The US is about to impose more strict regulations on students holding F-1 visas who are working in the U.S. under the Optional Practical Training (OPT) program. Besides, the authorities are planning to impose an additional tax specifically on such international students and end their current tax exemptions.
In brief, OPT is a program that enables international students holding F-1 visas in the U.S. to work for a limited period in a position that is directly related to their field of study. Recently, U.S. Senator Tom Cotton from Arkansas introduced a bill named the "OPT Fair Tax Act" in Congress. This bill, if passed, would abolish the tax exemption that is currently in place for Federal Insurance Contributions Act (FICA) for students working with OPT or STEM OPT programs.
What is FICA Tax?
FICA tax is one of the federal payroll taxes in the U.S., which is used to fund Social Security (mainly for retirement, disability, and survivors’ benefits) and Medicare (health insurance for older people). In the majority of American companies, this tax is required to be paid by both the employer and the employee. Normally, 6.2% of an employee’s salary is earmarked for Social Security, and 1.45% is taken out for Medicare. In total, these payments help to sustain the basic social and health programs that are available to the residents of the U.S.
Until now, the FICA tax has not been imposed on employers and foreign students working under the OPT program. The reason for that is, as per Internal Revenue Code (IRC) 3121(b)(19) and IRS rule 26 CFR 31.3121(b)(19)-1, the exemption is granted for temporary non-immigrant workers in the U.S. from this tax. To put it simply, international students on OPT were not required to make contributions to Social Security or Medicare as it was done by regular U.S. employees.
However, the U.S. government is now planning to change its existing rules by introducing the OPT Fair Tax Act, which would apply to international students working in the country.
Reason Behind the US OPT Fair Tax Act
International students on the OPT who are working in the U.S. will be required to pay 7.65% of their income to Social Security and Medicare if the Fair Tax Act is passed. The main objective of this modification is to prevent U.S. companies from hiring foreign workers and to give the first priority to American citizens.
Senator Tom Cotton said, “The last thing our tax code should do is to encourage businesses to hire foreign workers. The abolition of the FICA tax exemption will be the way to put American workers first.” But this regulation can have an impact on international students in a big way, as they cannot get Social Security or Medicare benefits, i.e., a large portion of their income will be taken away by taxes that do not benefit them.
Thousands of Indians to be Impacted
As per the recent Report (2023-24), roughly 3,30,000 Indian students are going to study in the US. Among these, almost 97,556 students are participating in the OPT program, and a significant number of them are pursuing STEM-OPT. The implementation of the OPT Fair Tax Act will thus affect these students directly.
