J-1 Exchange Visitors Employed by Foreign Employers

by Paula N. Singer, Esq. 

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:

• A nonresident alien individual
• A foreign partnership
• A foreign corporation

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:

• Paid for the first 2 years by a foreign employer and then for 2 years by a U.S. employer - U.S. days do not count for the first 2 calendar years only.
• Paid for the first 2 years by a U.S. employer and then for 2 years by a foreign employer – U.S. days do not count for the first 2 calendar years only.
• Paid for the first 3 years by a foreign employer and then for 1 year (or part of 1 year) by a U.S. employer – U.S. days do not count for the first 3 calendar years only.

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.

Paula Singer, Esq., Co-founder and Chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer LLP, Newton, MA, has over 25 years of experience providing advice and compliance services to individuals and their employers, and payers on cross-border matters.

Watch for Volume 4, Number 6 for "Honorarium Payments to J-1 Exchange Visitors."

Q: Is a J-1 Exchange Visitor who is exempt from federal income tax on his pay for services received from a foreign employer also exempt from state income tax?

A: It depends on the state. Many states define income for state income tax purposes with reference to federal gross income or adjusted gross income or federal taxable income. In these cases, the income would be exempt from state income taxes as well. Some states have their own rules determining when income from services performed in their state for a nonresident employer (i.e., an employer that is not resident in the state) are subject to state income taxes. Since the foreign employers rarely establish a U.S. payroll, it is unlikely that there is any compliance with state income tax rules that would tax this income.

Register Today for Windstar’s Year-end Nonresident Alien Training Workshop December 4th – 7th

Windstar will hold its Year-end Nonresident Alien (NRA) Training workshop Tuesday, December 4th through Friday, December 7th at the Boston Newton Marriott in Newton, Massachusetts. Windstar’s experts will provide substantive training on immigration rules related to paying foreign nationals, determining tax residency, the special withholding and reporting rules for wages, scholarship, and fellowship grants that apply to nonresidents, and exemptions from tax under the law and treaties. Included will be a day-long review of IRS Forms 1042 and 1042-S filing procedures and submission strategies. There will be an accounts payable track concurrent to the 1042 sessions.

The registration cost is $1,350 for the first attendee from an institution and $1,200 for each additional attendee. There is also an additional $300 fee to attend the “Introduction to Tax Navigator” session from 12:30 pm– 5:30 pm on Tuesday, December 4th. A discounted hotel rate of $145 per night for single or double bedrooms is available by calling 617-969-1000 before November 19th.

Recently Published Articles by Paula N. Singer, Esq.

Paula N. Singer Esq. has had several articles on taxation issues surrounding foreign nationals featured in publications over the summer months.

• “ U.S. Taxation of J-1 Exchange Visitors,” Corporate Business Taxation Monthly, October, 2007
• "Don't Extend U.S. Social Security Taxation to Currently Exempt Foreign Workers," Tax Notes International, Tax Analysts, August 13, 2007
• "Foreign Nationals Beware: Easy Steps to Avoid Tax Return Errors," AILA's Immigration Law Today, May/June 2007
• “Ten Common Tax Return Errors Foreign Nationals Should Avoid,” Section Review, Massachusetts Bar Institute, 2007

For more articles authored by Paula, visit www.windstar.com/public/PUBLICATIONS.htm.

Prepare for Tax Season with Windstar Publishing

A Guide for Filing IRS Forms 1042 and 1042-S and International Aspects of Individual U.S. Tax Returns from Windstar Publishing offer excellent resources to prepare for tax filing season.

A Guide for Filing IRS Forms 1042 and 1042-S provides a comprehensive overview of both forms and the rules and regulations that affect their filing. Additionally, the guide provides copies of relevant IRS forms and instructions.

International Aspects of Individual U.S. Tax Returns explains the various United States tax rules, forms, and procedures that apply to individual taxpayers who have tax returns with international aspects. These individuals include United States citizens and residents with income-producing assets abroad and those living and working or retired abroad, foreign nationals with United States source income and those living and working or studying in the United States, and individuals relocating to or from U.S. possessions.

For a comprehensive description of topics covered in each guidebook, visit shopping.windstar.com.

Windstar Will Dock at These Upcoming Trade Shows

Mid-Atlantic Banner Users Group (MABUG) 2007 Conference
Skelton Conference Center
Blacksburg, VA
October 8 – 9, 2007

Don’t miss Richard Adams’ presentation on “IRS Compliance Risks in Payments to Foreign Nationals: The Path Through the Regulatory Maze” from 1:00 pm – 1:40 pm on Monday, October 8th.

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California Community Colleges Banner Users Group (3CBG) Conference
Hilton Newark/Fremont
Fremont, CA
October 15 -17, 2007

Be sure to attend Richard Adams’ presentation on “IRS Compliance Risks in Payments to Foreign Nationals: The Path Through the Regulatory Maze,” at 3:30 pm on Tuesday, October 16th.

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Community College Business Officers Organization (CCBO) 2007 Conference
Rosen Shingle Creek Resort
Orlando, FL
November 10 – 13, 2007

Richard Adams will present on “IRS Compliance Risks in Payments to Foreign Nationals: The Path Through the Regulatory Maze” from 2:00 pm - 3:15 pm on Tuesday, November 13th.

Windstar Experts Will Be Speaking at These Upcoming Educational Conferences

American Payroll Association Educational Institutions Payroll Conference (EIPC)
Gaylord Texan Resort and Convention Center
Grapevine, TX
October 14 – 17, 2007

Windstar experts Paula N. Singer, Esq. and Linda Dodd-Major will present on NRA taxation and immigration issues.

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St. Norbert’s International Tax Summit
St. Norbert’s College
De Pere, WI
November 12 – 15, 2007

Don’t miss the Windstar Pre-Conference training from 8:30 am – 5:00 pm on Monday, November 12th.

Windstar experts Paula N. Singer, Esq. and Linda Dodd-Major will present on NRA taxation and immigration issues at the International Tax Summit.

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Windstar/COKALA NRA Payment Training
Courtyard by Marriott Phoenix Airport
Phoenix, AZ
November 27-28, 2007

Windstar experts Linda Dodd-Major and Terri Crowl will present on tax treaties and immigration issues at this two-day conference.

©Copyright 2007 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication.  While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.

Since 1995 educational institutions, hospitals, research institutions, and corporations have relied on Windstar Technologies, Inc. to deliver the expertise to comply with the U.S. tax residency rules, tax rates, and special tax exemption rules under the law and U.S. treaties.  When government agencies require information about foreign nationals in the workplace, Windstar provides straightforward analysis and reporting.  Comprehensive software for analysis and reporting, expert knowledge, and unparalleled customer service combine to make Windstar the first choice for nonresident alien tax compliance.

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