A new bill has been introduced in the US Senate seeking to remove payroll tax exemptions for foreign students working under the Optional Practical Training (OPT) program. The proposal, called the OPT Fair Tax Act (S. 2940), was introduced by Senator Tom Cotton in September and has been referred to the Senate Committee on Finance for consideration. If passed, this legislation could significantly increase the tax liability for both the students and the companies that employ them.
Details of the proposed OPT Fair Tax Act
The OPT Fair Tax Act aims to amend the Internal Revenue Code and the Social Security Act to subject employment by F-1 visa holders under OPT to Federal Insurance Contributions Act (FICA) taxes.
- The current exemption: Currently, F-1 visa holders working on OPT are classified as non-resident aliens for tax purposes. This status exempts their earnings from FICA payroll taxes, which cover Social Security and Medicare. This combined tax is 15.3% of wages, split equally between the employee and the employer. A student earning $50,000 saves roughly $3,825 annually due to this exemption, with the employer saving an equal amount.
- The proposed change: If the bill is enacted, OPT wages would be treated the same as domestic employment for tax purposes, requiring both the student and the employer to pay the FICA tax share, which is approximately 7.65% each.
Senator Cotton, the bill’s sponsor, argues that the current tax code shouldn’t “incentivise businesses to hire foreign workers” and that ending the FICA exemption would “put American workers first”.
What this means for skilled workers
If the OPT Fair Tax Act passes, international students, a significant cohort of whom are from India, would face immediate financial consequences:
- Lower take-home income: OPT participants would see a reduction in their net income as 7.65% of their salary would be deducted for FICA. For a student on a $60,000 annual salary, this deduction would be about $4,590.
- Reconsidered plans: This financial change could force students to budget more carefully for living expenses or potentially reconsider their plans to study and transition to work in the US before pursuing an H-1B visa.
What it means for employers
For US companies that utilize the OPT program to access skilled international talent, the new bill presents a direct increase in the cost of hiring:
- Increased hiring costs: The rule change would mean the employer must contribute 7.65% of the OPT worker’s wages toward FICA. The total additional cost of employment for one OPT worker would rise to around $7,650 annually on a $50,000 salary.
- Recruitment strategy changes: To offset these higher payroll expenses, some companies may choose to offer lower salaries or limit their hiring of non-resident graduates, which could affect the US’s competitiveness in attracting global talent.
- Administrative burden: If the law passes, employers will face an immediate need to update their payroll systems to correctly calculate, withhold, and remit the new FICA tax obligations for all OPT participants, increasing administrative and compliance complexity.
As US immigration and tax laws remain volatile, a robust Global Payroll solution is essential for companies managing a non-resident workforce.
Conclusion
The OPT Fair Tax Act represents a significant legislative challenge to the long-standing tax benefits of the Optional Practical Training program. By proposing to end the FICA tax exemption, the bill would simultaneously increase costs for employers and reduce the take-home pay for international students.
As the bill moves through the Senate Committee on Finance, companies relying on international graduates must prepare for a potential shift in employment costs and compliance requirements.
Multiplier’s Global Payroll platform can help employers maintain accurate and compliant tax withholdings, ensuring that any changes to FICA exemptions or other statutory payroll deductions are implemented correctly and immediately, mitigating the financial and legal risks associated with complex regulatory shifts.
FAQs
What is the OPT Fair Tax Act (S. 2940) and who introduced it?
The OPT Fair Tax Act (S. 2940) is a bill introduced in the US Senate by Senator Tom Cotton in September. It seeks to remove the payroll tax exemption for foreign students working under the Optional Practical Training (OPT) program.
What type of tax does the OPT Fair Tax Act propose to remove the exemption for?
The bill proposes to end the exemption for Federal Insurance Contributions Act (FICA) taxes, which cover Social Security and Medicare payroll taxes.
What is the financial impact of the OPT Fair Tax Act on an F-1 student's annual salary?
If the act passes, an F-1 student on OPT would have approximately $7.65\%$ of their gross wages deducted for FICA taxes. This is equivalent to about $\$4,590$ on a $\$60,000$ annual salary.
How would the OPT Fair Tax Act affect a US employer's cost of hiring an OPT worker?
The Act would require the employer to pay their $7.65\%$ share of the FICA tax. This means the total additional cost of employing one OPT worker would rise by the full $15.3\%$ combined FICA rate, which is about $\$7,650$ on a $\$50,000$ salary.
Why are F-1 visa holders currently exempt from FICA taxes while on OPT?
F-1 visa holders on OPT are currently exempt because they are classified as non-resident aliens for tax purposes. This classification exempts their earnings from the FICA payroll taxes.
What is the Optional Practical Training (OPT) program?
The Optional Practical Training (OPT) program is a benefit of the F-1 student visa that allows international students to work temporarily in the US in a field directly related to their academic degree.
