H1B and L1 visa holders working in the U.S. are legally bound to U.S. tax laws which require certain compliance. Such regulation involves filing an annual U.S. tax return for foreign workers. The substantial presence test establishes a determination for the tax liability of foreign workers of whether they are taxed as residents or nonresidents.
There are typical challenges like the differences in resident vs. nonresident taxation, eligibility status for tax deductions for H1B workers as well as FICA taxes for visa holders. In addition to this, there are countries that have tax treaties with the U.S. that can reduce or eliminate certain taxes for visa holders.
Not filing H1 taxes or L1 taxes can result in IRS penalty payments which include fine amounts as well as interest fees on unpaid taxes. Acknowledging such IRS tax forms for visa holders while staying fully compliant are fundamental action in order to prevent tax issues when deductions can be maximized.
| SPT Calculation | Days Counted |
|---|---|
| Current Year | 100% of days spent in the U.S. |
| Prior Year | 1/3 of days spent in the U.S. |
| Two Years Ago | 1/6 of days spent in the U.S. |
| Resident Alien if Total ≥ 183 Days | Taxed as a U.S. resident |
| Category | Resident Alien (Meets SPT) | Nonresident Alien (Fails SPT) |
|---|---|---|
| Tax Form | Form 1040 | Form 1040-NR |
| Taxed on | Worldwide income | Only U.S.-sourced income |
| Eligible for Deductions & Credits? | Yes (e.g., standard deduction, child tax credit) | No (except in limited cases) |
| FICA Taxes (Social Security & Medicare) | Yes | Generally exempt (unless employed under special circumstances) |
| Tax Treaties Apply? | Yes (May reduce tax liabilities) | Yes (May exempt certain income) |
The IRS taxes H1B visa holders and L1 visa holders by focusing on their tax residency status under resident vs. nonresident taxation rules. Resident aliens (meeting the Substantial Presence Test) are taxed at graduated tax rates on worldwide income. On the other hand, nonresident aliens are taxed only on U.S.-sourced income at different rates.
| Tax Rate (2025) | Single Filers | Married Filing Jointly |
|---|---|---|
| 10% | Up to $11,925 | Up to $23,850 |
| 12% | $11,925 – $48,475 | $23,850 – $96,950 |
| 22% | $48,475 – $103,350 | $96,950 – $206,700 |
| 24% | $103,350 – $197,300 | $206,700 – $394,600 |
| 32% | $197,300 – $250,525 | $394,600 – $501,050 |
| 35% | $250,525 – $626,350 | $501,050 – $751,600 |
| 37% | Over $626,350 | Over $751,600 |
Employers withhold federal income tax from wages under H1B visa tax filing and L1 visa tax rules. Tax deductions for H1B workers like the standard deduction as well as retirement contributions (401k, IRA) might reduce taxable income.
State tax obligations change depending on residency rules as indicated earlier.
| Category | States |
|---|---|
| No State Income Tax | Texas, Florida, Washington, Nevada, Wyoming, South Dakota, Alaska |
| States with Income Tax | California, New York, New Jersey, Illinois, Massachusetts, Pennsylvania, etc. |
H1B and L1 visa holders living in a state with income tax should fulfill state tax return filing obligations.
Some states do not recognize foreign tax credits. This situation might result in double taxation risks.
| Visa Type | FICA Tax Obligation | Possible Exemptions |
|---|---|---|
| H1B Visa Holders | Must pay Social Security & Medicare taxes. | No exemptions. |
| L1 Visa Holders | Generally required to pay FICA taxes. | May be exempt if from a country with a totalization agreement. |
| Exempt Countries (Examples) | – India (exemption for Indian Social Security contributors). – Germany, UK, Canada (due to bilateral agreements). | Must file IRS Form 8833 to claim exemption. |
L1 visa holders claim such exemptions by filing the correct IRS tax forms for visa holders.
| Form | Who Must File? | Threshold |
|---|---|---|
| FBAR (FinCEN 114) | U.S. persons with foreign bank accounts | $10,000 total foreign account balance at any time. |
| Form 8938 (FATCA) | H1B & L1 visa holders with foreign assets | $50,000 single / $100,000 joint (U.S. residents) or $200,000/$300,000 for expats. |
Failing in terms of filing such IRS tax forms for visa holders can lead to severe penalty amounts exceeding $10,000 per violation.
