Do L1 Visa Holders Pay Social Security Tax in the U.S.?

The L1 visa allows multinational companies to transfer employees from foreign offices to the U.S. on a temporary basis. While it provides a path for professionals to work in the country, it also comes with tax obligations that may not be immediately clear to visa holders. One common question is whether L1 employees must pay Social Security taxes while working in the U.S.

Paying Social Security as an L1 Employee

L1 visa holders working in the U.S. must pay Social Security and Medicare taxes, collectively known as FICA taxes. Employees contribute 6.2% of their wages to Social Security and 1.45% to Medicare, with employers matching these amounts. Unlike F-1 or J-1 visa holders, who may qualify for exemptions, L1 employees are treated as regular workers for payroll tax purposes.

These taxes apply regardless of how long an L1 employee stays in the U.S. The IRS considers wages earned in the U.S. as taxable, and employers must withhold the appropriate amounts from each paycheck. Failure to do so can result in fines and interest on unpaid amounts. Employers must report these withholdings on Form 941, the quarterly federal tax return, and provide employees with a Form W-2 at year-end, detailing total earnings and tax withholdings.

Determining Residency Status

An L1 visa holder’s tax classification depends on whether they meet the IRS’s substantial presence test, which determines if they are a resident or nonresident alien. A person is considered a resident for tax purposes if they have been in the U.S. for at least 31 days in the current year and a total of 183 days over a three-year period, using a weighted formula: all days from the current year, one-third from the previous year, and one-sixth from two years prior.

Resident aliens are taxed on their worldwide income, meaning they must report earnings from both U.S. and foreign sources. Nonresident aliens are only taxed on U.S.-sourced income, including wages earned while working in the country.

L1 visa holders close to meeting the substantial presence threshold may file Form 8840, Closer Connection Exception Statement for Aliens, to claim a closer connection to their home country and avoid being classified as a U.S. tax resident. This option is available only if they maintain significant ties to their home country and do not hold a green card.

Totalization Agreements

Some L1 visa holders come from countries with totalization agreements with the U.S., preventing dual taxation on Social Security contributions. Without such agreements, individuals could be required to pay into both the U.S. Social Security system and their home country’s equivalent program.

Totalization agreements determine which country has the right to collect Social Security taxes. If an L1 employee is assigned to the U.S. for less than five years and remains on their home country’s payroll, they may be exempt from U.S. Social Security and Medicare taxes. To claim this exemption, they must obtain a certificate of coverage from their home country’s Social Security agency, proving they are already subject to contributions elsewhere. Employers must keep this document on file in case of an IRS audit.

The terms of these agreements vary. Countries such as the United Kingdom, Germany, and India have agreements specifying conditions for exemptions, while others, like China and Brazil, do not. Employees from non-agreement countries must contribute to U.S. Social Security regardless of obligations in their home country, potentially leading to payments into two systems without full benefits from either.

Calculating Withholding

For L1 visa holders subject to U.S. payroll taxes, accurate withholding calculations are essential. Employers determine these amounts using IRS Publication 15 (Circular E), which provides tax tables and wage bracket methods. Withholding calculations begin with an employee’s gross wages, from which pre-tax deductions such as retirement contributions or employer-sponsored health insurance are subtracted. The remaining taxable wages determine the appropriate withholding amounts for Social Security, Medicare, and federal income tax.

Federal income tax withholding is based on Form W-4, which employees complete upon hiring. The IRS redesigned this form in 2020, replacing the previous allowance-based system with a method that accounts for multiple jobs, dependents, and tax credits. Employers use the information provided on this form, along with IRS withholding tables, to determine the correct amount to deduct each pay period. Errors in completing this form can lead to under-withholding, resulting in tax liabilities when filing a return.

Filing Obligations for Employers and Employees

Both L1 visa holders and their employers must meet specific tax filing requirements. Employers must report wages, withholdings, and tax payments to the IRS, while employees must file annual tax returns accurately. Misreporting or failing to meet these obligations can lead to penalties, audits, or legal consequences.

Employers submit Form 941, the Employer’s Quarterly Federal Tax Return, detailing wages paid and payroll taxes withheld, including Social Security and Medicare contributions. At year-end, they issue Form W-2 to employees, summarizing total earnings and tax withholdings. If an L1 employee qualifies for an exemption under a totalization agreement, the employer must maintain a certificate of coverage to substantiate the exemption in case of an IRS inquiry. Employers must also remit withheld taxes to the IRS on a semi-weekly or monthly schedule, depending on their total payroll tax liability.

L1 employees must file Form 1040 if classified as resident aliens or Form 1040-NR if nonresident aliens. They may also need to file state tax returns, depending on where they work. If Social Security taxes were withheld in error due to a totalization agreement, employees can request a refund by filing Form 843, Claim for Refund and Request for Abatement, along with supporting documentation. Keeping records of pay stubs and tax forms ensures accurate filing and helps avoid disputes with tax authorities.