed by USCIS.
Practical Training student employment on or off campus.
Employment as professor, teacher or researcher.

Understanding the Five-Year Rule

When measuring an international person's date of entry for the purposes of determining the five calendar years or the two calendar years mentioned above, the actual date of entry is not important. It is the calendar year of entry which is counted toward the two or five calendar years respectively. For example, a foreign student who entered the United States on Dec. 31st of the given year.

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A consequence of the five year rule is that the longer a student remains in an academic program, the more likely it is that their OPT authorization falls outside the FICA exempt period, leading them to be taxed normally. A typical bachelor’s student pursuing four years of study followed by one year of post-completion OPT remains exempt from FICA the entire time. The opposite trajectory holds for graduate students pursuing a master’s degree, as opposed to a PhD. Master’s students pursuing a standard program plus a year of post-completion OPT won’t be present for five calendar years, so they rarely enter taxable status.

As can be seen in Table 2 above, exempt status varies widely by OPT participants’ program, and whether they are on 12-month post-completion OPT or the STEM OPT extension. Because master’s programs are so short, the vast majority of OPT participation is FICA-exempt (99.1% of the time spent by master’s grads on 12-month post-completion OPT, and 88.1% on STEM OPT).

Common Misconceptions and Employer Errors

Occasionally off-campus employers of international students on OPT/CPT are unfamiliar with this IRC section and withhold Social Security/Medicare tax in error. This is often a point of confusion for employers not used to hiring NRA employees. If these taxes were withheld from your paycheck in error, first request a refund from your employer. If your employer is able to refund these taxes, no further action is necessary.

Steps to Take if FICA Taxes are Withheld in Error

You must contact the employer who withheld the Social Security/Medicare tax for assistance. If this request is successful, you may stop here. Please note instructions are provided for illustrative purposes. A statement from your employer indicating the amount of the reimbursement your employer provided and the amount of the credit or refund your employer claimed or you authorized your employer to claim. This refund application is not a quick process and may take several months.

Tax Obligations for OPT Students

Starting a new job on OPT comes with important tax responsibilities.

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Federal and State Income Tax

OPT students are taxed on their wages at graduated rates from 10% to 37% (it depends on your income level).

Each state has different rules involving its tax laws. Your state tax obligations depend on several factors, including where you lived, where you worked, and how long you spent in each state during the tax year. State tax rules are separate from federal tax rules, and filing a federal return does not automatically satisfy state filing requirements.

Filing Requirements and Resources

It’s vitally important that you file your taxes in time for the deadline. This form is required for all F-1 students, even if you had no income. federal income tax return for nonresidents. UMBC provides a login code to the Sprintax Program for all current F-1 international students each year, which assists students with their required tax return each year. Students that have graduated from UMBC and are currently on OPT or the OPT STEM Extension can request a login code if additional codes are available. The ISSS office will assign codes to all current students, then invite any graduates to request a login code if available. Please note, Sprintax can only be used for individuals that are still NRA’s for tax purposes.

Sprintax Returns reviews your personal situation and automatically determines whether a tax treaty benefit applies and which form should be used. However, H1B visa holders must pay FICA tax and are usually not entitled to use tax treaty benefits for students and scholars.

Self-Employment Tax

Are you an F-1 visa student on OPT working as a self-employed or a freelancer? A nonresident alien is not liable for the self-employment tax.

Tax Residency and the Substantial Presence Test

Internationals who remain in the USA for lengthy periods of time will find that they have moved from NRA (Non Resident Alien) for tax purposes to RA for tax purposes and then back to nonresident for tax purposes.

Nonimmigrant visa holders are considered resident aliens for the purpose of collecting federal taxes, provided they spend a sufficient amount of time physically present in the United States (determined by the “substantial presence” test).

The Proposed OPT Fair Tax Act (S. 2940)

A new bill has been introduced in the US Senate seeking to remove payroll tax exemptions for foreign students working under the Optional Practical Training (OPT) program. The proposal, called the OPT Fair Tax Act (S. 2940), was introduced by Senator Tom Cotton in September and has been referred to the Senate Committee on Finance for consideration. The OPT Fair Tax Act (S. 2940) is a bill introduced in the US Senate by Senator Tom Cotton in September. If passed, this legislation could significantly increase the tax liability for both the students and the companies that employ them.

Details of the Proposed Legislation

The OPT Fair Tax Act aims to amend the Internal Revenue Code and the Social Security Act to subject employment by F-1 visa holders under OPT to Federal Insurance Contributions Act (FICA) taxes.