H1B and L1 visa holders can select between the standard deduction option or itemized deductions option. The choice depends on the higher tax benefit.
| Filing Status | 2024 Standard Deduction |
|---|---|
| Single / Married Filing Separately | $14,600 |
| Married Filing Jointly | $29,200 |
| Head of Household | $21,900 |
The U.S. has tax treaties with distinct countries to prevent double taxation. Another target is to present tax relief for foreign workers which includes H1B visa holders as well as L1 visa holders. These treaties help in three key ways as outlined below:
✔ Tax Rate Reductions: Some treaties lower withholding tax rates on income like dividends, interest and royalties.
✔ Foreign Tax Credits: H1B and L1 visa holders are able to benefit from foreign tax credits (Form 1116) to offset U.S. taxes on foreign income.
✔ Exemptions for Nonresident Aliens: Some tax treaties enable certain visa holders to exempt income from U.S. taxation under Form 8833:
| Country | Tax Treaty Benefits |
|---|---|
| India | Reduces Social Security tax liability, allows certain income exemptions. |
| Canada | Covers retirement accounts (RRSPs) and avoids double taxation. |
| U.K. | Reduces taxes on investment income. |
| Germany, France, Japan, South Korea, China | Provide various tax rate reductions and credit provisions. |
H1 taxes and L1 taxes can be significantly reduced in the case when treaty benefits apply. Paying attention to Form 8833 and Form 1116 establishes full compliance with U.S. tax laws when tax savings are maximized.
✔ Determine The Tax Residency:
✔ Collect The Documents:
✔ Selecting the IRS Form:
✔ The Deadline (April 15):
✔ Decide How:
✔ Failure results in below consequences:
✔ FBAR Penalties for Unreported Foreign Assets:
Willful violations might lead to fine amounts exceeding 50% of the account balance.
✔ Resident aliens file Form 1040 and pay taxes on worldwide income.
✔ Nonresident aliens file Form 1040-NR and pay taxes only on U.S.-sourced income.
❌ Mistake to Avoid: Tax treaties should regularly be checked for exemptions that might change residency classification.
✔ Deadline: April 15 (automatic extension to October 15).
✔ Penalty for non-filing: Minimum $10,000 per violation (higher for willful violations).
❌ Mistake to Avoid: Do not assume that FBAR does not apply to joint foreign accounts or employer-provided accounts.
✔ Foreign Tax Credit (Form 1116) – Offsets double taxation.
✔ Retirement Contributions (401k, IRA) – Lowers taxable income.
✔ Student Loan Interest Deduction – Up to $2,500 per year.
✔ Moving Expenses – Only for military personnel (as of 2018).
❌ Mistake to Avoid: Do not assume that nonresident aliens qualify for all deductions—most credits apply only to resident aliens.
| Topic | Key Points |
|---|---|
| Tax Residency (SPT Test) | 183+ days rule determines resident vs. nonresident taxation. |
| Resident vs. Nonresident Taxation | Residents: Form 1040, taxed on worldwide income. Nonresidents: Form 1040-NR, taxed on U.S. income only. |
| Federal & State Taxes | Federal: Graduated tax rates (10%-37%). State: No tax in TX, FL, WA, NV, WY, SD, AK; high taxes in CA, NY, NJ, IL. |
| FICA Taxes (Social Security & Medicare) | H1B: Pays FICA taxes. L1: May be exempt under totalization agreements (e.g., India, Germany). |
| Key IRS Tax Forms | 1040/1040-NR, W-2, 8843, FBAR, Form 8938. |
H1B or L1 visa holder taxation implications necessitate careful attention to residency status and deductions alongside compliance requirements. Tax professionals can lend a helping hand in order to establish precise filing and own maximized deductions.
Need assistance with your H1B/L1 visa tax return? Contact our team at Dimov Tax today!
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L1 visa holders pay federal, state (if applicable), and FICA taxes based on income. Rates range from 10% to 37%.
Not automatically. SPT determines tax residency status.
No specific “L-1 form” for taxes; L1 holders file Form 1040 or 1040-NR.
L1 is for company transfers, H1B is for specialty jobs. H1B allows employer changes; L1 doesn’t require a lottery.
Generally, none. Some tax treaties may reduce FICA taxes.
No, employers must pay prevailing wage per DOL rules.
Varies by job and location; DOL wage data sets the minimum.
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