One of the more confusing parts of working in the US with an H1B visa is the issue of taxes. The US tax code is fairly stringent for anyone that earns an income inside the country (and even more so for US citizens who have to pay tax on income worldwide). Certain types of withholding and tax payments are required for most H1B visa specialty occupation positions, and this should be taken into consideration when negotiating a salary.
Note: The following information is general in nature, and should not be relied to make your tax decisions. It is a good idea if you secure an H1B position to find a tax advisor who is experienced in the nuance of alien taxation.
Social Security and Medicare
In general, all foreign nationals employed by a US company will have to pay the employee portion of both social security and Medicare contributions. These are basically pension and healthcare provisions for retirement that everyone that works in the US must pay.
Your portion of Social Security is 6.2% and Medicare is 1.45% of gross salary, and the employer contributes the same amounts. That may seem unfair if you wont be in the US after retirement to receive the benefit of the payments, but many countries have the same scheme in place of withholding on foreign workers. It is just a reality of working in foreign countries.
In some cases, you can receive Social Security benefits even if you leave the US, but this depends on a number of factors including any tax treaty the US has with your home country.
Federal Income Tax
If you are a non-resident and working under an H1B visa, you will be subject to the non-resident income tax system. This means that you are only taxed on money that you make inside the US, at the same rate as US citizens. You will have file a US tax return (Form 1040NR), and do not have access to the same deductions as citizens (such as the standard deduction or ability to itemize deductions).
If you become a resident (or elect to be taxed like one) you would have access to the full range of deductions, but would also pay US tax on any income earned outside the US. Your tax advisor can tell you which choice is best for your situation.
The US tax rate for individual ranges from 10% to 39.6% depending on your income level. Most unmarried H1B workers will pay a rate of 25-28% on taxable income (the amount after exemptions) based on average H1B occupation wage levels.
State Income Tax
Another tax that is often not anticipated is state tax, and depends on the state where you work. Only a few states do not have any income tax, and some states such as California (where many H1B IT positions are located) can add as much as an additional tax of 6.5-10 % of taxable income.
Healthcare contributions may be required by your employer if you avail yourself of their group plan. Under Obamacare, having health insurance is a requirement, but this could be changing soon given the new administration in the US. In any case, due to the high cost of healthcare in the US, it is prudent to have some type of plan to give you basic coverage.
As you can see, your US tax obligations can reduce your take home pay by as much as 30-35% when you factor in all of the payments. Still, the US has one of the lowest tax rates of all developed economies, and while living here you do have the use of tax-supported services and infrastructure.
- February 1st, 2017