The current exemption: Currently, F-1 visa holders working on OPT are classified as non-resident aliens for tax purposes. This status exempts their earnings from FICA payroll taxes, which cover Social Security and Medicare. This combined tax is 15.3% of wages, split equally between the employee and the employer. A student earning $50,000 saves roughly $3,825 annually due to this exemption, with the employer saving an equal amount.

The proposed change: If the bill is enacted, OPT wages would be treated the same as domestic employment for tax purposes, requiring both the student and the employer to pay the FICA tax share, which is approximately 7.65% each. If the act passes, an F-1 student on OPT would have approximately $7.65\%$ of their gross wages deducted for FICA taxes. The Act would require the employer to pay their $7.65\%$ share of the FICA tax.

Senator Cotton, the bill’s sponsor, argues that the current tax code shouldn’t “incentivise businesses to hire foreign workers” and that ending the FICA exemption would “put American workers first”.

Potential Impact on International Students

If the OPT Fair Tax Act passes, international students, a significant cohort of whom are from India, would face immediate financial consequences:

Lower take-home income: OPT participants would see a reduction in their net income as 7.65% of their salary would be deducted for FICA. For a student on a $60,000 annual salary, this deduction would be about $4,590.
Reconsidered plans: This financial change could force students to budget more carefully for living expenses or potentially reconsider their plans to study and transition to work in the US before pursuing an H-1B visa.

Potential Impact on Employers

For US companies that utilize the OPT program to access skilled international talent, the new bill presents a direct increase in the cost of hiring:

Increased hiring costs: The rule change would mean the employer must contribute 7.65% of the OPT worker’s wages toward FICA. The total additional cost of employment for one OPT worker would rise to around $7,650 annually on a $50,000 salary.
Recruitment strategy changes: To offset these higher payroll expenses, some companies may choose to offer lower salaries or limit their hiring of non-resident graduates, which could affect the US’s competitiveness in attracting global talent.
Administrative burden: If the law passes, employers will face an immediate need to update their payroll systems to correctly calculate, withhold, and remit the new FICA tax obligations for all OPT participants, increasing administrative and compliance complexity.

Fiscal Impact Assessment

Having established how the FICA exemption functions for F-1 students, we next quantify the fiscal impact of closing the FICA exemption, as proposed in the OPT Fair Tax Act (S.2940).

To estimate how much to F-1 students earned on OPT, we work backwards from the earnings reported on initial cap-subject H-1B petitions filed between FY2021-2024 on behalf of F-1 students. These I-129 petitions are filed on behalf of workers, and indicate whether the beneficiary has an existing status and what it is. This allows us to look at the salaries of initial H-1B workers transitioning from student visas (i.e., the earnings of people in their first year after OPT). Because they are likely to earn more after having been tested in the labor market, we combine these earnings data with the Social Security Administration’s age-earnings profiles to back project their likely earnings the previous year. We take this to be a reasonable estimate of the average salary earned by OPT participants. To go from annual wages of OPT workers to actual earnings requires information on how much students actually worked while on OPT. We already calculated this from SEVIS data in Table 1 above. In line with traditional fiscal scoring assumptions, we make the static assumption that OPT participation is not changed by ending the FICA exemption. Multiplying the total number of FICA-exempt work months by estimated monthly wages gives the amount of income earned while shielded from FICA.
Creating a ten year fiscal score requires estimating how the additional FICA revenue raised each year evolves over time. We assume that the number of students working on OPT remains constant over the next decade, an intentionally conservative assumption, but that OPT salaries increase. We estimate this rate of increase by assuming that OPT workers’ earnings grow annually at the historical rate observed in the wages of I-129 petitions for former F-1 students from 2021 to 2024. The described methodology produces a ten-year fiscal score of taxing OPT participants like other US residents.

The Broader Context

The Federal Insurance Contributions Act (FICA) is by far the most significant wage-financed social insurance program in the United States, and it applies broadly to all US tax residents. FICA requires that a total of 15.3% of resident workers’ wages be paid into Social Security and Medicare, split evenly between employee and an employer. Employers can pass some of the cost of the employer-side FICA contribution onto workers in the form of lower salaries, but to the extent they can’t, the FICA exemption creates an incentive to hire foreign workers over Americans.

The Importance of Accurate Tax Information

As US immigration and tax laws remain volatile, a robust Global Payroll solution is essential for companies managing a non-resident workforce.

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