Hiring a student on an F-1 or J-1 visa? Their paycheck taxes are not the same as a regular W-2 employee’s — and getting it wrong is one of the most common payroll mistakes. The two errors we see most often are withholding Social Security and Medicare that never should have come out, and charging the employer FUTA it never owed. Here is what actually applies, and the law behind each piece.
This is general information, not tax advice for a specific situation. When in doubt, confirm an individual’s residency status with a tax professional.
The short version
While an F-1 or J-1 student is a nonresident alien for tax purposes, wages for services their visa permits are exempt from FICA (Social Security and Medicare) and from FUTA (federal unemployment). They are still subject to federal income tax — but nonresident aliens are withheld under a different method, so the amount can look higher than a comparable U.S. resident’s. State unemployment and disability taxes follow state law and are generally not covered by the federal exemptions.
Social Security and Medicare (FICA): exempt
Under IRC § 3121(b)(19), services performed by a nonresident alien present in the U.S. on an F-1, J-1, M-1, or Q visa are excluded from Social Security and Medicare tax, as long as the work is authorized by the visa (for example, on-campus employment or approved practical training).
The exemption applies while the student is a nonresident alien. F-1 and J-1 students are treated as “exempt individuals” — meaning their days in the U.S. do not count toward the substantial presence test — for their first five calendar years. During that window they are nonresident aliens and the FICA exemption applies.
FUTA: also exempt — and this is the one that gets missed
Federal unemployment tax has its own exclusion that mirrors the FICA one almost word for word. IRC § 3306(c)(19) excludes the same nonresident-alien F-1/J-1/M-1/Q services from FUTA. Same visa categories, same “services allowed by the visa” condition, same result.
This is where a lot of payroll systems get it wrong: they correctly zero out Social Security and Medicare but still charge the employer FUTA on the same wages. Because the two exemptions come from parallel provisions — § 3121(b)(19) for FICA and § 3306(c)(19) for FUTA — if the FICA exemption applies, the FUTA exemption applies too. The employer should owe $0 FUTA on those wages.
Federal income tax: NOT exempt, and withheld differently
None of the above touches federal income tax. Nonresident-alien employees still owe it and still have it withheld each paycheck. But the IRS uses a special procedure for them (Pub 15-T and Notice 1392): an additional amount is added to wages before withholding is figured, and nonresident aliens generally cannot claim the standard deduction the way a resident does and are withheld at single rates.
The practical effect is that a nonresident alien’s federal withholding is often noticeably higher than a U.S. resident earning the same wage — the opposite direction from the FICA/FUTA exemptions. If you compare an NRA’s paycheck to a resident’s and the income-tax number looks high, that method is usually why.
State taxes: check your state
The federal exemptions do not automatically carry over to the states. State unemployment insurance (SUI/SUTA) and state disability programs are creatures of state law, and most states still apply them to F-1/J-1 wages. California is a common example — state UI and the employer’s reemployment obligations follow the California code, not the federal FUTA rule.
The takeaway: never assume a federal FICA/FUTA exemption zeroes out the state side. Confirm each state’s treatment separately.
When the exemption ends
The FICA and FUTA exemptions are tied to nonresident-alien status. Once an F-1 or J-1 student has been in the U.S. long enough to pass the substantial presence test — generally after the fifth calendar year for students — they typically become a resident alien for tax purposes. From that point, Social Security, Medicare, and FUTA apply just like any other employee.
That means a student’s tax treatment can change from one year to the next. It is worth reviewing visa and residency status each year rather than setting it once and forgetting it.
How Payrollix handles it
In Payrollix, you mark the employee’s exemption status once. From then on, payroll runs automatically zero out Social Security, Medicare, and FUTA on their wages — both exemptions, not just FICA — in line with § 3121(b)(19) and § 3306(c)(19), while still applying state unemployment where the state legally requires it and withholding federal and state income tax normally.
It is a small setting with a real dollar impact, and it is exactly the kind of edge case that is easy to get wrong by hand or with software that only handles the FICA half. If you employ students or other nonresident-alien workers, it is worth confirming your payroll is treating both the FICA and the FUTA side correctly.
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