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Comprehensive Guide on US Taxes
for H1 and L1 Visa Holders

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.

Do H1B and L1 Visa Holders Need to File U.S. Taxes?

Tax Residency Status: Substantial Presence Test (SPT)

SPT CalculationDays Counted
Current Year100% of days spent in the U.S.
Prior Year1/3 of days spent in the U.S.
Two Years Ago1/6 of days spent in the U.S.
Resident Alien if Total ≥ 183 DaysTaxed as a U.S. resident

 

Resident vs. Nonresident Taxation

CategoryResident Alien (Meets SPT)Nonresident Alien (Fails SPT)
Tax FormForm 1040Form 1040-NR
Taxed onWorldwide incomeOnly 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)YesGenerally exempt (unless employed under special circumstances)
Tax Treaties Apply?Yes (May reduce tax liabilities)Yes (May exempt certain income)

Tax Obligations for H1B and L1 Visa Holders

Federal Income Tax

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 FilersMarried Filing Jointly
10%Up to $11,925Up 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 $626,350Over $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 Taxes

State tax obligations change depending on residency rules as indicated earlier.

CategoryStates
No State Income TaxTexas, Florida, Washington, Nevada, Wyoming, South Dakota, Alaska
States with Income TaxCalifornia, 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.

  • Part-year residency rules apply to taxpayers who are relocated between states.
  • Some states do not recognize foreign tax credits. This situation might result in double taxation risks.

FICA Taxes (Social Security & Medicare)

  • H1B visa holders should pay FICA taxes.
  • L1 visa holders generally pay FICA taxes. There are existing exemptions under totalization agreements between the U.S. and some countries as exemplified in the below table.
Visa TypeFICA Tax ObligationPossible Exemptions
H1B Visa HoldersMust pay Social Security & Medicare taxes.No exemptions.
L1 Visa HoldersGenerally 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.

IRS Tax Forms

Form 1040 (Residents) vs. 1040-NR (Nonresidents)

  • Resident aliens (meeting the Substantial Presence Test) should perform filing practice for Form 1040 in order to report worldwide income alongside qualifying tax deductions for H1B workers.
  • Nonresident aliens (not meeting the SPT) should fulfill Form 1040-NR. They report only U.S.-sourced income and are generally not eligible for deductions.

Form W-2 – Wage & Tax Statement

  • Employers issue Form W-2 to H1B visa holders and L1 visa holders. They summarize wages and withheld federal/state taxes.
  • It is beneficial for H1B visa tax filing and L1 visa tax rules compliance.

Form 8843 – Nonresident Tax Exemption

  • Nonresidents who claim tax treaty benefits or exemption from FICA taxes for visa holders should pay attention to file Form 8843.
  • It is typically leveraged by foreign students, trainees as well as J-1 visa holders.

Form 8938 & FBAR

FormWho 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. 

Common Tax Deductions & Credits

Standard vs. Itemized Deductions

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 Status2024 Standard Deduction
Single / Married Filing Separately$14,600
Married Filing Jointly$29,200
Head of Household$21,900
  • Most H1B visa holders take the standard deduction since they do not have extensive deductible expenses.
  • Itemized deductions might be useful in the case of paying high state taxes, mortgage interest or medical expenses.

Foreign Tax Credit & Treaty Benefits

  • H1 visa holders and L1 visa holders with foreign income are able to claim the Foreign Tax Credit (Form 1116) in order to prevent double taxation.
  • Some visa holders might qualify for tax treaty benefits (Form 8833), which reduce U.S. tax liability on specific types of income.

Retirement Savings Contributions (401(k), IRA)

  • H1B and L1 visa holders can reduce taxable income. As detailed, they can contribute to 401(k) plans alongside Traditional IRAs.
  • 2024 Contribution Limits:
    • 401(k): Up to $23,000 (plus $7,500 catch-up if 50+).
    • IRA: Up to $7,000 (plus $1,000 catch-up if 50+).
  • Contributions grow tax-deferred and aid foreign workers to design long-term savings when they lower taxable amounts.

Tax Treaties & How They Help

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:

CountryTax Treaty Benefits
IndiaReduces Social Security tax liability, allows certain income exemptions.
CanadaCovers retirement accounts (RRSPs) and avoids double taxation.
U.K.Reduces taxes on investment income.
Germany, France, Japan, South Korea, ChinaProvide 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.

How to File Taxes as an H1B/L1 Visa Holder

Steps to File Your Tax Return

Determine The Tax Residency:

  • Substantial Presence Test (SPT) should be used to determine if the taxpayer qualifies as a resident alien or nonresident alien.

Collect The Documents:

  • Form W-2 (issued by the employer).
  • Form 1099 (for additional income, if applicable).
  • Form 8843 (for nonresident tax exemptions).

Selecting the IRS Form:

  • Resident aliens file Form 1040.
  • Nonresident aliens file Form 1040-NR.

The Deadline (April 15):

  • Form 4868 should be filed to extend time to October 15.

Decide How:

  • Online: IRS Free File can be used as well as software like TurboTax, H&R Block.
  • Professional Accountant: Professional help matters if you have foreign income, tax treaty claims or complex deductions.

IRS Penalties for Late Filing

Failure results in below consequences:

  • Failure-to-file penalty: 5% of unpaid taxes per month (up to 25%).
  • Failure-to-pay penalty: 0.5% per month on unpaid taxes.

FBAR Penalties for Unreported Foreign Assets:

  • Minimum $10,000 fine per violation.

Willful violations might lead to fine amounts exceeding 50% of the account balance.

Common Mistakes & How to Avoid Them

1. Misreporting Residency Status

✔ 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.

2. Not Filing FBAR for Foreign Accounts

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.

3. Overpaying Taxes by Missing Deductions

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.

Final Thoughts

TopicKey Points
Tax Residency (SPT Test)183+ days rule determines resident vs. nonresident taxation.
Resident vs. Nonresident TaxationResidents: Form 1040, taxed on worldwide income. Nonresidents: Form 1040-NR, taxed on U.S. income only.
Federal & State TaxesFederal: 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 Forms1040/1040-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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Frequently Asked Questions

1. How much tax do L1 visa holders pay?

L1 visa holders pay federal, state (if applicable), and FICA taxes based on income. Rates range from 10% to 37%.

2. Is an L1 visa holder a U.S. person?

Not automatically. SPT determines tax residency status.

3. What is an L-1 form?

No specific “L-1 form” for taxes; L1 holders file Form 1040 or 1040-NR.

4. Is L1 better than H1B?

L1 is for company transfers, H1B is for specialty jobs. H1B allows employer changes; L1 doesn’t require a lottery.

5. What taxes are H1B exempt from?

Generally, none. Some tax treaties may reduce FICA taxes.

6. Do H1B workers get paid less?

No, employers must pay prevailing wage per DOL rules.

7. How much do H1B workers make per hour?

Varies by job and location; DOL wage data sets the minimum.